Dollar General Plans an IPO — A Sign of the Spend Management Times in More Ways than One?

In recent quarters, much of the financial community has been maligned for making what were in retrospect clearly dumb bets on complex financial products (e.g., collateralized debt obligations or CDOs in the mortgage markets). But through their actions, certain private equity firms including the infamous Kohlberg Kravis & Roberts (KKR) have focused on creating real value within their portfolios by tackling operational and Spend Management initiatives. Earlier this year, I wrote that "Having spoken to a number of advisers and consultants serving the PE market in recent years [KKR included], I can say with near certainty that these firms are taking an aggressive stance at driving cost reduction programs within their portfolio companies, in some cases even building internal strategic sourcing and lean teams."

Well, it turns out all this work is paying off. Earlier this summer, it was leaked to the press that KKR is planning to IPO one of its top performing investments, Dollar General. The above-linked WSJ article suggests that KKR "is in advanced preparations for an initial public offering of stock in Dollar General Corp." Dollar General has performed well of late and its IPO "frames the current state of private-equity investing, which has been damaged after years of overpriced acquisitions. [Moreover] the down economy has left buyout shops few successes to share with their investors. That has proved a boon for Dollar General, which sells cheap housewares and private-label food." Profits increased over 1000% to $83 million from over the same quarter May 1, 2008. But what's most interesting to us is how Dollar General's IPO is a sign of the Spend Management times. Indeed, Dollar General has been eating the same thrifty dogfood it serves up to customers, relying in significant part on supply management, reverse auctions and inventory reduction initiatives to achieve these results.

Take, for example, the statements in a quarterly earnings call from Dollar General CEO Richard Dreiling earlier in 2008. In it, he noted that "we have made strides to improve our sourcing. For example, we have begun participating in on-line auctions to find and source better products at better values. To date we have utilized the auction process for approximately $100 million of merchandise, supply and service purchases. This has resulted in significant cost savings. We're also taking a fresh look at how and where we source all of our merchandise. In particular, we believe we can enhance our sourcing efforts in our non-consumable categories." As part of this effort Dollar General has considerably ramped its private-label sourcing programs as well.

While my wife and I are not exactly Dollar General's target audience -- our monthly Costco bill could probably make the difference for one of DG's marginal stores between being in the red or black for the month -- we recently dropped about thirty bucks in the local DG for the first time, buying a shopping cart full of stuff for our kid's birthday parties. The value was unbelievable. And without question, it all comes back to smart sourcing -- both on our part and their part. We'll go back. As will investors who are beginning to realize that it is possible to build highly profitable companies that compete almost entirely on the execution of their sourcing and supply chain programs.

Jason Busch

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