Dive Brief:

• Dollar General last week opened DGX, a new small-format banner made to appeal to urban millennial shoppers, reported Supermarket News.
• The 3,400-square-foot store, which opened in Nashville, includes many consumables, grab-and-go foods, beverages and a limited assortment of home décor and electronics.
• A second location is slated to open in Raleigh-Durham, N.C.

Dive Insight:

DGX is Dollar General’s attempt to diversify and expand on the exceptional growth the company has enjoyed over the past few years. Value-focused shoppers turned to dollar stores during the recession, and these savvy operators — with their low overhead, small store size and heavy focus on consumables that encourage repeat visits — managed to not only capitalize, but retain many of those customers. Between 2010 and 2015, according to research and consulting firm Conlumino, annual dollar store sales increased from $30 billion to $45 billion, a 50% growth rate that far outpaced retail sales growth during the same period.

Low- and middle-income consumers have been dollar stores’ bread and butter. But what’s surprised many, including dollar stores themselves, is their appeal to high-income millennials. According to the NPD Group, one quarter of the shoppers at three of the top dollar store chains are millennials from households earning $100,000 a year or more.

Turns out millennials love the value and the quick convenience dollar stores offer. Dollar General has taken extra steps here by offering home décor, electronics and other upmarket offerings.

As many in the industry know, however, this consumer segment is notoriously fickle. Many attempts to specifically target millennials have failed in the past. And Dollar General is not the only company that’s deploying small-format stores in urban areas. Target, which has seen slower traffic and sales of late, plans to roll out hundreds of small stores in the years ahead, while Whole Foods has already started doing so with its 365 stores. Convenience stores like Wawa, Sheetz and Circle K, meanwhile, are stepping up their game in cities and college towns, stocking gourmet prepared foods in addition to Slurpees and racks of candy.

All of these companies see a huge opportunity — but they can’t all win. And despite its popularity with some affluent millennials, DGX will likely have an uphill climb to convince city dwellers to shop with a dollar store offshoot.

So what will it take for the format to succeed?

Execution will be critical. Customers won’t tolerate messy aisles, stale sandwiches, and out-of-stocks. Because they value unique, ever-changing flavors, they’re going to want more than BLTs and caesar salads. DGX also needs to get its mix of consumables right. Urban millennials need toilet paper, shaving cream and cleaning supplies just like anyone else. But many of them eschew mainstream value brands or those that might seem cheap to them.

That said, analysts agree Dollar General has bested its dollar store competitors at reaching higher-income shoppers. And with news that it's investing more in private label, the company probably has some attractive store brands up its sleeve.