Dirt Cheap: Extreme Value Retail
Dirt Cheap’s unique procurement process allows it to deliver incredible value (and prices!) to customers
Dirt Cheap is an extreme value retailer headquartered in Hattiesburg, MS and is an particularly effective example of alignment between the company’s business model and operating model. Selling merchandise under three banners (“Dirt Cheap,” “Treasure Hunt,” and “Treasure Hunt Building Supplies”), Dirt Cheap is focused on purchasing goods from insurance claims, manufacturer and retailer buybacks, closeouts, bankruptcies, overstocks, liquidations, customer returns and out of season goods. The company’s business model, therefore, is to offer items to its customers at an extremely low-cost (30-90% of retail) – the same items that their customers could normally find at Walmart, Target or other value retailers. Dirt Cheap offers a wide variety of products in its stores, including clothing, home goods, electronics and other hardline goods.
The operating model of the business is to procure merchandise from a variety of unconventional sources, in particular insurance salvage and customer returns, as cheaply as possible to enable passing those savings along to the customers of Dirt Cheap. This is key to both their operational and business models as their procurement staff buys bulk goods that have become “problem inventories” for retailers or insurance companies. Through finding these great supplies of merchandise (i.e. a retailer with a large amount of returned goods after the holiday season) Dirt Cheap can price the goods in its retail locations in line with the value it captured during the purchase. Their entire supply chain is then set up to handle inventories that other retailers cannot handle (like individual returns that may or may not work). The company then send the goods out to the various stores, refreshing the retail inventory and creating another reason for the customers to return to the store to see what new treasure may lie in wait.
In this sense, Dirt Cheap’s business model and operating model are fully aligned and self-reinforcing. Dirt Cheap provides an outlet for other retailers to liquidate items they cannot use (or are not set up to handle in terms of reverse logistics) and is able to obtain these goods at a bargain which they can then pass on to their customers. Additionally, due to the episodic nature of the way they procure merchandise, the inventory of Dirt Cheap stores is continually changing, driving high frequency among its customer base and a “treasure hunt” atmosphere in the stores. The unique way in which Dirt Cheap procures merchandise and the operating model that is set up around valuing and pricing bulk goods provides a sustainable advantage versus other value retailers. As many of the items are one-off or small batch returns, it would be very difficult for another retailer to do a similar function and therefore capture the value that Dirt Cheap does. These unique capabilities, therefore, are leveraged in the business model as the retailer can sell items for dramatically lower prices than their competitors. While Dirt Cheap is a private company, and therefore does not have financials available, the retailers continued store growth to 60 locations across the southeast over the last 25 years is testament to the alignment between its business and operating models. It continues to offer quality goods to its customers at extremely low prices – a strong recipe for great financial performance and sustainability.
Sources:
https://www.facebook.com/ilovedirtcheap
http://www.businesswire.com/news/home/20150608005735/en/KKR-Invests-Channel-Control-Merchants
Given the miscellaneous nature of the inventory sources, I am surprised that Dirt Cheap is able to maintain such low costs throughout the process of procurement to retail sale. In particular, I would think that Dirt Cheap would have high expenses related to sorting through returned items – and then potentially fixing those unusable items. You mention that their supply chain is set up to handle inventories that other retailers can’t handle, and I’m surprised that doesn’t raise costs across the board. I’d be really curious to get a glimpse at their supply chain and see what they’re doing that a Walmart or a Target is unable to incorporate into their operations.
The idea of repurposing expired/unusable inventory reminds me of a business model that Doug Rauch, CEO of Trader Joes, has incorporated into the business. Check it out:
http://www.npr.org/sections/thesalt/2013/09/21/222082247/trader-joes-ex-president-to-turn-expired-food-into-cheap-meals
I wonder if retail businesses will one day decide to bring this type of operation (repurposing “bad” inventory) in house, the way Trader Joe’s is doing.
Thanks Sarah – some great issues you raised. To address a few of your concerns:
– While I am sure Dirt Cheap does incur some additional costs from having to sort through the items, my understanding is that the goods can be purchased for such a steep discount that there is still plenty of room to pass on margin to customers.
– On the fixing unusable items front, they do not guarantee that their products (particularly electronics) will work. The way they deal with this is by having “plug stations” in their stores where customers can plug in products to make sure they work before they buy.
– Finally, in terms of Walmart and Target, I think many retailers just aren’t set up to spend a lot of attention on reverse logistics and Dirt Cheap has been able to create a business out of this inefficiency. I’m not sure focusing a ton of attention on this area, however, would deliver a lot of value for Walmart or Target as customer returns are a very small percentage of their total volume.
And thanks for the link to Trader Joe’s! Very interesting comp.
Mark,
As a proud shopper of these fine establishments, I agree with you that their models are aligned nicely. I think what people may forget when looking at these stores is the thrill of finding a great deal for the customers. Often when you walk into one of these stores, the inventory is scattered which at first may be overwhelming but then you realize that its part of the shopping experience. If you go frequently, there are actually die hard fans who know where to look and know when to buy the items whose opinions are sought after. It is a interesting concept that has developed almost a cult following in the south.
Interesting post. Very clever business model that strikes me as a Dollar General twist on the discount retailers that have proliferated over the past decade (TJ Maxx, Gilt, etc.). As long as supply of goods is strong (?), would imagine these boxes could be stamped out in any city/town that is appropriate for a dollar store – which as we learned today, is a lot of locations. Curious about their selection of their target customer though. The name “Dirt Cheap” seems to suggest they are positioning for a very specific type of customer; might potentially ostracize customers who like bargain hunts but don’t want to be seen as “dirt cheap”?
Nice post Mark! And, as @TLiu noted, very timely in light of our recent case. I loved hearing a bit more about the operational model, and how their supply chain is uniquely suited for their business model. I have to say though, I am not convinced of the long-term sustainability of these sorts of brick & mortar businesses (Dollar General, etc. included). When compared with what’s available on-line (through Amazon, Craig’s List, e-bay, etc.), it seems to me that e-commerce options will ultimately be able to offer superior value and service – it’s just a question of wide-spread consumer adoption. With higher-end retail, the brick & mortar model may be able to hold because of the brand allure or the experience/service of shopping in-store, but I question the longevity of four-wall stores that sell simple utility or ultra-discount items. My perspective could be pre-mature or un-informed (or both), but I’m curious how Dirt Cheap intends to navigate the age of e-commerce and fend off any online competitors.