Dollar General customers are buying groceries but skipping non-essentials as they rely on savings, credit cards, and borrowing money from friends to get by

• While more people are shopping for groceries at Dollar General, other categories are suffering.
• Sales of home products and seasonal items were more muted during the most recent quarter. 
• Analysts say adding more grocery items to stores can risk cannibalizing sales in other departments. 

More people are shopping for cheap groceries at Dollar General, but it's not necessarily a good thing.

The discount chain reported its fourth-quarter earnings early Thursday. Same-store sales were up 5.7% during the quarter, largely thanks to growth in its consumables category, the company said.

Revenue for consumables – which includes food items, health and beauty products, and snacks, among other things –increased by 22.7% during Q4, while sales of non-consumable products such as homeware and seasonable items were up by a more muted 3.1% and 5.7%. Apparel sales declined by 7.3%. 

While more consumers are focused on essentials like food as inflation pressures budgets, experts say that Dollar General may also be struggling to persuade shoppers who come in for food to buy other things.

Food inflation has reached historic highs over the last year, with prices for certain grocery basics, such as eggs, creating challenges for discount-focused retailers. Earlier this week, fellow dollar store chain Dollar Tree announced it was pausing stocking eggs due to high prices.

Dollar General has been gradually ramping up its grocery business, bringing fresh and frozen food to more stores and building out a self-distribution model for these products as part of its DG Fresh initiative. The company said it would have fresh produce in 5,000 of its stores by the end of 2023 and plans to bring these items to 10,000 of its more than 19,000 locations over the next few years. 

Dollar stores, in general, have been gaining market share in the grocery sector as inflation bites and shoppers look for cheaper alternatives. According to a recent report from Coresight Research, Dollar Tree and Dollar General ranked in the top five retailers from which consumers bought food in 2022.

Grocery is a low-margin business, but the idea is that having a grocery assortment drives more customers to stores and leads to repeat visits. When these customers come to the store, the hope is that they'll be tempted to buy more. 

But the flip side to this is that by offering groceries in its stores, it could actually end up cannibalizing sales elsewhere. 

"Fresh is great, but it can be very disruptive," Simon Johnstone, senior director of Retail Insights at Kantar, said in a recent call with Insider. 

Discount shoppers, who come into the store and have a limited amount to spend, might end up using their allotted amount to buy groceries rather than shopping for other items, such as homeware, which generates higher margins for Dollar General. 

Dollar General shoppers are still employed but are "relying more on savings, credit cards, and, quite frankly, borrowing money from friends," Dollar General CEO Jeff Owen said on Thursday during the company's fourth-quarter earnings call.

That financial pressure is leading the average customer to buy fewer items and focus on essentials like food, he said. "We're seeing her shift her purchases more to consumables," Owen said.

But Neil Saunders, managing director of GlobalData Retail, said a focus on essentials like food isn't the only reason why shoppers might be turned out from buying other items in its stores. Its "shabby and cluttered" stores may also be to blame, he said.

"While Dollar General has been steadily improving the offer ... there is still more work to do to improve the proposition," he said Thursday.

"The aim here should be to entice consumers with some interesting displays and offers that wow them ... This will encourage higher-income shoppers to buy more and will serve the company well once lower-income shoppers are less affected by inflation," he added.