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Dollar General Is Giving Store Managers $70 Million in Raises to Improve Service

Dollar General (DG) has apparently discovered that its lower income shoppers also want decent service and clean stores.

The retailer said on Thursday it would be giving store managers $70 million in raises in 2017 and acknowledged the pressure the raises will put on profits. Dollar General’s move comes two years after other discount chains, including Walmart (WMT) and Target (TGT), increased pay in a more competitive labor market and tough retail environment that is making shoppers up and down the income spectrum far more demanding about service.

“To strengthen our position for the long term, we are making significant investments, primarily in compensation and training for our store managers given the critical role this position plays in our customer experience,” Dollar General CEO Todd Vasos said in a statement.

The news comes on the heels of a marked slowdown of Dollar General’s sales growth at existing stores and ahead of a continued, aggressive store expansion plan.

In the fourth quarter of fiscal 2016, sales at stores open at least a year rose 1%, and were up a mere 0.9% for the full year. It was Dollar General’s 27th straight year of same-store sales increases, but a clip well below the pace in recent years. Just five years ago, same-store sales rose 6%.

At the same time, Walmart’s comparable sales growth has been more robust, suggesting many customers are trading up again. That company has spent $2.7 billion in the last two years on higher wages and more training for its store staff. Dollar General’s business boomed during and after the Great Recession as low income shoppers cut back on their spending and were less willing to drive far to stores to save on gas.

Yet despite the softening of its same-store sales growth (overall growth rose 7.9% as Dollar General opened some 960 stores last year), the company is going full steam ahead with its expansion and remodeling plans: Dollar General plans to open approximately 1,000 new stores and relocate or remodel 900 stores this year. That will take its store fleet to more than 14,000 stores compared to 9,935 just five years ago.

And some on Wall Street are calling that too aggressive.

“We believe store growth should slow,” Jefferies analyst Daniel Binder said in a research note. “Additionally, our prior analysis shows that a reduction to 3-4% growth could yield more profitable growth, better cash flow and higher ROI (return on investment)” That would mean opening 500 stores rather than 1,000. The average Dollar General store is about 7,400 square feet in size, and 70% of them are in towns of 20,000 or fewer people.

In the quarter finished Feb. 3, total sales rose 13.7 percent to $6.01 billion despite fewer shoppers coming to its stores. Analysts had expected sales of $5.97 billion, according to Thomson Reuters I/B/E/S. Net income rose to $414.2 million or $1.49 per share down from $376.2 million or $1.30 per share a year earlier and below analyst forecasts for $1.41 per share.