Dollar Tree Acquires Family Dollar
Over the past two decades, one of the great success stories in retailing has been that of dollar stores. In following Chain Store Guide’s current series on Recession Busters, certainly the three top national dollar retail chains- Dollar General, Family Dollar and Dollar Tree all easily qualify as retailers which have more than survived the recession but actually thrived and significantly grew their imprint during a period which ravaged many retailers.
Some might claim that low price retailers were the most likely companies to use the harsh economic conditions brought on by the recession to underline their importance to cash strapped consumers. This includes much more than retailers residing within the lower socio-economic climes of our country. The recession brought many long-term residents of affluent communities to a new economic reality, which often included repeat visits to dollar retailers to best survive a startlingly newly forced lifestyle.
The recessionary influences providing promising conditions for dollar store growth, including aggressive store expansions and intoxicating financial results at a time when most retailers were struggling to survive, were not simple matters of fortune. The dollar chains proved to have established strong real estate organizations, which were able to turn on a dime and quickly gobble up bargains as recessionary conditions suddenly forced their offerings.
As with pre-recessionary financials, dollar stores found that as recessionary financials continued to grow, they could easily afford to purchase properties to raise their brand in neighborhoods only too glad to welcome opportunities for new community-based jobs at venues offering local consumers relatively low prices and at times outright bargains. While Dollar Tree’s single price format generally offered the lowest price on most products, the company is limited in just how many products could be profitably offered for one dollar. Unlike most of its competitors, Dollar Tree offers little in the way of apparel.
Thus Dollar General and Family Dollar expanded more aggressively and dominated the landscapes of traditionally economically challenged communities. Dollar General even opened two new, significantly larger prototypes to accommodate demand for additional and new products, especially in terms of perishable groceries, including organics.
One of the most interesting aspects of Dollar Tree’s acquisition of Family Dollar is that these dollar chains represent distinctly different dollar retailing philosophies. Dollar Tree of course is a single price retailer offering all merchandise for one dollar. Family Dollar and Dollar General are extreme value retailers, selling the majority of their inventories for ten dollars or less. Of course, their customers expect low prices arising from clever buying and merchandising through low margins. This year both Family Dollar and Dollar General issued major announcements regarding reducing prices and thus margins to gain market share. Both are constantly reviewing products offered to revise respective merchandising mixes to enhance consumer appeal and profitability.
The question here is can a Family Dollar chain run by Dollar Tree flourish by managing both single price and extreme value dollar business models. Dollar Tree expects to operate both models as separate entities, much as they are now. The company expects to see economic benefits through greater buying power and access to the many additional neighborhood locations which Family Dollar serves.
Actually Dollar Tree currently operates a chain which is essentially somewhat of a hybrid between the single price and extreme value models. When entering newly opened Deal$ locations, it is not uncommon to hear managers and store personnel compare their stores to ones based on selling many Dollar Tree products priced at the one dollar level with but with the addition of offering many additional products which compete with prices seen at Dollar General and Family Dollar.
However, Deal$ has not met with the consumer acceptance of Dollar Tree or its aforementioned rivals. New store openings have been less than aggressive. One must wonder, if the concept had proven more successful, would Dollar Tree have needed to spend an estimated $8.5 billion to acquire Family Dollar.
Currently Dollar Tree operates just around 200 Deal$ compared to 4,800 Dollar Tree locations in the United States. Family Dollar operates nearly 8,500 locations. While on course to open 500 locations during the current fiscal year, the company recently announced plans to close 370 underperforming stores. This is a result of recently disappointing financials, including a sales decline of 6.1 percent during the recently completed second quarter. At the same time Family +Dollar announced price decreases on about 1,000 items.
Dollar Tree is increasingly a rarity, holding the line as a single price retailer, as many independent and regional single price retailers gradually succumb to a model somewhat akin to Deal$. These retailers offer consistent low prices, with most products selling at a price point at around a dollar, while increasing the number of offerings at somewhat higher price points.
The Dollar Tree acquisition of Family Dollar is expected to be completed during 2015. The resulting company would leap over market leader Dollar General both in terms of store count (Dollar General currently operates over 11,000 locations) and annual sales. However other retailers are taking note as well, especially Walmart.
Though Walmart management continues to emphasize the growth of its ‘small stores’, here the company continues to refer predominantly to its Neighborhood Market grocery concept, rather than its dollar store rival Walmart Express platform, which continues to grow at a snail’s pace.
While Walmart has long envied the success and growth of neighborhood-based dollar stores, the real apple of its eye has been the Dollar Tree, single price model. By adding Family Dollar’s cadre of stores and real estate, Dollar Tree’s buying power should increase to a point to be able to improve its single price offerings, making eventual competition from Walmart even more unlikely.