Dollar Store Price War?
The term dollar store implies more than just a significant location at which to expect a deep discount. This brand stands behind competitive, at or approaching near one dollar low prices. For extreme value retailers, it is expected that most products are discounted at less than ten dollars.
Just over a year ago Family Dollar experienced a quarter of particularly troubling financials. Sales had fallen about six percent. A sort of panic rang out from corporate headquarters and an announcement was issued shortly that the company was cutting prices on around 1,000 items. When a retailer’s prime draw is price, what better way to drive up customer visits than by announcing price cuts, pretty much across the board?
Of course, while the aim of cutting prices is to drive store traffic, the move brings with it the prospect of lower profits. Family Dollar’s recently completed quarter indeed did reflect a three percent sales increase but just a 0.5% increase in same store sales. While trips to its stores were up, average rings were down.
These are just some of the factors influencing the sale of Family Dollar to Dollar Tree and future moves necessary for the combined companies to succeed.
A recent study compared prices on a group of 42 items purchased at Dollar General, Family Dollar and Walmart. The Family Dollar tab came to $151. The Dollar General basket cost $150. Walmart proved to be the winner at $149. Over 42 items this difference is relatively miniscule but the non-dollar store was the winner.
This should not be surprising considering Walmart’s enormous international scope of retail stores and distribution. Thus, Walmart epitomizes the concept of retail buying power. They are at the forefront of retailers extracting demands from manufacturers to simply sell through their stores with an enormous reputation for offering low prices.
Still when Dollar Tree announced its intent to purchase Family Dollar, its offer was followed by several intricately higher bids from Dollar General to acquire Family Dollar. At the time many expected Walmart to enter the competition but no such offer was to be made.
Since then, Walmart has converted its few remaining Express format stores to Neighborhood Market locations and has stated that there will be no additional Express locations in its future. Walmart Express had been seen as its entry into its long coveted desire to compete in the expanding dollar store market.
Of course, dollar stores offer more than just a reputation for low prices. Their smaller formats offer shoppers a relatively quick in/out time. Their locations are neighborhood based and this completes the brevity of the shopping experience and cuts down on transportation costs. Many consumers can actually walk to their nearest dollar store.
This proximity of stores to the consumer also increases opportunities for emergency trips to the store. Many urgent visits also result in impulse purchases. These are often inspired by low prices combined with the general urgency to buy. Such purchases can significantly add to a retailer’s financial picture, if the store is merchandised to promote ancillary or impulse purchases.
As Walmart closed down its Express concept, Target seems confident in growing its newer TargetExpress format. Walmart’s decision to discontinue this concept was believed to be largely due the difficulty on focusing on a new small concept, while maintaining its enormous domestic and international operations.
Now there is talk that Dollar Tree plans to again cut prices, once it talks control of Family Dollar. How much cutting can be done without destroying profitability? The answer may come from Dollar Tree’s own very successful single price operation.
It is highly unlikely that Family Dollar will go to any type of a single price format. However, by including significant product from Dollar Tree’s one dollar offerings, the new Family Dollar would seem to offer lower priced, desirable products, while increasing the company’s buying power as its demand goes up. Combined with the familiarity of the Family Dollar brand, these price points should drive traffic while increasing profitability and avoiding a bloody price war/bloody price cuts.