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[22 comments]

Should Walmart acquire Family Dollar?

February 20, 2014

If you've ever tuned into sports talk radio, you know that there are always fans who suggest trading away players to pick up a favorite from another organization. While there is no possibility of the trade ever taking place, fans like to dream. It seems the same with analysts some times. They come up with merger and acquisition scenarios that might sound okay, but rarely happen.

The latest deal du jour is the suggestion by Credit Suisse analyst Michael Exstein that Walmart acquire Family Dollar. Mr. Exstein makes the case that Walmart is pursuing a small store growth strategy (it plans to open up to 150 units this year) and that Family Dollar already has more than 7,500. Acquiring Family Dollar would put its small store approach on steroids.

The Credit Suisse analyst also thinks Walmart would have a relatively easy time getting Federal Trade Commission approval for a Family Dollar deal because only 19 percent of its stores are within a mile of the dollar chain's locations.

While Walmart has traditionally shied away from acquisitions in the U.S., it has bought companies to achieve its growth goals in other countries. Walmart declined to comment on the analyst's speculation.

FINANCIALS:     [NYSE:WMT] [ NYSE:FDO] [ ]

Discussion Questions:

Do you think a Walmart acquisition of Family Dollar would be a good business move? What do you see as the pros and cons of such a move?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Would a Walmart acquisition of Family Dollar be a good or bad business move?

Comments:

NO!

(There I feel better).

Why buy what you can build better?

Walmart certainly has the financial reserves necessary to introduce a new format so why wouldn't they just build the kinds of stores they want in the locations they want? The alternative is to pay a premium for over 7,500 -- many of which we can assume aren't all that great.

On the pro side, I suppose you could argue there is a network of stores already in place, but again that means inherited leases, inventories and staffs -- so, once again, why not do it your way from the beginning?

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Ryan Mathews, Founder, ceo, Black Monk Consulting

 
10

Walmart seems to have been successful on its own, so an acquisition may not help out that much. I think dollar stores still have a low-end reputation that Walmart doesn't need (as it strives for a value reputation).

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

On the surface, this seems almost too simple: If you can't beat your dollar store competitors, buy 'em. But history suggests that Walmart is a lot more successful when it controls and develops its own concepts -- from supercenters to marketplace and neighborhood formats.

If Walmart rebranded Family Dollar stores it might be a different story, but chances are good that FD is loaded with plenty of undesirable locations that would not be worth a second look. The bigger question is whether a "race to the bottom" is in Walmart's long-term strategic interest, since it already struggles (along with the dollar stores) to sell discretionary goods to the lowest-tier consumer.

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Dick Seesel, Principal, Retailing In Focus LLC

While Walmart has traditionally built versus bought in the US, such an acquisition could make sense for Walmart. Walmart's new CEO, Doug McMillin, is pursuing a small store format initiative and dollar stores represent a viable alternative.

Dollar stores today offer over 60% consumables and have come a long way from their dodgy variety store days. In fact, dollar stores have been known to be the best survivors of the "scorched earth syndrome" often associated with the opening of a new Walmart Supercenter. Management at Walmart has been known to refer to dollar stores as "ankle biters." Pesky competitors that are difficult to defend against let alone kill.

Such an acquisition, assuming Walmart can avoid the disastrous culture clash it experienced in Germany, would not only take out a serious ankle biter but also position it better to ward off the other extreme value retailers.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

Family Dollar, and for that matter all of the "dollar" type stores, are popular since they are closer to their customers. Older Americans do not want to drive out of town to the Walmart nor do they want to walk around a 100,000 square foot store to find just a few things.

Walmart has several choices. One is to enter the "dollar" store market on their own and complete directly with them. They can just lower prices to complete with them but not answer the distance and store size issue. Or, they can buy one of them, such as Family Dollar. However, buying a chain of over 7,000 stores and converting them into the Walmart culture may be more then they would be able to do. Yes they have done so in other countries, but they were large stores and just another Walmart.

Small is a very different store and not in the Walmart dictionary! It is not going to happen.

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Frank Riso, Principal, Frank Riso Associates, LLC

Walmart has been experimenting with different small-size stores (e.g., neighborhood stores, express stores) serving different consumers (e.g., urban areas, and some suburban areas). The acquisition of dollar stores only makes sense if that is the size store Walmart has decided to expand and if the current dollar store locations are the ones in which Walmart plans to expand. If the location or format is not part of either, it makes no sense for Walmart to make this acquisition.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Gobbling up other banners can be a perilous and disjointed plan these days as Supervalu and others have found out. Up to this point, Walmart has taken a measured and strategic approach to small format rollouts and has had no intention of hitting Family-Dollar-like scale. Walmart won't have to in order to make its omni-channel strategy sing. It is already a multi-format retailer and continues to work toward driving brand recognition for its separately-branded Neighborhood Market concept. The last thing it needs is to tack on thousands of lower-end stores and tackle the varying productivity levels that would come with the deal.

Although Walmart and dollar stores are often lumped together as "discounters," their business models are apples and oranges. Walmart should march ahead with building its own small formats.

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Carol Spieckerman, President, newmarketbuilders

There is little point in repeating what others have already said about this being a bad idea. So I'll simply agree with what Ryan, Stephen, Camille and Carol have already said!

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Ben Ball, Senior Vice President, Dechert-Hampe

My answer is NO. Walmart continues to focus on shoppers and formats in what seems to be more of a "slow and steady" manner, but when they decide to roll, it will be because they've done their homework and they know how to scale within their systems. Trying to merge from a systems POV with a "dollar" retailer, no matter which one, seems risky at best with a chance for total chaos.

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Anne Howe, Senior Vice President, Shopper Solutions, part of Acosta Mosaic Group

Ryan is right, why buy when you can design, build, merchandise and staff better? Well, maybe not the last one, but certainly the first three. And I'm glad he's feeling better.

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Ron Margulis, Managing Director, RAM Communications

Walmart is the master of its fate;
Walmart is the captain of its soul.
Acquiring Family Dollar might speed growth
But in Bentonville that would seem droll.

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Gene Hoffman, President/CEO, Corporate Strategies International

What Ben Ball said and I'll just add Anne and Ron to his list.

'Scanner'

The dollar stores have for a long time been an outlet for inventory overages. Both importers and manufactures have taken advantage of these stores to find a home for product placement which Walmart could use for its massive clearance issues in the distribution centers they own. Much of the dollar store inventory is a variety of nameless knockoff merchandise that is slow to sell. Walmart could easily replace these goods with more recognizable product at lower prices than the consumer is use to. Maybe even lower than Amazon!

This single move if properly managed could put two huge competitors in check for some time to come. Properly managing the merger and mindset of the two companies is the single critical path to success for this venture. Managing outside egos is not a strength of the Walmart leadership as we all know. The exploration of this opportunity might bring enough incentive for ownership to grow its management tolerance style for success in mergers. This singular mindset and awareness is why I guess we will most likely never know for sure about this one.

'gjarnoldjr'

I can see why Walmart might pursue this because there are synergies and probably a great overlap in customers. I think many people do go to the smaller footprint Family Dollar for basic items, specifically to avoid the two football field sized Walmart megastores and the huge parking lots. There were rumors that Walmart has been thinking about opening some smaller stores under their own name.

That said, I hope the merger does not take place because the dollar store innovation and product lines come from having different eyes and ears on their market at the highest levels of management, and then being able to fine tune to the neighborhood by local management who run local ads and specials. Much of this would be neutralized (even if unintentionally) under a Walmart umbrella.

'Liatt'

Okay, I understand the vast majority voting a quick "no" for all of the reasons clearly outlined in the comments above. However, in my humble opinion, I do think it is worth serious consideration. Note that I didn't say they should acquire, but that it should be seriously considered. In fact, I would assume that Walmart has already considered it, probably several times, and on an on-going basis.

Here is why I think it would be worth considering:

1. "Dollar stores" have become part of the shopping mainstream, across multiple shopper segments, and continue to erode Walmart sales.

2. The "dollar store" segment is getting pretty crowded with just the big three, Family Dollar, Dollar General, and Dollar Tree, having 22,000+ stores - consolidation is on the horizon.

3. The core of dollar store sales is regular replenishment merchandise, like laundry detergent, paper towels, etc. For example, I believe Family Dollar sells more Clorox Bleach than any other retailer.

4. Although called "Dollar Stores," these stores are not the stores of decades past, have many different price points in addition to $1, and now carry a wide range of merchandise, much of it at good margin. In fact, Family Dollar now carries fresh items like bread, milk, eggs, juice, and more.

5. Family Dollar has been a well run organization with a strong management team who have managed locations, leadership, culture, and staffing pretty well.

6. A significant number of store locations are probably in areas that have prevented the building of a Walmart.

7. Such an acquisition would provide a huge new channel for Walmart's extensive assortment of private label merchandise like Great Value, Sam's Choice, Equate (health & beauty), Mainstays (bedding), Ol'Roy (dog products), Special Kitty (cat products), Parent's Choice (baby products), etc.

8. There would be huge "synergies," in other words cost saving opportunities, in everything from merchandise purchasing to technology infrastructure and just about everything in between.

So, should they acquire Family Dollar? I can't say, that would take some more serious analysis. Should they consider? Yes, they must.

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Verlin Youd, Principal, VPY LLC

Walmart eventually will decide when and where they want to jump in with this type of format. When they do, it will be from the ground up, as they have the capital and probably will take business from Family Dollar, which is what they want. Hard to stop this train, for sure.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

I would rather talk about trading our fringe players for someone else's stars. This has little merit for me. Walmart will be better served following their growth plan.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

As most note, a mixture of "yes" and "no" reasons. But I think the overall reaction to it would be negative, since it would imply just a little bit of panic on Walmart's part...let's leave frantic - and dubious - acquisitions to the social media sector, shall we?

'notcom'

Although I do agree with my esteemed colleagues that this seems like an ill-guided move, there are some pros.

1) Value shoppers are here to stay.
2) Walmart could quickly enter markets with this smaller format.
3) The efficiencies of Walmart would improve Family Dollar's bottom line.
4) The already big would become enormous.

An acquisition such as this for Walmart is likely not going to happen ... but is FD available to others? If so, whom?

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Dave Wendland, Vice President, Hamacher Resource Group

No. Walmart would be better served to build a format that fits their approach rather than taking over someone else's physical plant, culture, and all the other issues that can come with an acquisition.

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Brian Numainville, Principal, The Retail Feedback Group

Walmart built the grocery business without any huge acquisitions. Although on the outside, the idea of going from 150 small stores to 7,500 overnight sounds attractive, the deal comes with baggage. Walmart's corporate culture is very different than Family Dollar. How much will that cost to address? Can it be addressed? That's just one of many hurdles that makes me think Walmart could do it better on its own.

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John Boccuzzi, Jr., Managing Partner, Boccuzzi, LLC

While on the surface it may appear as a good idea not for synergies but to eliminate competition, I don't believe the facility design and parking lots will be consistent with what Walmart will require. Also, will Walmart include their pharmacy in the express and neighborhood locations? This could have a huge impact on Walgreens and CVS.

I could see Walmart making the purchase for the locations as long as there is ample space for its customer parking and trucking requirements.

Alan Cooper, Contract Trainer/Training Consultant, Independent/Freelance

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