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[16 comments]

Will Dollar Tree + Family Dollar spell trouble for Dollar General?

July 28, 2014

Dollar Tree has reached an agreement to acquire rival Family Dollar Stores in a deal that will create the largest operator of dollar stores in North America. The estimated $8.5 billion deal, a cash and stock transaction, is expected to close somewhere in 2015.

The deal will create a business with over 13,000 stores in 48 states as well as five provinces in Canada. The combined company has over $18 billion in annual sales and employs 145,000 people. Dollar Tree and Family Dollar will continue to operate as a separate banners once the agreement is completed. Dollar Tree stores sell goods at $1 or less while Family Dollar's price points exceed $1.

Bob Sasser, CEO of Dollar Tree, called the Family Dollar acquisition "a transformational opportunity" in a statement.

"Throughout our history, we have strived continuously to evolve and improve our business. This acquisition, which enhances our footprint and diversifies our company, will enable us to build on that progression, and importantly, positions Dollar Tree for accelerated growth," said Mr. Sasser. "By offering both fixed-price and multi-price point formats and an even broader, more compelling merchandise assortment, we will be able to provide even greater value and choice to a wider array of customers."

Dollar Tree acquires a Family Dollar chain that is not at the top of its game. In April, Family Dollar announced plans to close 370 stores and lower prices on about 1,000 items after reporting a sales decline of 6.1 percent during the second quarter. More recently, activist investor Carl Icahn acquired a 9.4 percent stake in the company and began a push for its sale. Howard Levine, chairman and CEO of Family Dollar, will remain with the company after the deal is closed and will take a seat on the Dollar Tree board.

"This acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint. We plan to leverage best practices across both organizations to deliver significant synergies, while we accelerate and augment Family Dollar's recently introduced strategic initiatives," said Mr. Sasser. "Combined, our growth potential is enhanced with improved opportunities to increase the productivity of the stores and to open more stores across multiple banners."

Dollar Tree reported a net sales increase of 7.2 percent for its first quarter ending May 4. Comparable-store sales were up 1.9 percent during the period. The company said it saw both an increase in traffic and its average ticket during the quarter.

Rival Dollar General, which operates 11,338 stores in 40 states, saw its overall sales grow nearly seven percent in the most recent quarter with comp sales up 1.5 percent. It also reported that traffic numbers and rings were up for the 25th straight quarter. Dollar General has increased its emphasis on category management, engaged in SKU optimization and made a greater commitment to private label goods to differentiate itself from Family Dollar and others. Rick Dreiling, chairman and CEO of Dollar General announced last month that he would be stepping down at the end of May 2015.

Discussion Questions:

What do you expect from Dollar Tree's acquisition of Family Dollar? What will the deal mean for Dollar General and other competitors to the Dollar Tree and Family Dollar chains?

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:

Do you give thumbs up or thumbs down to Dollar Tree's acquisition of Family Dollar?

Comments:

I would think Dollar General should be nervous, although in my neck of the woods, a lot of Family Dollars are very close to Dollar Trees, which means one or the other would close. May be an opportunity for Dollar General to pick up some cheap real estate.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

This acquisition follows the typical pattern of consolidation after a period of growth. This has happened over the years in segment after segment of the retail industry (and other industries), from department stores to discounters. The combined company now becomes roughly equal in size to its biggest competitor, Dollar General, but will have some growing pains to contend with because of some location overlap along with different approaches to the "dollar" business.

If the outcome is successful, there are two strong competitors in this category. They both have the potential to become more robust factors as big box stores like Walmart and Target rush into the small-format battle. Meanwhile, look for other industry segments (e.g., off-prices) to hit a period of maturity followed by consolidation, too.

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Dick Seesel, Principal, Retailing In Focus LLC

The discount fever is not going away, and this merger props up the two companies in a way to gain strength in sheer numbers. The CPG companies will now have to up the ante in their offerings, as size does matter, and this trend will continue for other mergers in the future. Walmart is in a league by themselves, and with their flat numbers continuing, it only adds more fuel to the fire. Aldi, Save-a-Lot, Bottom Dollar and the like are all chasing the same customers base, which is growing due to a horrible economy.

Independents are at most risk for continued slides in their sales, and eventually some will fold, as profits shrink to nothing. I have never seen such a dramatic growth in these types of stores in my lifetime, and it will continue for a while as many rural areas, once dominated by local stores, are the target for multiple saturation of these markets. Cheap is chic, and there are still plenty of places to put up these stores around the country. Gotta love it!

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

Money must grow on trees after all. $8.5 billion dollars is a lot for Dollar Tree to pay for the ailing Family Dollar stores. Upon first thought, I expect the biggest gains will fall to the big investors.

There may be many opportunities that could come out of this deal, but my first guess is that it isn't really a good retail purchase. In that initial frame of mind, I wonder who knows what devilment lies in the hearts of big deal makers.

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Gene Hoffman, President/CEO, Corporate Strategies International

While the companies are going to continue to operate under their respective banners and use their current business models, there will be some network rationalization. Once the issues that always come from combining two companies are resolved, I would then expect that the competition between the Dollar Tree and Dollar General to heat up for locations and customers. This will make it more difficult for smaller rivals to compete.

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Steve Montgomery, President, b2b Solutions, LLC

This is a financial play. I predict very little impact on Dollar General or the retail landscape in general, particularly if Sasser sticks to his "operate both chains separately" assertion. Dollar Tree and Family Dollar are very different concepts, and synergies are hard to see as well.

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Ben Ball, Senior Vice President, Dechert-Hampe

I'm not an expert in these matters, but I can only think logically that what Mr. Sasser said will be true: "This acquisition will extend their reach to lower-income customers and strengthen and diversify our store footprint; they will leverage best practices across both organizations to deliver significant synergies, while they accelerate and augment Family Dollar's recently introduced strategic initiatives. Also, their growth potential will provide improved opportunities to increase the productivity of the stores and to open more stores across multiple banners." All together, I think it will be a rough road for Dollar General.

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Naomi K. Shapiro, Strategic Market Communications, Upstream Commerce

My sense is that the real winners here are Carl Icahn and the other big investors. Dollar Tree may have achieved size, but at what cost?

Dollar Tree has been a very well-run operation that produces high sales per square foot of retail space. They have had a consistent positioning as a fixed price point retailer and offered the shopper a limited product line.

Family Dollar has been a less efficient operation that produces much lower sales per square foot. It has essentially evolved from a dollar store into a "neighborhood value store" that competes with C-stores, low-end grocery and even Walmart.

It's not clear how they will achieve great synergies if they run the operations separately. They carry very different merchandise and have different pricing concepts. They may find the management of this large and diverse an enterprise to be quite challenging.

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Raymond D. Jones, Managing Director, Dechert-Hampe & Co.

This is going to be a massive undertaking. Stores will be closed, remodeled and re-branded, and executives will be shuffled. The very capable people at Dollar Tree are really going to have their hands full.

If I were managing Dollar General, I'd want to roll out several key differentiators that would keep existing customers close.

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Cathy Hotka, Principal, Cathy Hotka & Associates

Ben Ball is exactly right.

The two telling comments in the piece are:

"Family Dollar announced plans to close 370 stores and lower prices on about 1,000 items after reporting a sales decline of 6.1 percent during the second quarter."

As well as:

"Rival Dollar General, which operates 11,338 stores in 40 states, saw its overall sales grow nearly seven percent in the most recent quarter with comp sales up 1.5 percent."

As with many other retail offerings, it is location, location, location. In so many instances these two land side-by-side. Consumers are making a clear choice.

Without major changes in operations at Family Dollar, I would expect little change in the current trend.

Growth versus contraction tells a lot in this scenario. The question might be; does Dollar Tree really understand what they bought?

'Scanner'

Any attempt to save a company and a business is always good for business in general. The problem for dollar stores that may have brought about the necessity for the merger/acquisition is not addressed in this discussion; sales.

Most dollar stores are expanding in scope and pricing. This is how their problems started. The slim margins inherent within this business might be a problem for the expanded overhead needed to display new product offerings, which in turn crushes cash flow; the blood supply of any business. The rest of the retail population has made several strides in providing equal or more competitive pricing against this market plan, which is keeping the consumer in their stores for the whole order that is also still declining. A look at their distribution costs might reveal additional pressures not easily disposed of or absorbed. The core problems are most likely in the marketing plan's need for an update to face the economy they felt was sure to be a friend to the way they do business. Unfortunately, a bad economy is always bad for everyone.

'gjarnoldjr'

While this move certainly has the opportunity to put additional pressure on Dollar General, the competitor to likely feel the most pain is Walmart.

Walmart grew up catering to the value consumer. Walmart is increasingly moving to a format that is "between." Between Target and other medium-to-middle class retail consumer favorites and the dollar format. Retailers in the middle have struggled traditionally (take J.C. Penney between Target and Macy's). If value retailers become more appealing and the upper-middle does a better job catering to the consumer, where does Walmart fit in? This is a challenge that the new leadership team at Walmart is facing at this very moment. Threatened by Amazon, upper-middle and now potentially the value competitors, Walmart must pivot and appeal to consumers in ways they have not previously succeeded. The retail landscape just became far more interesting with this latest development. No retailer is too large to fail and exit. Success will be realized as retailers focus on the consumer, and answer "yes" and "now" to every question asked by the consumer.

Kevin Sterneckert, CMO, OrderDynamics

This has to make Dollar General take notice. They have been the top dog for a good while and now change is happening quickly. I am only surprised that it has taken this long to see consolidation in this silo begin.

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

We now see consolidation in the "low end." Wow! Guess it was bound to happen—a normal business model.

I LOVE Dollar Tree. Some—although not all—of their assortment represents great value. On the other hand, Family Dollar stores that I have visited seem a little scattered and sometimes messy. Their prices are fairly good and in step with competitor Dollar General, yet both have a similar and different business model than Dollar Tree. Dollar General, however, runs a MUCH tighter ship and seems to do a better job with merchandise assortment, store layout and overall company operations. DG does seem to place itself in more affluent areas compared to Family Dollar, which seems to be concentrated in lower socioeconomic areas—areas that probably benefit from having it there, so there is an alternative to other much higher-priced options. ALL of these stores provide good value and decent-to-good product for their customer.

I do not think that DG will be intimidated in any way by this merger. DG's business model is different from DT and DT has work to do with the FD stores. In my humble opinion, DG had already won the war with FD, and surpasses it in merchandise mix, quality, day-to-day operations, and store appearance.

DT DOES have a small "greater than one dollar" store unit from their Deals acquisition, so they are NOT completely unfamiliar with this category. Perhaps FD will be maintained as the "low end" and their "greater than one dollar" unit will take over some of the FD stores.

Overall, I think DT has the ability to improve the FD stores and it is probably a good thing for DT to have done. Also, DT does not hesitate to change or shutter stores that are under-performing—they seem to be adept at that. That may present a problem for some communities as FD may have tolerated poor performers since FD did seem to be a good community partner.

William Passodelis, associate, ML Co.

With same-stores sales growth barely (or not even) keeping up with inflation,
even the stronger two of this trio are barely treading water; so the real question: is an economy in which poverty retailing is a growth industry a bad thing, or is an economy where even THEY aren't growing a worse thing?

'notcom'

My first thought was Dollar General wins when Dollar Tree starts closing down Family Dollar stores where there is redundancy.

David Livingston, Principal, DJL Research

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