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[6 comments]

Does Family Dollar/Dollar General make a monopoly?

August 25, 2014

Family Dollar surprised many by rejecting Dollar General's merger offer based on the premise that the combination holds too much anti-trust risk.

The rejection came despite the fact that Dollar General's $9.0 billion all-cash proposal came in higher than the earlier $8.5 billion cash-stock deal from Dollar Tree.

Antitrust authorities are expected to explore whether any merger will lead to monopoly-like pricing leverage.

According to a New York Times analysis, Family Dollar believes regulators looking to approve the merger will focus their analysis on the dollar channel, where Dollar General is the leader and Family Dollar is second. Dollar General believes authorities will take a broader view, "looking at numerous other competitors that sell their product range, from Walmart to Walgreens."

In its statement, Family Dollar claimed Dollar General had canceled proposed meetings several times to discuss antitrust concern and CEO Howard Levine said Dollar General's proposal letter "contained blatant mischaracterizations and did nothing to address the antitrust issues in Dollar General's proposal."

Dollar General asserted Family Dollar didn't have all the relevant information.

"We have done extensive antitrust analysis using experienced advisers, the results of which confirm that the transaction as proposed is capable of being completed," said Rick Dreiling, Dollar General's chairman and CEO, in a statement. To resolve potential monopoly violations, Dollar General offered to sell 700 locations.

The Dollar General/Family Dollar combination would have nearly 20,000 stores in 46 states with over $28 billion in sales. The Dollar Tree combination promises over 13,000 stores in 48 states as well as five provinces in Canada, with sales over $18 billion. Dollar Tree's format — with all products under a buck — also differs somewhat from Family Dollar's.

Some reports felt the rejection was made because Mr. Levine planned to stay on in some capacity post-merger. Others felt the rejection was a ploy to get Dollar General to up its offer or add a guarantee it would pursue the deal regardless of what regulators demand.

Pointing to the recent mergers of Office Depot/OfficeMax and Men's Wearhouse/Jos. A Bank, The Wall Street Journal said the Federal Trade Commission has lately been more receptive to retail mergers by similar companies. The report noted that Amazon has changed the "competitive dynamic" but it also noted that dollar store shoppers tend not to shop online.

Indeed, some felt leverage could be gained depending on the geography. Scott Hemphill, a professor of antitrust law and intellectual property at Columbia Law School, told Marketplace Business, "If you are a customer in a part of the country that's close to Dollar General and close to Family Dollar, but not close to a Wal-Mart, then there's a real concern that the firms that they merged would be able to raise their prices."

Discussion Questions:

How would you assess the antitrust concerns of a potential Family Dollar/Dollar General merger? How should authorities view at the competitive landscape? What's your estimation as to the likely reason Family Dollar rejected Dollar General's higher offer?

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:

How would you rate the antitrust concerns around a potential Dollar General/Family Dollar merger?

Comments:

I would be surprised to see the government block this merger (if it happens) on antitrust concerns, as long as store overlap is addressed. It represents concentration in only one segment of the retail industry (dollar stores), not unlike the Macy's-May combination in the department store segment. It's not hard to make the case that dollar stores are competing for market share with discounters (especially Walmart's small format stores), drug chains and e-commerce retailers like Amazon, not just against each other.

Regulators have bigger fish to fry, right? Think about the antitrust effects of a Comcast-Time Warner Cable merger, or the recently proposed Fox-Warner acquisition. These have a potentially more far-reaching impact than the merger of two dollar stores.

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Dick Seesel, Principal, Retailing In Focus LLC

The number of retail channels the dollar stores compete with includes c-store, chain drug, supermarkets, mass merchants, etc. I would expect the FTC to require more than the 700 proposed locations be divested, but ultimately to approve the sale. I also think that the combination of the similar business models of Dollar General and Dollar Tree would result in a greater upside for their shareholders.

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Steve Montgomery, President, b2b Solutions, LLC

Mergers should be evaluated in terms of their impact on the marketplace. In this case, it should be the degree to which it restricts competition and controls prices to the consumer.

These stores sell virtually nothing that the consumer can't buy at alternative outlets such as Walmart or Walgreens. If anything, the merger should enable them to become more efficient and offer even lower prices to the consumer.

Of course, we must remember the FTC blocked Whole Foods from buying Wild Oats. Not one of its finer moments.

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

The potential Family Dollar/Dollar General merger does not meet the criteria of a monopoly. Consumers can still purchase similar products at similar prices from a large number of other retailers. If the merger does happen, there will continue to be a great deal of competition in this retail arena.

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Larry Negrich, Vice President, Marketing, nGage Labs

In these days when ecommerce sites are experiencing double digit compounded annual growth, it is a very interesting question of how you define a competitive landscape. Prices are typically equivalent or even cheaper online, especially if you include eBay marketplace.

It could be argued that certain communities or economic groups do not have access to online shopping (e.g. no credit card, PayPal or even the lack of internet access).

But for almost all, there is a Walmart, Kmart, Alco, Walgreens or equivalent offering very similar products at very competitive prices. There is little to warrant strong antitrust concerns for this "Dollar merger."

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Chris Petersen, PhD, President, Integrated Marketing Solutions

It's a dollar store, so what's the worst that could happen? Everything is pretty much a dollar. For the most part, these are low volume stores that compete with a greater landscape of big box stores. When I look at my list of Dollar General store volumes, the highest I see is a bit over $7 million per year. Not much of a retailer when Walmart now has several over $150 million per year.

The big box stores will always keep them honest on price. The government is usually a decade behind on defining what a competitor is. I recall working on the Kroger/Winn-Dixie deal in Fort Worth and the government said it would be a monopoly. Why? Because Walmart and Sam's Club were not defined as supermarkets at the time. Now that the definition of supermarket competitor has been broadened, perhaps the regulators can expand the definition of a dollar store competitor to include Walmart and Target, etc, paving the way for a merger.

David Livingston, Principal, DJL Research

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