Should Walmart make a bid for Family Dollar?

Evidently there are people who think it would be a good idea for Walmart to throw its hat into an already crowded ring of parties looking to acquire Family Dollar. I come to this conclusion after responding to emails and being interviewed by a media outlet on the topic. Earlier this year, Credit Suisse analyst Michael Exstein floated the same idea.

As I understand the reasoning, Walmart would try to acquire Family Dollar because it could provide the retailer with a rapid ramp-up of its small store expansion plans while taking out a competitor that is currently cutting into its own share of market, particularly among low income consumers. Mr. Extstein also made the case that a Walmart acquisition of Family Dollar would get Federal Trade Commission approval because only 19 percent of Walmart’s stores are within a mile of a Family Dollar.

As to why Walmart would be making a big mistake if it entered into the bidding for Family Dollar, there are a number of reasons. The biggest is that Walmart continues to struggle in the U.S. and needs to keep its focus on fixing its own issues before taking on those of another chain. Same-store sales at Walmart’s stores in the U.S. were flat in the most recent quarter following declines in the five quarters that preceded it. Customer traffic has fallen for seven straight quarters.

family dollar storefront

The chain that acquires Family Dollar will be taking on its problems, and there are plenty. In the third quarter, Family Dollar’s same-store sales dropped 1.8 percent. That followed a 3.8 same-store sales decrease in the second quarter and a 2.8 percent drop in the first quarter. Earlier this year, Family Dollar announced it would close 370 underperforming stores and slow its new store openings in 2015.

If Walmart is looking to acquire a dollar store chain, the one it should consider is Dollar General. Clearly the number one player in the dollar store channel, Dollar General recently reported same-store sales growth of 2.1 percent in its second quarter. The chain has grown both customer traffic and the average tickets at its stores for 26 consecutive quarters.

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Discussion Questions

Should Walmart enter the bidding competition for Family Dollar? Do you think Walmart should be looking to expand its business through acquisitions in the U.S.?

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Dr. Stephen Needel
Dr. Stephen Needel
9 years ago

Not sure that Family Dollar is the right acquisition at this point in time. And George makes a good point—that Dollar General may be a better choice. If they were to acquire either, they would need to change the infrastructure to fit Walmart practices, which may make them more efficient.

Ed Dunn
Ed Dunn
9 years ago

Yes. Walmart’s small-format efforts to make inroads in urban areas has not been as effective as the dollar store format. It would make sense for Walmart to aggressively pursue Family Dollar to leverage the urban locations instead of building out new small-format stores.

Ian Percy
Ian Percy
9 years ago

WAY back when I was completing a degree in clinical psychology and conducting therapy sessions, one thing I noticed is that people who are struggling take on even more struggles as a diversion at best and a denial at worst. Couples struggling with their relationship, for example, often buy an unnecessarily bigger house because it gives them something else to focus on. (Not that I would have any personal experience of this).

Walmart clearly has its hands full of its own struggles. So would going after Family Dollar be a diversion or a denial? And of course Walmart would feel compelled to remake any such acquisition into its own image, justifying it on the basis of efficiency and buying power—which would also pretty well kill the simple joy of the dollar shop experience.

Paula Rosenblum
Paula Rosenblum
9 years ago

Interesting concept. I think it’s actually a great idea. I’ve said often that Walmart doesn’t have the in-house expertise to do neighborhood markets right. This would allow them to instantly get it.

The question is, is it in their DNA to do it?

David Livingston
David Livingston
9 years ago

Hard to say one way or the other. Walmart does have the same-store sales issue going on, mostly as a result of opening sister stores, cannibalization and expansion of online retailing. I think Walmart could increase sales at these units, but mostly at the expense of existing Walmart stores. These dollar stores would be a drag on the overall sales per square foot ratios because on average they don’t really generate very much sales volume per unit. I think Walmart should focus on Walmart and not try to rescue struggling dollar stores.

Cathy Hotka
Cathy Hotka
9 years ago

Walmart should have opened small-format stores decades ago.

If Walmart decides to pursue Family Dollar, they should leverage Family Dollar’s learnings around small-format operations, and not attempt to impose Walmart’s large-format processes. Why throw away Family Dollar’s demonstrated expertise?

Arthur Shatz
Arthur Shatz
9 years ago

If Walmart were to get into the fray, I can’t imagine a scenario where the FTC would not have some objections. I also agree that Walmart needs to deal with its own issues before taking on someone else’s.

Ryan Mathews
Ryan Mathews
9 years ago

NO!!!

Ah, sorry … No, I don’t think that would be a good idea at this time.

Walmart needs to find some way of bolstering its U.S. business, and acquisition, while a relatively fast way of growing potential share, may not be a good idea until the rest of the house is in order.

Dave Wendland
Dave Wendland
9 years ago

This has been a question I’ve debated for some time.

On the one hand, Walmart would benefit from the small footprints, inroads to areas unsuccessfully tapped by their own efforts, and they would be able to reach even more shoppers in one fell swoop.

On the other hand, Walmart has its hands full and it may not need additional distraction from their core. The shoppers may become further confused and basically create channel shift and not new dollars. And, finally, the FTC may have something to say about this.

So, as an alternative, what if Walmart created a store-within-a-store Dollar Store concept? The real estate already exists if they could figure out how to duplicate the convenience of the value channel. Such an approach may actually bring more people into existing Walmart locations instead of driving them toward an alternative site.

Dick Seesel
Dick Seesel
9 years ago

I think this came up a few weeks ago when the original Dollar Tree bid took place. My answer then was no, and I still feel that way. Walmart has more opportunity expanding its own small-format concepts, and has never had much track record acquiring and growing businesses that did not develop organically. Stick to your knitting and find new ways to leverage your brand.

Steve Montgomery
Steve Montgomery
9 years ago

I concur with all those that have stated Walmart’s purchase of Family Dollar would be a bad idea. Walmart has yet to demonstrate that it can run store formats this small. Learning how to do it with a chain of this size (while resisting the temptations to make them mini-Walmarts) would distract the company from the focus needed to fix its Supercenters and other large-format locations.

If they are having trouble staying in stock with large backrooms, dedicated receivers, etc., how would anyone believe they could do so in several thousand small-format locations? Better they continue to learn how to operate small formats internally, where the glare of Wall Street is blundered by the relative insignificance of those locations on the overall company.

Zel Bianco
Zel Bianco
9 years ago

With all of the facts laid out, it sounds to me like a strategically all-around bad decision for Walmart to consider making a bid for Family Dollar specifically. The potential reward in this situation is just not worth the risk. Not only is Walmart facing problems of its own, such as same-store sales being flat for the most recent quarter following declines in the additional five quarters that preceded it, but they additionally have had customer traffic fall for seven straight quarters. It needs to handle these issues, and consider them top priority over a new acquisition.

Family Dollar is also in a mess itself. Even though they would be taking out a competitor, they would be taking out a low-performing competitor with large same-store sales drops and the closing of numerous stores. There would be less risk, a much stronger guarantee of reward, and one less noteworthy competitor if Walmart were to seek out acquiring a similar competitor which is doing well, such as Dollar General. An additional smart and creative thing to do would be to acquire a chain that has stores in markets they are having trouble penetrating.

Gene Detroyer
Gene Detroyer
9 years ago

The bidding has already escalated to the point where there will be little chance to increase shareholder value. This scenario is the perfect case study on why acquisitions fail. We are at the point of management hubris. Strategy is out the window.

If Walmart were to enter the bidding, it would only escalate the already too-high price. M&A should never be based on market share. It should always be based on ROI. We are dealing with very mature markets here. Horizontal M&A in mature markets have a failure rate (increase in shareholder value) of over 80 percent.

Assuming Walmart’s cash to invest in growth is finite, they have considerably better opportunities off shore, where over 68 percent of their stores are already located, and where they are experiencing their growth.

Al McClain
Al McClain
9 years ago

If I were Walmart, I would definitely pick up a dollar chain because: 1.) It gives them an instant huge footprint in the small-store format, which they have struggled with for years. 2.) It provides thousands and thousands of new and easily accessible in-store pick up locations for dot-com merchandise. 3.) There should be supply chain and other efficiencies as they combine operations and sell even more key items. 4.) Instant revenue increase. 5.) One less competitor.

Suggested name for these small stores: Family Walmart.

Bonus points: The acquisition might get Wall Street off their back for a year or so.

Camille P. Schuster, Ph.D.
Camille P. Schuster, Ph.D.
9 years ago

Entering this bidding competition is a bad idea for Walmart. With all the experimentation that Walmart is doing with new formats and new locations and new sizes, a move to tie them into real estate with a specific location and size would be a mistake.

Gordon Arnold
Gordon Arnold
9 years ago

The dollar stores are struggling for many reasons like size, shrink, location, very slow turn inventory and of course overhead. Not exactly an appetizing lure for a company like Walmart that is awash with market pains of their own.

Another consideration is the lower margins for the stores which make the Walmart arketing plan more of an obstacle in the face of this segment. Spending money to penetrate the gas-and-go market will pay better and allow for growing pains, thanks to the existing very high store margins and the very low part time pay scales that Walmart just loves. There is always the possibility that they will write the check to close the stores. I would rather let them just die off on their own, or at least shrink to a new level of enduring insignificance.

George Anderson
George Anderson
9 years ago

An email from a Walmart spokesperson referenced comments made by CFO Charles Holley last month regarding the announced deal between Dollar Tree and Family Dollar. In response to a question from Bloomberg TV, Mr. Jolley said Walmart’s “smaller formats can sell anywhere between three times to eight times what some of those stores do. And we think it’s a much better fit for our customer—and for our shareholders, because they have really good returns for us.”

Lee Kent
Lee Kent
9 years ago

Walmart has had enough trouble fixing its own ailing self. What would they do with another ailing dependent? ‘Nuff said for my 2 cents….

James Tenser
James Tenser
9 years ago

Would adding the 8,000 Family Dollar locations help Walmart gain rapid coverage in urban neighborhoods with high traffic potential and advertising synergies?

I didn’t think so until I checked a few key metro areas using the store finder on their site: None in Manhattan, but 124 locations encircling it. 81 in Chicago. 64 in Dallas. 12 in L.A. 25 around Phoenix. 42 in Charlotte. 29 in Atlanta.

Let’s re-phrase then: Would adding a thousand or so locations in top 100 metro markets help Walmart add incremental shoppers and trips? Would it help it make headway in the share-of-wallet wars? Hmm….

Add this to the considerations that may be in play in Bentonville: At $9.1B, Family Dollar may look like an economical way to rev up a small store urban/dense suburban strategy. The rural market strategy may be an entirely separate reasoning process. Why not spin those units off?

Acquiring a stronger player like Dollar General might lead to a similar analysis, but at a higher price.

John Fermann
John Fermann
9 years ago

I believe Family Dollar, Dollar General, etc. is a great fit for Walmart. They have the best fulfillment system in the US and having more stores to deliver to on runs they are already making would only make them more efficient.

Mohamed Amer
Mohamed Amer
9 years ago

No! it would be the beginning of the end of Walmart. The only way for it to work is IF Walmart is prepared to accept new retail genes in their DNA pool without forcing into a homogeneous Walmart mold/factory. At the same time, those new genes need some work to regain the vitality of their youth.

Ed Rosenbaum
Ed Rosenbaum
9 years ago

I agree that Walmart’s efforts to penetrate new markets with their small store concept has not been as successful as they had planned. But I do not think getting into the battle for Family Dollar is going to be very beneficial. What makes them think the Family Dollar customer will quickly become a Walmart customer? I can’t think of many beneficial reasons except Walmart’s belief that no one is better than them at what they do.