Deal$, Deal$, Deal$
By George Anderson
Supervalu is getting out of the standalone dollar store game and Dollar Tree is more committed to it than ever.
Yesterday, the wholesaler and retail grocer announced it had reached a deal to sell its Deal$ dollar store chain to Dollar Tree for $30.5 million in cash plus an undetermined amount of inventory. The chain has 138 stores in 16 states.
In its fourth quarter conference call, Dollar Tree’s president and chief executive officer Bob Sasser said, “Deal$ is a strong and recognized brand in its market. We intend to keep the name on the stores, leverage the best of what they’re currently doing while leveraging the Dollar Tree infrastructure for improved efficiency.”
“Furthermore,” he added, “the Deal$ acquisition includes a number of combo stores that offer an expanded assortment of merchandise, including items selling for more than a dollar. We plan to continue what’s been started there using the Deal$ stores to test new assortments and price points without disrupting our focus on Dollar Tree stores.”
Mr. Sasser said the acquisition brings with it an “experienced store and field management team” that he believes “will be able to integrate efficiently and really hit the ground running. We have existing logistics capacity to efficiently serve these stores with no additional capital expenditure.”
Moderator’s Comment: Firstly, what is your reaction to this deal and, secondly, how do you assess the current state of the dollar store market?
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George Anderson – Moderator
If 158 stores are only worth $30.5 million, then Supervalu is smart to cut and run. That is too many stores taking up too much valuable time. The same amount of money is what they spent to buy 3 Jewel stores in Chicago. Much easier to run 3 stores than 158.
Dollar store format is in great shape…it’s just evolving, as the big players in this sector start moving into new sub-segments and others try to jump into the segment. As for SuperValu selling, it’s a smart move. They already have a strong brand in the dollar segment and with the purchase of Albertsons, they need to be careful they don’t wind up with too many retail brands / formats. SuperValu has their hands full with the number of different retail types they own or supply, so it only makes sense to do a little pruning.
SuperValu is smart to get out of the dollar store business. There are too many competitors, and constant excessive location growth will reduce profits further. Dollar Tree would be smart to merge (for stock not cash) with as many of their profitable competitors as possible, as quickly as possible, and use the next 3 years to improve operations without opening any new stores. Retailing has too many categories featuring redundant competitors who’d do a lot better with rollup strategies. Dollar stores are the poster child for redundant strategies. The merger catalyst could be the same used in other redundant industries: golden parachutes for the acquired firms’ CEO’s and boards of directors. Don’t pay cash for the shares, just use cash for the parachutes. For all the pain and waste related to the Federated rollup strategy, investors love it because it eliminates the cost of competition.
Smart move for SuperValu? Yes. But because they don’t have dollar store format operation as a core competency — not because dollar stores are headed for a fall.
Smart move for Dollar Tree? Absolutely. Dollar Tree is one of the few competitors sticking to the true dollar price point / treasure hunt format and doing it well. But there is a segment of this channel that is going to be all about the cheapest place to buy essentials, regardless of price point. That means food. And food means getting some pricing flexibility. The Deal$ format allows Dollar Tree to experiment and grow in that arena without damaging their “treasure hunt franchise.”
SuperValue has made the correct strategic decision. First, this frees up both cash and management talent for the Albertsons acquisition. Second, operating only at 100 plus stores is below critical mass. To expand this chain would require investment in logistics, while the Albertsons acquisition will achieve greater utilization and a higher ROI on existing capital investment. Last, this indicates SuperValue understands its core business and says nothing about the dollar store category or format, only a better allocation of resources.
Good deal for Supervalu, which can use some extra cash in the coffers with its acquisition activity. Deal$ was also not to their core mission. I was wrong a few years ago about how strong dollar stores would get, so I’m not too trusting of my instincts here. Never saw them as a long-term player, and still don’t. I see slight gains this year based on new stores, but on a same-store basis, channel-wide, I’d expect the average to be slightly down. It’s kind of a Johnny one-note concept, and I question how much of a real treasure hunt exists. I’d suspect that low-end limited assortment stores with better focus will gain inroads against them, along with other formats now evolving. But as I said, I’ve been wrong before….