Dollar Tree And Family Dollar: What Does This Mega Deal Mean For Retail?

Posted on August 4, 2014

Dollar Tree’s announced acquisition of Family Dollar represents one of the largest retail mergers in recent history. Combined, the two chains will create a retail powerhouse, with over 13,000 stores and more than $18 billion in revenue. The merger would create a rival slightly bigger in size and scope than the current market leader, Dollar General.

Despite the similarity in names, the two operate very different business models. Dollar Tree prices everything at a dollar, about half of its products are consumables and it is less nationally brand driven and derives a greater percentage of its business through imports. At Family Dollar, consumables make up about 70 percent of products, the chain is more nationally brand focused and sells at variable price points, with a concentration of product priced under $10. Just 27 percent of Family Dollar’s SKU’s are priced under a dollar.

While both chains operate boxes that are around 7,000 to 10,000 sq. ft., their real estate strategies have been markedly different.

Family Dollar focuses its attention on low income customers, with a concentration on rural and urban markets where these customers are located. Very low rents, low fixed build-outs and short-term leases are the watchword for these stores, which make their economics work with store units that can succeed at just over $1.2 million in revenues per location. Family Dollar has focused its business on customers who need to carefully watch their budgets and are looking for the best deals to feed their families.

Dollar Tree, with its $1 price points, reaches a more diverse customer base, from an income perspective. Its customers are interested in saving money, but may also be looking for bargains and deals in categories including party supplies and seasonal events (Christmas decorations, Halloween, Easter, etc.) The chain has focused its real estate strategy on more suburban locations and is geared toward driving higher productivity per box.

Family Dollar has been adversely affected by the economy, with low income consumers impacted by higher fuel prices and reductions in food stamp programs. The chain has been under-performing, had planned on closing 370 stores and has scaled back its store opening program for the coming year. It is also no coincidence that retailers like Wal-Mart Stores are paying much closer attention to this space and plan on greatly expanding its Walmart Express format, which is targeting similar markets to Family Dollar.

The real question is whether the combination of Family Dollar and Dollar Tree makes sense and what changes can we expect if this deal goes through? Despite the differences in formats, there is synergy. There will be cost savings (projected at $300 million per year) in combining headquarters operations. We would also expect to see potential synergies in private label program development and vendor leverage. It should be assumed that both formats will continue to be run separately. We could see some units change names on the door if a particular piece of real estate is better suited to one format rather than the other.

We would expect to see the biggest changes occur within the Family Dollar format. An expectation of more $1 price point items and perhaps a shift to higher margin general merchandise products are in the future.

We would not anticipate significantly more closures than what has been announced. The two formats can comfortably live together if needed.

This is the second major deal in the retail sector this year where an industry dominated by three formats has been reduced to two. The Office Max/Office Depot deal will have a similar impact in the office supplies sector, but with a much greater number of stores ultimately at risk. If mergers follow mergers, perhaps further consolidation is potentially in the cards.

And what will be Wal-Mart’s response? Will they sit still in getting shut out of this growth category? We’d expect more activity in the second half of the year.