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Discount Merger a Bargain?

August 29, 2014
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Editor's Note: The following deal is not yet final. Family Dollar rejected Dollar General's $9.1 billion proposal, saying it is in discussions with the Federal Trade Commission over the antitrust implications of its deal to be bought by Dollar Tree, according to reports. 

 

The speculation is over. While talk of a takeover of discount retailer Family Dollar has been circulating for months, a merger has finally been revealed.

Dollar Tree, a discount retailer of the “everything’s a dollar” variety, announced in July that it’s entering into a definitive merger agreement to acquire Family Dollar.

The cash and stock transaction is worth about $8.5 billion and annual sales will exceed $18 billion after the merger, according to Dollar Tree. Is this deal a bargain for Dollar Tree? Analysts are saying other possible buyers (including Dollar General) may still come forward (none had at time of press).

While both Dollar Tree and Family Dollar operate around the adage of “value,” this transaction will beef-up the company’s convenience factor, allowing the retailer to operate more than 13,000 stores in 48 states and five Canadian provinces (Dollar Tree recently reported operating 5,080 stores, while Family Dollar reported a range of 8,200).

Dollar Tree said it currently targets customers within a broad range of Middle America, with stores located primarily in suburban areas, while Family Dollar targets low- and lower-middle income households through its urban and rural locations.

The expansion will instantly jump the discount retailer in front of competitor Dollar General, which had 11,338 stores in 40 states as of May 2, 2014. Dollar General currently has more U.S. retail locations than any other discount retailer and has been expanding. In PLBuyer’s March cover story, “Evolution of the Discount Channel,” Crystal W. Ghassemi, APR of Dollar General, confirmed plans to open 700 new stores in 2014, noting approximately 25 percent of Dollar General products are priced at $1.00 or less.

This acquisition positions Dollar Tree for accelerated growth, stated Bob Sasser, Dollar Tree’s CEO. “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.”

Sasser added that the acquisition will extend the company’s reach to lower-income customers and strengthen its store footprint.

The merger also might create a bigger threat to Walmart, if the newly combined company is able to under-price the retail giant, reach more discount shoppers, and offer better, more diverse products. Walmart has been expanding its small store formats with banners like Neighborhood Market and pilot Walmart Express. Also testing out the small box format, Target opened its 20,000-square-foot TargetExpress protype in the Dinkytown neighborhood of Minneapolis in July.

As competition from small box stores increases, discount retailers have been actively adding to their food offerings. Dollar Tree has increased its private label offerings, including more refrigerated and frozen foods, while in the third quarter of fiscal 2014, Family Dollar’s strongest sales were in the consumables category, driven primarily by strong growth in refrigerated and frozen food, and tobacco (for more information on private brand frozen foods see page 21). In 2010, the retailer launched its Family Gourmet food range, which replaced the Family Pantry brand.

Dollar Tree has described its product assortment as “a balance between consumable merchandise and variety/seasonal merchandise,” noting Family Dollar›s assortment “consists primarily of consumable merchandise and home products.” The company said these “complementary assortments will enable the Dollar Tree and Family Dollar brands to expand category offerings and to deliver a broader, more compelling assortment to all customers.”

Dollar Tree offers myriad private labels across a multitude of categories, identifiable only by a “Distributed by Greenbrier International Inc.” tag on the back of product packaging, while Family Dollar private labels are more notable and bring multiple price points to the table to woo value shoppers. Private brands include Family Dollar, Family Pet, Family Chef and Kidgets, a line of value-priced clothing, diapers and baby products.

The Kidgets line corners a specific value-seeking market: families. The line’s current savings is notable. A Kidgets pacifier two-pack, for example, was advertised for $1.50 in July, while the retailer also sells national brand Gerber pacifier two-packs for twice as much. Packs of Kidgets diapers start as low as $6.00.

Family Chef offers similar kitchen items to Dollar Tree, such as kitchen towels and storage, but at a slightly higher price point the chain can offer a wider assortment. For example, a 14-piece Family Chef storage set of plastic food containers starts at $6.00, and new $3.00 kitchen towels with a border print are a little prettier than what shoppers might find at the lower-priced Dollar Tree.

Dollar Tree’s assortment is peppered throughout the store, with private brand labels such as The Home Store for kitchen towels and linens, Surefresh for food storage, Greenbrier Kennel Club for pet food, and April Bath & Shower for personal care items. The chain also offers a considerable amount of private brand food.

Personally, I feel Dollar Tree’s seasonal merchandise is a considerable strength, as I know shoppers across all economic stations that shop the store for holiday items. The $1.00 price point allows them to add holiday flair on the cheap, without the guilt of spending money on nonessentials.

 Dollar Tree’s entire popular Cobblestone Corners Christmas Village can be ordered online for $36.00 (the 61-piece set works out to less than $1.00 per item). I might pick up the 16-piece Tombstone Corners Halloween Set, new this year. And, at $1.00, who could argue the new battery-operated pumpkin strobe light isn’t a fun bargain for any autumn pumpkin carver.  

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