Dollar Tree, Family Dollar Deal: What's Next For Dollar General?

By Erin Harris, Editor-In-Chief, Cell & Gene
Follow Me On Twitter @ErinHarris_1

Dollar Tree’s acquisition of Family Dollar for $8.5 billion is especially interesting in light of discounters’ poor performance as of late. Back in April, Family Dollar reported it would cut jobs and close approximately 370 underperforming stores from its 8,100 store portfolio. Also at that time, Family Dollar decreased prices on nearly 1,000 basic items in an effort to better meet low-income shoppers’ needs. While deep discount retailers flourished and expanded rapidly during the recent recession, these same retailers are struggling today, as sluggish wage growth has strapped many of those employed in low-paying industries. Not to mention the brutal Northeast winter that spiked utility and food costs. Media pundits have stated that Family Dollar may have taken the biggest hit due to poor decisions in pricing, merchandising, and site selection. As such, the acquisition could mean turn around for Family Dollar. 

As Walmart expands its smaller Neighborhood Market and Walmart Express concepts to compete with deep discount retailers and cater heavily to low-income customers, Dollar Tree’s move is a good one. The deal affords suburban-based, middle-income-focused Dollar Tree more flexibility; its fixed pricing has helped attract customers and boost sales, but it also puts the company in a tough spot as inflation pushes up its costs and pressures profit margins. Family Dollar is far more flexible in its pricing, which allows it to sell a greater variety of items at various price points. Dollar Tree intends to keep Family Dollar as a separate brand.

While Dollar General, the current leader in the space, is not part of the acquisition, it will most certainly be affected by it. Wall Street expected Dollar General to make the move to acquire Family Dollar. Now, some financial analysts are suggesting that Walmart may be eyeing up Dollar General as a way to expand its smaller store footprint.  With or without a Walmart takeover, the recent Dollar Tree/Family Dollar acquisition coupled with CEO Rick Dreiling’s retirement announcement means Dollar General will experience a number of transitions, too.

If the acquisition deal goes through, Dollar Tree and Family Dollar will have more than 13,000 stores in 48 states and in Canada, and more than $18 billion in revenue, which closely rivals Dollar General’s $17.5 billion. Mergers and acquisitions are extremely complex, but one of their basic economic principles states that for the transaction to be justified, the two firms involved must be worth more together than they were apart. For Dollar Tree and Family Dollar, this is especially true, given that they’ll now have bigger market share than Dollar General.