By Bill Peters
‘It was just a culmination of things that all needed fixing,’ analyst says
Roughly a decade ago, both Dollar Tree Inc. and archrival Dollar General Corp. were bidding for Family Dollar as the rapidly growing dollar-chain industry opened lots of new stores. When Dollar Tree (DLTR) finally closed on that bid in the summer of 2015, executives described the $8.5 billion deal as a “transformational opportunity” to sell more products in more places to more low-income consumers. There was talk of “cost synergies” and “store productivity.”
But even with some big leadership changes and efforts to shovel cash into store upgrades, that vision, and the financials, never exactly materialized.
On Wednesday, Dollar Tree capitulated, announcing that it would sell Family Dollar to two private-equity firms for $1 billion, far less than it paid for the chain. And despite the synergy-related enthusiasm of the past decade, Dollar Tree Chief Executive Mike Creedon said Dollar Tree and Family Dollar were, in fact, “two different businesses with limited synergies” that were better off on their own.
Analysts cite a number of reasons for Family Dollar’s difficulties, including low-income shoppers who are wrestling with inflation, competition with Dollar General (DG) and mass-market retailers like Walmart Inc. (WMT), and issues with logistics, too many store openings, poorly maintained stores and pricing.
“Customers noticed that, and it was just a culmination of things that all needed fixing,” said Melius Research analyst Karen Short.
“You have to paint stores,” she added later. “You have to change tiles. You have to change shelving. That’s just day to day.”
Leadership changes, store differences
Short noted that over the years, management made efforts to clean up Family Dollar stores, to bring in lower-priced items and to set up Family Dollar and Dollar Tree combo stores. It tried remodeling stores, selling more party supplies and alcohol, and adding freezer and cooler space.
But Family Dollar’s sales, after seeing a pandemic-era lift, slipped last year, according to FactSet data, and were expected to fall further. Analysts remained concerned about profit margins. In 2023, Mike Witynski left his position as Dollar Tree’s chief executive, a role taken up by former Dollar General Chief Executive Rick Dreiling, who brought with him hopes of a stronger turnaround but who left the chain in November due to health issues. Creedon replaced him.
Dollar Tree first said that it was reviewing “strategic alternatives” for Family Dollar last year, after announcing a year before that it planned to close about 970 Family Dollar stores. And analysts say that Dollar Tree and Family Dollar have notable differences – even though both have the word “dollar” in their names.
Dollar Tree sells a higher-end mix of discretionary items, like party supplies and greeting cards, which make up around half of its business, said John Zolidis, president of Quo Vadis Capital. The stores tend to target middle-income shoppers with locations in the suburbs, sometimes right next to a Walmart, and they are intended to be a bit more fun, and a bit more about the “treasure hunt” for bargains. Analysts have said Dollar Tree was the stronger business of the two.
Similar to Dollar General, Family Dollar mainly sells lots of low-priced consumables – like food, paper and plastics, household cleaners and health and beauty products – to lower-income consumers, he said. Family Dollar stores are often in urban or downtown areas or in rural areas where Walmart isn’t, with the goal of drawing customers on a tight budget or who only need to pick up a few things.
But even as price increases and a higher cost of living over the past several years keep many consumers focused on the basics, Zolidis said those basics can be found in lots of other places. That has made it tough for Family Dollar to stand out.
“The consumables are something you can buy not just at dollar stores, but also at drugstores, big-box retailers, grocery stores – the products found pretty much everywhere,” he said. “They don’t really have a differentiated assortment from a product standpoint.”
Placer.ai, a firm that tracks retail foot traffic, said in a report this week that when the pandemic hit in 2020, dollar stores were designated as “essential” retailers, which helped sales and prompted Dollar General and Dollar Tree to keep opening new stores. However, the stores’ traffic growth later slowed. And for Dollar Tree and Family Dollar, it went in opposite directions.
In 2024, visits to Dollar Tree rose 5.4% year over year, a slowdown from the 13.9% gain in 2023. But for Family Dollar, traffic last year fell 4% year over year.
Big-box competition, store issues, low-income consumers’ struggles
Over that time, the biggest retailers – like Walmart , Costco Wholesale Corp. and Amazon.com Inc. – also started flexing their muscle, at the expense of other discounters.
They cut prices and started selling items in smaller package sizes to attract shoppers making quicker “fill-in” grocery runs, while also rolling out online delivery, pickup and drive-thru services. BMO analyst Kelly Bania, in a note in November, said Walmart and Amazon (AMZN) were also offering more benefits to customers who were using government assistance. Walmart has also attracted wealthier customers seeking a break on prices, and Costco (COST) sees those customers as a bigger opportunity.
Some analysts said that over the past two decades, the dollar stores had started to stock their shelves with more discretionary items, or things that aren’t basic necessities. While that might help them stand out, it may have also harmed sales over the past few years, as consumers prioritized essentials.
Melius Research’s Short said Family Dollar hadn’t kept up with Dollar General, which had hunted out prime real-estate locations in an effort to target Family Dollar. Zolidis said that after Dollar Tree bought Family Dollar, it missed an opportunity to use its sourcing expertise to bring more in-demand discretionary items to Family Dollar.
In 2023, Dollar Tree and Family Dollar agreed to settle with the U.S. Department of Labor to address store safety issues, such as “blocked exits, access to fire extinguishers and electrical panels, and improper material storage at stores nationwide.” The agency ordered the companies to take steps to eliminate future hazards, and Dollar Tree agreed to set up a 24-hour hotline to field safety complaints.
Then there are the struggles of shoppers themselves. Both Dollar Tree and Dollar General have noted that low-income consumers, who often shop at dollar stores, have been hit harder by price increases and the higher cost of living over the past several years. Dollar General said the year ahead was unlikely to get any easier for its low-income consumers.
“Our customers continue to report that their financial situation has worsened over the last year, as they have been negatively impacted by ongoing inflation,” Dollar General Chief Executive Todd Vasos said during the company’s earnings call this month.
“Many of our customers report that they only have enough money for basic essentials, with some noting that they have had to sacrifice even on the necessities,” he added.
‘Legitimate questions’ about the future
Against that backdrop, other discount stores have also teetered. Big Lots Inc. filed for bankruptcy protection last year. Also last year, 99 Cents Only Stores said it would shut down amid what it said was “shifting consumer demand” and “persistent inflationary pressures,” among other factors.
Noah Rohr, an analyst at Morningstar, said that the biggest retail chains had more resources and leverage to keep prices low amid a broader rise in costs of all kinds. But he said that dollar stores still served a purpose in the retail world, especially in more sparsely populated areas, where the next-closest store might be another 15 to 20 minutes away.
“There are legitimate questions about their existence,” he said. “But I think to some degree, they still at least have a place in retail. They might not just grow as fast as they have historically.”
Short also said that the dollar stores were smaller and easier to navigate for quicker trips and that going to an brick-and-mortar store was sometimes still easier and faster than waiting for a delivery of an online purchase.
As for the sale of Family Dollar, she said that given the chain’s struggles over roughly two decades, the deal could have been worse for Dollar Tree.
“Frankly, the fact that they were able to get proceeds from the sale of Family Dollar is remarkable to me,” she said.
-Bill Peters
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