Dollar Tree’s unloading of its Family Dollar division does not exactly come as a shock to anyone who’s been paying attention. The parent company has pretty much regretted its decision to buy Family from almost the minute it took ownership ten years ago in what was a hard-fought battle with its arch-rival Dollar General. Dollar Tree won…but it’s clear it really lost.
Family turned out to be in worse shape than anyone on the outside — and maybe some on the inside too who weren’t talking — was willing to admit. Its stores were old and tired and often in poor locations, especially compared to Dollar General which had been doing a better job of updating its fleet.
Then there was Covid which didn’t exactly help stores catering to low-income consumers who suddenly had some more money to spend thanks to the federal government and were only too happy to trade up a retail notch or two. Then came the post-pandemic hangover when those same shoppers just as suddenly didn’t have a whole lot of spending power, especially as inflation got ugly. Those down-and-dirty dollar stores — no matter what the name over the front door read — just didn’t fare very well when compared to much better discounters like Walmart and Aldi.
And that’s a very important (and often overlooked) aspect of the dollar misery of the past few years. Walmart has gotten so much better recently and has become an even better choice for cash-pressed shoppers. Likewise Aldi, which is now the third largest grocery chain by number of units and is therefore much more accessible to a greater number of Americans. For consumables like food and household products, it is a much better choice for shoppers than dollar stores, with their limited assortments and uncompetitive prices. Many dollar stores are just dismal, depressing places to shop and unless you’re looking for salty snacks and high-calorie beverages, they are poorly merchandised and assorted.
By the way, for those of you who are dollar-challenged and tend not to ever step foot in one of these stores, remember this important distinction: Family Dollar and Dollar General are going after the same budget customer with consumables, some apparel, a bit of home and other similar merchandise, with stores generally in low-income zip codes. Dollar Tree is a different animal, targeting a more affluent customer with an assortment focused more on discretionary merchandise like party supplies and impulse items. Its stores tend to be in more middle-income neighborhoods and despite the similarity in names it has little in common with the other two Dollar doppelgangers.
It’s why at the time of the purchase, buying Family Dollar might have made sense for Dollar Tree as it offered a complementary retail format that had it been well-grounded would have enhanced the overall corporation. Dollar General wanted Family too, to first, keep it out of the hands of someone else, and, secondly, to take out a competitor and perhaps run the two brands under one umbrella, maybe even eliminating it completely. Then again, it could have pursued a TJX strategy of have two related nameplates — in their case TJMaxx and Marshalls — running them in unison. That’s proven very successful for them even as nobody else has made that model really work.
What Family Dollar’s new owners do with their acquisition is a great unknown. The standard private equity investor gameplan is to cut costs, close stores and kick back fees and dividends to the owners, so we shouldn’t be surprised to see any and all of these things happen. The two investors are known real estate salivators and that may be their plan here too. But we shouldn’t be surprised too if it doesn’t work, since it rarely does. I take that back: it works for the investors who get their money back and then some, it just doesn’t work for the retail business itself. The retail landscape is littered with lots and lots of examples from Sears and Kmart to more recently Toys’R’Us and Tuesday Morning.
For Dollar Tree it’s a $9 billion hit to both its balance sheet and its pride, as that is the shortfall between what they paid for Family and what they sold it for. But it was time for them to cut bait, lick their wounds and get back to their core business. (Enough cliché metaphors in that sentence for you?) Dollar Tree is in a good position once the economy picks up even a smidgen (a technical term from economists), especially with the demise of a big competitor, Party City. Let’s not forget too the drastic cutbacks by the big drug store chains — Walgreens, CVS and Rite-Aid — that are creating some more white space in the physical retail space.
The dollar channel isn’t going away. It serves a useful purpose on the retail matrix and even as the competition gets tougher it still has its place. You can drive down secondary and back roads in much of rural America and dollar stores are the only retailers you’ll see, often side-by-side-by-side and only miles apart. There are more than 20,000 of them in the country, under just these three nameplates, compared to about 4,600 Walmart, almost 2,500 Aldi locations and about 2,000 Targets.
There will be continued jockeying for position in the dollar world, to be sure. This Family Dollar sale changes the players…but not the game.
WarrensReport 