What Dollar Tree Gets With $9.2 Billion Deal for Family Dollar

Family Dollar (FDO) announced this morning that it will be acquired by Dollar Tree (DLTR) in a $9.2 billion deal, giving rise to an important question: What’s the difference?

At Dollar Tree, everything actually costs $1. Family Dollar sells more expensive items, such as clothing and electronics; only about 13 percent of sales are $1 or less. This has actually been part of Family Dollar’s recent struggles: Its core customers cut back on spending after the recession, and Family Dollar recently lowered prices on about 1,000 items. As of now, there are no plans to change the fixed price point at Dollar Tree or to turn Family Dollar into an actual dollar store. Executives plan to open more stores under both names.

Dollar Tree

In addition to the expected cost savings on the operational side, here’s what Dollar Tree’s getting:

Scale. Combined, the two chains will have more than 13,000 stores in the U.S. and another 200 in Canada, passing Dollar General (DG), which has about 11,300 locations. In terms of sales, the new company will also have more than $18 billion in sales, a little more than Dollar General’s (DG) revenue of $17.5 billion last year.

A wider range of products. Consumers, especially those from smaller households, such as older shoppers, are turning more and more to dollar stores for quick shopping trips and groceries, as those outlets tend to be more convenient and have smaller packages than super centers such as Costco (COST) and other retailers. The Dollar Store is limited in what it can reasonably sell for $1, but Family Dollar has the flexibility to take advantage of this trend.
Dollar Tree

Access to more expensive markets. Dollar Tree says its shoppers are suburban “Middle America” consumers across income brackets, while Family Dollar’s customers tend to be from lower-income households in urban and rural areas. Now that they’re not competing against each other, some Dollar Trees can become Family Dollars—in urban areas, for example, where operating costs are too high for a store that sells everything for $1—and vice versa, based on shopping habits in the area.

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28 July 2014 | 3:31 pm – Source: businessweek.com

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