Bloomberg News

Dollar-Stores Merger Shows That Cheap Is Still Chic

July 29, 2014

Family Dollar Store in Mansfield, Texas

Sales at dollar stores, which specialize in cheap household goods, surged during the recession because they provided bargains without requiring a long drive, letting Americans save time and spend less on gasoline. Photographer: Ben Torres/Bloomberg

Dollar Tree Inc. (DLTR:US), in agreeing to acquire Family Dollar Stores Inc. (FDO:US) for about $8.5 billion, is capitalizing on Americans’ lingering thriftiness following the worst economic slump since the Great Depression.

Sales at dollar stores, which specialize in cheap household goods, surged during the recession because they provided bargains without requiring a long drive, letting Americans save time and spend less on gasoline. While dollar-store revenue growth has slowed since the economy began improving, the chains are still outpacing bigger discount retailers such as Wal-Mart Stores Inc. and Target Corp.

“There’s still plenty of room for them to grow,” said Ken Perkins, an analyst for Morningstar Inc. in Chicago. Plus, there’s little evidence that shoppers are shying away from dollar stores now that the economy is better, he said.

These stores will always appeal to low-income shoppers, said Burt Flickinger, managing director at retail consulting firm Strategic Resource Group. And dollar stores have become more alluring to well-heeled consumers as well, he said. Even as the job market rebounds again, everybody still wants a bargain.

“Dollar stores were perfectly positioned for the recession, and are still well positioned for the moderate growth we’re in now,” Flickinger said.

Dollar Tree’s acquisition of Family Dollar, announced yesterday, will create a discount chain with $18 billion in sales and more than 13,000 locations. That would give it a bigger store count than any other U.S. retailer. Having this kind of scale provides opportunities to cut costs and get better prices from suppliers, Perkins said.

Small-Format Stores

Bulking up also helps Dollar Tree compete with Dollar General Corp. -- currently the largest dollar-store chain with more than 11,000 locations -- and Wal-Mart, which is opening more small-format stores.

Family Dollar shares (FDO:US) rose 25 percent to $75.74 yesterday in New York after the deal was announced. Dollar Tree (DLTR:US)’s stock gained 1.2 percent to $54.87.

While the dollar-store format harkens back to five-and-dime retailers, the chains’ focus on deals and quick shopping trips still resonates with today’s shopper, Flickinger said. And many retailers -- from office-supply chain Staples Inc. to discounters Wal-Mart and Target -- view smaller, more convenient stores as key to their future growth.

“You get what you want and check out in a few minutes,” Flickinger said. “There’s no walking through a big box.”

Internet-Proof?

Dollar stores have also been immune to the disruption caused by the Internet for the most part because purchases often fill an immediate need, Perkins said.

Dollar Tree and Family Dollar have different approaches to retailing. At Dollar Tree, which began as a five-and-dime store in 1953, everything sells for $1 or less. Family Dollar, which started in 1959, operates more like a neighborhood discount store, offering items at a range of prices.

The whole market still has room to expand, including in Canada and other countries, Flickinger said.

“There’s an opportunity for the dollar-store segment to grow substantially in the future, both nationally and international,” he said.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Anne Reifenberg

Sales at dollar stores, which specialize in cheap household goods, surged during the recession because they provided bargains without requiring a long drive, letting Americans save time and spend less on gasoline. Photographer: Ben Torres/Bloomberg July 28 (Bloomberg) -- Customer Growth Partners' Craig Johnson discusses Dollar Tree's agreement to buy Family Dollar Stores for about $8.5 billion. He speaks with Cory Johnson on "Taking Stock." (Source: Bloomberg)

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Companies Mentioned

  • DLTR
    (Dollar Tree Inc)
    • $58.35 USD
    • 0.80
    • 1.36%
  • FDO
    (Family Dollar Stores Inc)
    • $77.49 USD
    • 0.53
    • 0.68%
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