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Dollar Tree, Family Dollar to merge in $8.5B deal

At Family Dollar, not everything costs a buck.

A nonstick frying pan costs $8.50, a set of dishes costs $15 and women's sandals cost $6.

That's just fine with Sabrina Voss, a mother of four who shops at Family Dollar almost every day for her basic household needs. She likes the selection and the value. On average, she spends about $100 a week, a big part of her budget.

"I come here before I go to Walmart,'' she said after shopping at Family Dollar in Sulphur Springs, a poor Tampa neighborhood.

Disabled because of a back condition, Voss is unemployed and lives on Social Security. She goes to Family Dollar because it's cheap and close to home. The employees are helpful and kind to her kids, ages 13, 10, 8 and 3.

Voss, 33, heard the news last week that Dollar Tree plans to buy Family Dollar, and she hopes nothing changes at her store. She prefers variable pricing over the everything-is-a-buck model because she wants a broader range of products. A $1 box of cereal isn't a good deal if everyone in her house thinks it tastes terrible.

Voss is just the kind of customer that dollar stores want to keep. The stores lost some business as the recession lifted, but still appeal to anyone living paycheck to paycheck or seeking low-priced goods. Recovery for the poor has been slower than for the middle and upper classes.

Dollar stores play a strong role in the retail scene. Forty-two percent of all consumers shop at them more than once a month, according to a study from the Hartman Group, a consumer market research firm. One in four shoppers go once a week or more.

To the bean counters, the stores do well. Dollar Tree has a profit margin of about 11.6 percent, meaning that for every dollar of sales, it makes 11.6 cents. Walmart's margin is 5.6 percent, and Family Dollar, which announced in April it plans to close 370 underperforming stores after a bad quarter, is at 4.5 percent.

Dollar stores are often the best option for low-income consumers who find the smaller packages of food and other necessities more affordable. Buying a 32-pack of toilet paper isn't always feasible, even if the price per roll ends up being a few cents less.

"I have to budget my money, and the prices here are lower than at the main stores like Walmart,'' said Victoria Shipman, 47, who shops at Family Dollar a few times a week.

Once the sale goes through as expected next year, Dollar Tree and Family Dollar will have more than 13,000 stores and annual sales of $18 billion. That surpasses the top dollar store retailer, Dollar General, which has more than 11,000 stores and annual sales of $17.5 billion.

The $8.5 billion purchase price is staggering when you consider that Dollar Tree is built on $1 transactions, a good reminder of the power of a piddly buck.

Dollar Tree says it plans to keep both brands, but could switch a Family Dollar store to a Dollar Tree, or vice versa, if a location isn't meeting its goals. It hasn't said whether any stores will close.

Sandy Skrovan, U.S. research director of Planet Retail, a retail intelligence company, said she doesn't expect many closures because the concepts are complementary. Dollar Tree tends to locate in suburban areas in mid- and large-sized cities. Family Dollar targets poorer urban and rural areas.

Although dollar stores have rapidly expanded, they aren't maxed out, she said. Plenty of opportunities remain, especially on the West Coast, where the concept isn't as entrenched.

"There are still a lot of people who desperately need to shop at dollar stores,'' she said. "We still see quite a big expansion runway left for dollar stores. There's a lot of open territory.''

Although both have "Dollar" in the name and target price-conscious shoppers, the stores are different.

Dollar Tree attracts the treasure hunter looking for $1 finds, from wine glasses to party decorations to name brand food. It recently started selling Just Mayo by Hampton Creek, a trendy vegan mayo maker also available at Whole Foods. Its small packages appeal to one- and two-person households and empty nesters.

Family Dollar attracts lower-income customers trying to stretch every dollar. The stores draw people from the immediate vicinity who visit frequently. Different prices allow for more diverse products, from a $17 table fan to a $30 As Seen on TV Glow Pet. Think mini-Kmart.

The stores expect that the merger will save about $300 million a year through stronger buying power with suppliers and consolidation of distribution costs. More importantly, perhaps, it better arms them against rival Walmart, the biggest threat to retailers.

To fill in markets and offer shoppers convenience, Walmart is adding smaller Walmart Express stores with fresh produce, meats, dairy and a pharmacy. The stores are about 12,000-square-feet, about 3,000 more than the typical Dollar Tree or Family Dollar.

Walmart has a few dozen Express stores around the country (none in Florida) and plans to add 100 this year in the hopes of grabbing more business from supermarkets, dollar stores and other discount retailers. With Dollar Tree and Family Dollar becoming one, the fight is only going to intensify.

"Dollar Tree,'' Skrovan said, ''doesn't intend to give up any turf to Walmart.''

Contact Susan Thurston at [email protected] or (813) 225-3110. Follow @susan_thurston.

To compare, Walmart's is 5.6 percent.

Dollar Tree, Family Dollar to merge in $8.5B deal 08/01/14 [Last modified: Monday, August 4, 2014 3:36pm]
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