The 3 Dollar Stores (Not the $3 Store) | RetailNext

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The 3 Dollar Stores (Not the $3 Store)

Shelley E. Kohan
Shelley E. Kohan
Vice President of Retail Consulting

Change in the dollar store market has been predominant in the news lately, but the biggest news might lie in market growth yet to come.

FW_Woolworth_store_Providence_RIDollar Tree’s recent acquisition of Family Dollar (NYSE: FDO) leaves the third dollar player, Dollar General (NYSE: DG), out in the cold and in a likely position of putting up its competitive guard. The new Dollar Tree (NASDAQ: DLTR) conglomerate will boost over 13,000 store locations once it integrates over 8,000 former Family Dollar stores into its portfolio, taking the market leadership position from Dollar General and its almost 12,000 locations. Last week, Dollar General reported $18.9 billion in net sales for 2013, as compared to $18.2 billion for Family Dollar and Dollar Tree combined. Now there are two gorillas in the room!

How did the Dollar Tree versus Dollar General rivalry develop for the struggling Family Dollar chain? Let’s start with that latter point – Family Dollar and its struggles – first.

The overall competitiveness in the small format discount store environment is extremely high, and the industry’s focus on low cost coupled with delivering the “convenience factor” in its shopping environment has made the market especially challenging on profits. Family Dollar had a particularly difficult year with a 2.1 percent decline in comp store sales paired with a 1.6% increase in Cost of Goods Sold (COGS), which led them to continue a self-assessment of its business model.

Family Dollar’s review centered around strengthening its value proposition and increasing its overall business performance, and halfway through last year (and knowing about a possible Dollar Tree merger), Family Dollar introduced several restructuring initiatives to improve current and future business, including closing almost 400 unproductive stores, reducing headcount and adding assortments in consumables to help increase the frequency of customer visits. From an external perspective, the strategic plan was to review a potential merger or sell off to a similar type of business with a proven success record.

Enter Dollar Tree.

The Dollar Tree experienced a 2.4 percent growth in comp store sales in 2014, and continued an ongoing growth strategy of acquiring similar businesses with strong operations to create a competitive advantage. When comparing growth rates of DLTR and FDO from a store count perspective, neither one alone would be able to compete with Dollar General. However, as a combined entity, they can absolutely compete.

Dollar General will continue to be an enormously tough competitor, as it has a foundation of 25 consecutive years of comp store sales grow. DG has opened stores at a clip of 625-650 annually over the past three years, and it has an ironclad brand recognition with its shopper base. DG just announced last week that the plan is to open 730 stores this year, 80 more than last year.

Now, why Dollar Tree and not Dollar General as the partner to Family Dollar? The answer goes back to many of our childhoods and the classic game of Monopoly, and is purely a function of economics. If DG and FDO had merged, there would be too many legal ramifications and potential store closings in accordance with laws around operating in a monopolistic environment. 

I think the merger of DLTR ad FDO is very good for both companies, and allows the collective entity to compete directly with Dollar General. Since the core businesses are slightly different between the two, they can reap advantages on the supply chain and purchasing side, while at the same time keep consistency with brand recognition on the consumer side. At the end of the day, I believe the actual store format that will be heavily targeted soon by all dollar stores will be convenience stores. With the added assortment of tobacco, fresh and frozen consumables and the core competency of “convenience,” the dollar stores will give the C-stores a run for the money! 

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