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Dollar Stores Duke it Out

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One of the hottest and most competitive sectors in retail is the “Dollar” store category, the largest of which are Dollar General, Dollar Tree and Family Dollar. This chunk of billion-dollar retail was bitten into when Dollar Tree announced a deal to buy Family Dollar for $8.5 billion. If the deal goes through, the union could result in a total 13,000 stores in North America alone. (Wal-Mart has around 11,000 stores worldwide.)

Selling things on the cheap doesn’t necessarily make you a winner. While Dollar Tree sells everything for a dollar or less, Family Dollar doesn’t quite adhere to that policy and it’s hurt them, but helped its new owner. With low priced JC Penney and Sears struggling to stay afloat, dollar stores sales have boomed because it’s thought by many retail analysts that this is the direction America has taken.

Retail analyst Howard Davidowitz says, “The dollar stores are doing better because they have more and more customers who are trading down.”

During the recession, this category grew because the number of working Americans living in poverty increased by almost 40%, according to the U.S. Bureau of Labor Statistics.

With shoppers struggling to make ends meet, the rock-bottom prices of dollar stores and proximity to consumers’ homes were very enticing. Many Wal-Mart supercenters were often much farther away from shopper’s homes than dollar stores, plus the normal package sizes of products (vs. the buy-in-bulk amounts) were much more convenient for cash-strapped buyers.

Joining forces with Family Dollar can enable Dollar Tree to get better deals out of its suppliers and thus compete more closely with the number one Dollar General Corp. It can also gain more clout to go up against any “fresh” moves made from Wal-Mart and Target.

The combined companies would have more than $18 billion in annual sales and could save about $300 million a year due to better leverage and buying power and consolidation of their distribution networks.

Since 2008, more and more people have been shopping at dollar stores, with 53% of U.S. shoppers in 2013 saying they went to one in the past month, up from 48% in 2007, according to Kantar Retail, a retail consultant firm. On the flip side, visits to Wal-Mart decreased to 65% in 2013, down from 69% in 2007. Target showed a similar decline.

But even when the economy started its upswing, lower income families were still left behind. According to the Bureau of Labor Statistics, households earning less than $30,000 a year dropped by 1% between 2004 and 2012, but households that earned more than $150,000, nearly doubled.

Looking to keep in step or ahead of Wal-Mart, Family Dollar announced it would begin a rollout of beer and wine in 2015 to draw more people in to boost sales. Wal-Mart has not only been focusing on this area, but has been doubling the number of smaller stores it owns (as has Target with its TargetExpress), so shoppers who only want to buy a few things at a time can do so, rather than have to pay more for bulk-size versions.

If the Dollar Tree-Family Dollar deal goes through, the two stores will co-exist under each banner. While each store caters to different geographies and slightly different demographics, their combined targets will reach a broader range of customers, delivering even greater value.

Complementary product offerings (Dollar Tree = consumable merchandise and variety/seasonal merchandise; vs. Family Dollar = consumable merchandise and home products), will allow Dollar Tree and Family Dollar brands to engage in broader categories and offer more appealing assortments to their customer base.

Some analysts believe this merger could result in cannibalization of its own sales. But either way, this union could see dynamic change afoot in this explosive sector.

TAGS: retail, retail trends, retailers,
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