The idea of naming a store and limiting its wares to a certain price-point is nothing new. The old “five-and-dime,” started by the F.W. Woolworth Co. in the late 19th century, was a revolutionary idea at the time. The Pennsylvania store's concept eventually spread globally, making it an ancestor to the “dollar stores” of today.
But the tentative, if friendly, $8.5 billion acquisition of Family Dollar by Dollar Tree is a sign that the dollar-store arena is getting a shakeup.
Why the merger
With the 2009 recession and the following limping recovery, discount variety stores like Dollar General, 99 Cents Only, Family Dollar, and Dollar Tree did well, and even expanded.
But these discount chains have also been up against retail discount giants like Wal-Mart Stores and Costco. Wal-Mart in particular, along with Target, has been launching into smaller-format, more urban-based stores that compete with dollar stores in both concept and location.
Family Dollar has struggled recently and planned the closure of 370 stores, while Dollar Tree has seen profits flatten. While the companies say Dollar Tree and Family Dollar will continue to operate under their own names and formats, the merger gives Dollar Tree a chance to be more competitive by expanding its reach.
The merger creates a discount retail behemoth with more than 13,000 stores in the U.S. and Canada (no word on whether or how many stores might be closed). In order to meld, the two retailers would have to reconcile their different approaches. Dollar Tree maintains its pricing under a dollar to keep with the price point model, while Family Dollar offers a wider variety of items and prices.
The role of Carl Icahn
Activist investor Carl Icahn has more or less achieved what he said he wanted in a June 19 letter sent to Family Dollar CEO Howard Levine. Icahn, who had earlier revealed a 9.4% stake in the company, said in the letter that favorable interest rates and the booming stock market made for good timing for a merger, and that consolidation in the discount retail space was “inevitable.”
At the time, Icahn thought that dollar discount rival Dollar General was the likely suitor, something that became unlikely after CEO Rick Dreiling announced his impending retirement.
While the merger between Dollar Tree and Family Dollar is essentially what Icahn has been advocating, he has said he would like to see other offers to buy Family Dollar. Icahn saw a healthy return just days after the merger announcement, a mere two months after increasing his investment and pushing for consolidation.
What the merger could mean
Many see this consolidation of dollar stores as a strategic move to compete with Wal-Mart, one that would result in continued consumer pressure to keep prices low. Others, like Los Angeles Times economic columnist Michael Hiltzik, note that it’s a sign that Americans still struggling under the tepid recovery can't afford even discounted items found at retailers like Wal-Mart or dollar stores.
And that is part of the “retail funk” lament being heard lately — an economic situation where the rich like Icahn profit from dollar stores, while some Americans under financial stress can’t even shop at them.
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