Dollar Tree is making a move to better attract budget-conscious customers. On Monday, the chain said it would acquire rival discounter Family Dollar for $8.5 billion, making it the biggest player in the dollar store category. The acquisition comes as Wal-Mart Stores Inc. goes after lower-income customers with smaller stores. Despite their names, Dollar Store and Family Dollar vary in their business models.
Primarily, the deal gives Dollar Tree greater diversity in pricing and product mix. Here's a snapshot of the two chains:
Founded in 1986.
About 5,000 locations.
True to its name, everything in the store costs a buck.
About half the products are "consumables," or cereal, potato chips and sodas.
The target customer is a "broad range of middle America."
Founded in 1959.
About 8,000 locations.
Prices vary, with only 13 percent of sales coming from items that cost $1 or less. Most items are less than $10.
About 72 percent of products are consumables, 10 percent home products, 10 percent seasonal & electronics and 8 percent apparel and accessories.
The target customer is "low- to lower middle-income."
NEW YORK - The fight for penny-pinchers is intensifying.
Dollar Tree said Monday it is buying rival discounter Family Dollar for $8.5 billion, significantly broadening its reach as it looks to fend off Wal-Mart, which has been stepping up its courtship of lower-income customers.
The deal makes Dollar Tree the biggest player in the dollar store segment, with its more than 13,000 combined locations, including those in the Charleston area, eclipsing current leader Dollar General Corp., which has about 11,300.
Dollar stores grew during the recession as people across income groups searched for cheaper options. To attract a broader array of customers, they also expanded their offerings to include more groceries and brand-name products, instead of just the party favors and other knickknacks people often associated with them.
More recently, however, sales at dollar stores have been suffering because the lower-income customers who go to them are facing persistent job instability and slow wage growth in the aftermath of the recession. Wal-Mart Stores and Kroger Co. also have been opening smaller store formats to directly compete with dollar stores. During its current fiscal year, Wal-Mart plans to open 270 to 300 smaller outlets designed to cater to shoppers looking for more convenience.
Wal-Mart recently submitted plans to Dorchester County to build a Neighborhood Market, one of its small-format stores, at Dorchester and Bacons Bridge roads. Several others have opened elsewhere in South Carolina, in Greenville, Greer and Myrtle Beach, and two more are reportedly on the way to Fort Mill and Rock Hill.
Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, said that because the Dollar Tree deal will allow the company to lower expenses by merging its operations, it will ultimately be able to lower prices to better compete with Wal-Mart.
"Now, they're going to take the fight back to Wal-Mart," Sozzi said.
The deal also gives Dollar Tree more flexibility.
Dollar Tree is true to its name, with everything in its stores costing a buck. The fixed pricing has helped attract more customers and boosted sales, but it also puts the company in a tough spot as inflation pushes up its costs and pressures profit margins.
Family Dollar is far more flexible in its pricing, which allows it to sell a greater variety of items, including Kraft cheese and Tide laundry soap, at various price points.
Still, Family Dollar, which has more than 8,000 locations, including 24 stores in the Charleston area and at least three more under development, has been shuttering stores and cutting prices in hopes of boosting its financial performance. Last month, investor Carl Icahn urged the company to put itself up for sale. Icahn has built up a stake in the company of more than 9 percent, according to regulatory filings. Based on his purchase price at the time, he stands to make nearly $200 million from the deal.
The companies did not say if any Dollar Tree or Family Dollar stores would be closed. Dollar Tree, which has about 5,000 locations, will continue to operate under the existing Dollar Tree, Deals, and Dollar Tree Canada store banners. It will keep the Family Dollar brand as well, with Chairman and CEO Howard Levine.
Representatives for Wal-Mart and Kroger weren't available for comment. A representative for Dollar General, which last year reported sales growth of 9 percent, declined to comment.
Stockholders of Family Dollar Stores will receive $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own.
Including debt and other costs, the companies estimate the deal to be worth more than $9 billion.
The boards of both companies unanimously approved the deal, which is expected to close by early next year. It still needs approval from Family Dollar shareholders.
Abigail Darlington of The Post and Courier contributed to this report.
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