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How Will Dollar Tree and Family Dollar Survive Their Growing Difficulties?
Dollar Tree and Family Dollar are closing 1,000 stores across the nation. This seemingly sudden move is sending ripples through the retail sector as 600 Family Dollar stores are scheduled to close during the first half of fiscal 2024. The announcement comes as part of a larger restructuring plan, with approximately 370 Family Dollar and 30 Dollar Tree stores set to close over the next several years as leases expire.
This significant development sheds light on a tumultuous period for Dollar Tree and Family Dollar, marred by product safety concerns and operational challenges. The chain faced a severe setback in 2022 when a Family Dollar distribution center in Arkansas became infested with rats, prompting a massive product recall and substantial losses. Despite efforts to clean up and reopen the facility, the company faced hefty penalties amounting to around $41 million in a settlement with the Justice Department.
These setbacks underscore broader issues within the company, culminating in an operating loss of $882 million for the fiscal year that ended on Feb. 3. Despite strategic changes at the executive level and investments in supply chain infrastructure, Dollar Tree continues to grapple with disappointing performance, particularly within the Family Dollar segment.
The decision to close hundreds of Family Dollar stores marks a significant pivot from Dollar Tree’s earlier strategy of rapid expansion, epitomized by its acquisition of Family Dollar in 2015.
Neil Saunders, managing director at GlobalData, characterized the move as Family Dollar waving the white flag in the competitive value grocery landscape, where rivals like Walmart, ALDI, and Dollar General have surged ahead. “Basically, almost ten years on, Dollar Tree is still sifting through the mess it inherited and has not been able to completely turn around,” he said. Despite attempts to enhance pricing and store experiences, Family Dollar has struggled to keep pace with its competitors, remaining a straggler in the value segment.
As of Feb. 3, 2024, Dollar Tree operates 8,415 stores, while Family Dollar operates 8,359 outlets, according to documents filed with the Securities and Exchange Commission (SEC). While a comprehensive list of closing Family Dollar stores is not yet available, Dollar Tree CEO Rick Dreiling emphasized the company’s methodical approach to addressing underperforming locations, considering factors such as individual store performance, local operating conditions, and broader strategic imperatives.
Dollar Tree’s recent changes are primarily affecting its U.S. stores, with no impact on Canadian branches. The company acquired Family Dollar in 2015 for over $8 billion after a bidding war, but integrating it has proven challenging. Furthermore, Dollar Tree announced a $950 million impairment charge for the Family Dollar trade name and a $1.07 billion goodwill charge. Family Dollar will also incur over $594 million in expenses for store closures or rebranding, essentially nullifying profits from the holiday season.
After Dollar Tree shared the news on Wednesday, its shares fell by more than 14%.
Dreiling expressed confidence that the rationalization of unprofitable stores would unlock significant value for the enterprise. However, the closure of 600 Family Dollar stores signals a pivotal moment for Dollar Tree, marking a strategic shift aimed at revitalizing its retail footprint and addressing longstanding challenges within its operations. As the retail landscape continues to evolve, Dollar Tree’s decision underscores the imperative for agility and adaptability in navigating an increasingly competitive market.
Discussion Questions
Considering Dollar Tree’s acquisition of Family Dollar in 2015, what specific operational and cultural barriers have hindered the successful integration of the two chains, and what alternative strategies could Dollar Tree have pursued to better leverage synergies and mitigate risks associated with the acquisition?
With Dollar Tree’s decision to close stores amid ongoing operational challenges and financial losses, what innovative approaches can retail executives adopt to enhance store performance, customer experiences, and competitive positioning in an era defined by evolving consumer preferences and intensifying market dynamics?
Poll
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Anil Patel
Founder & CEO, HotWax Commerce
Rachelle King
Retail Industry Thought Leader
Although they’re part of the same group, it’s important to draw a distinction between Dollar Tree and Family Dollar. Generally speaking, Dollar Tree is a solid business. Over the past 8 years, sales have risen by 59.5% and gross profit is up by 61.6%. Underlying margins are reasonable, and the company has a clear place in the value segment. All of the problems emanate from Family Dollar which has never been a strong business – indeed, it was arguably a mistake for Dollar Tree to acquire it back in 2015. Since its first year of trading under Dollar Tree ownership, Family Dollar sales have risen by a muted 25.9%, gross profits are up by a very poor 13.3%, and margins have weakened. Due to poor operational control and too many stores in sub-optimal locations Family Dollar just hasn’t delivered. This is why Dollar Tree is cutting its losses and shutting over 900 Family Dollar stores. This will cause some near-term financial pain but it’s the right decision and will hopefully enable a reduction of losses and a better return on investment. But it is very telling that almost ten years on from the acquisition Dollar Tree is still trying to optimize the business it bought.
What “growing diffilculties”? Isn’t the closing of redundant stores one of the main points of a merger ?? Obviously we’d need a store-by-store breakout to see if this the case here, but the mere number doesn’t mean much. Or anything at all.
Family Dollar aquisition was a fight between Dolar General and Dollar Tree, and Dollar Tree (won the battle and ) Lost (the war). Dollar Tree has never seemed to be able to incorporate Family Dollar into the scheme, although they do seemed to have seriously tried. It was originally supposed to be a way for Dollar Tree to segway into More than One Dollar price points but they did not seem to concentrate on Family Dollar with dilligence and Family Dollar seemed to drift a bit. Dollar Tree on the other hand seems to be a Total WIN! They KNOW what they are doing legacy wise. It will still take a lot of work to make Family Dollar into what will benefit Dollar Tree—They are on the route and closing underperforming locations IS a needed alteration. Perhaps this should have been done in 2016-2017? They need to rejuvinate a lot of loacations–update and better organise the stores. Regardless– I wish them well and I hope that they can sort out a way to make what could be a winner for them, into a winner.
In my view, Dollar Tree’s struggle to integrate Family Dollar stems from both operational and cultural disparities. The differences in product offerings, pricing strategies, and store formats have created challenges in harmonizing the two chains. Dollar Tree could have implemented more robust cultural integration initiatives and clearer communication channels to bridge these gaps.
Additionally, instead of solely focusing on rapid expansion, Dollar Tree could have prioritized incremental integration steps, such as aligning supply chain systems and optimizing store layouts. Moving forward, embracing technology for data-driven decision-making, enhancing employee training programs, and refining the customer experience are some ways through which retail executives can navigate similar acquisitions more successfully.
Dollar Tree/Family Dollar must focus on refining the strategic approach and operational efficiencies to navigate through these current challenges. The closures and restructuring signal a crucial period for adaptation, where emphasizing customer experience and innovating in the face of competition could be key to their survival. Having taken this long to deal with the poor performers post-acquisition may have been a mistake.
While acquisitions don’t guarantee scaled success, streamlining store operations likewise does not guarantee sustainable improvements. The underlying issue with this type of hard discount format is increasing inflation, high energy/transportation costs and lack of differentiation other than price. It is hard to be known for $1.00 goods when margins are pressed and retail prices are exceeding $1.25-$1.50.I can see a rebranding/remerchandising of some sort with Dollar Zones, but the concept of everything under a dollar is becoming extinct.
When you’re talking roughly 16,000 stores, closing 1000 underperforming units is not that big of a deal, in my opinion. We’re over-stored, especially in this format. Close the underperforming stores and improve the operations in the remaining stores, especially considering the competitive landscape in this category.
Absolutely correct, David. But, those 1,000 stores didn’t become unprofitable overnight.
Don’t you think those units were already unprofitable or redundant on the day of the acquisition? This feels like a long-overdue housecleaning.
The stores were in sub-optimal locations at the time of acquisition. Family Dollar has always had a long tail of badly performing stores. They’ve probably gotten worse over time, but they were not great to begin with!
This acquisition was a planned disaster because there clearly was no plan for integration. It was likely a decision made out of hubris. The larger the entities, the more likely the inability to integrate will cause the disaster. Most horizontal combinations fail to give stockholders value. Some, like this one, create deteriorating value.
The fact that they haven’t fixed the issues since 2015 doesn’t speak well for current management. I might suggest that they empty the Family Dollar stores and take each one on as a new Dollar Tree entity. But if they haven’t done that successfully in seven years, what makes us think they have the ability to do it now?
They have rebadged a lot of Family Dollar stores to Dollar Tree. However, I guess what we’re seeing now is the closure of the ‘dregs’ that can’t be rebadged and are not turning much, if any, of a profit.
Usually you know the poor performers at the time of the merger. It shouldn’t have taken this long to determine which stores should be closed, despite best efforts to turn them around.
It took 9 years to figure out that there were some stores that needed closing? And then it’s not just a handful, but hundreds of stores? Is the premium assigned to “growth” so overwhelming that an ongoing review of location productivity can’t be executed AND applauded by Wall Street? I would have hoped so, but apparently not. Seems like short term numbers are more important than long term health and stability. And then all of a sudden the patient is rushed to the emergency room. First Macy’s, and now these guys. Yes, retail is difficult and it’s always about moving targets. But this scenario is further proof that even when the data is abundantly obvious, the decision to execute is painfully difficult. Painfully difficult but not deferable forever.
Family Dollar continues to be a drag on Dollar Tree ten years post acquisition. In wartimes, generals moved troops, ammunition, supplies, etc. from divisions that were bogged down to those which were moving forward. After a decade of attempting to moved the severely bogged down Family Dollar, Dollar Tree is trimming & reallocating Family Dollar resources. While execs commonly seek to turn around struggling businesses, the harsh sounding better advice here is to ‘shoot the losers’.
Dollar stores have enjoyed spectacular growth over the past fifteen years; it only makes sense to reevaluate and change up the strategy. Disclosure: I’m a huge Dollar Tree fan.
At some point, the Dollar Tree/Family Dollar merger will be an excellent masterclass in failed mergers and acquisitions. Inasmuch as we all want to know what works in retail, it’s equally important to understand what didn’t work and why.
The current state of this business defies the intuitive inclination toward success. How could two similar chains, with similar consumers and similar market positioning not have a successful merger? Culture is one of the most difficult things to change in an organization. An acquisition does not necessarily trump organizational culture. Without an agressive strategy/intent to fundamentally change the operational cultural of Family Dollar, this merger faced signifanct headwinds from the start.
Nearly 10yrs post aqcuisition, Dollar Tree is still struggling with operational efficiency and financial productivity of Family Dollar stores. This is a good indication that some very tough decisions are ahead, beyond just store closures.
As the retail landscape continues to shape shift with mergers and acquisitions, its imperative to understand that just having similar business is not enough to ensure success. Operational culture, can be a hard thing to size up but it can make or break an otherwise seemingly good deal. Dollar Tree/Family Dollar is a case in point–for now. I believe there will be more to come from Dollar Tree.
In the competitive retail landscape, it’s important to tighten up and trim the fat. Underperformers and duplicate stores in a saturated market are reasons to scale down. Once the changes are made, that is when we know that the management of DT and FD made the right decisions.
While low prices and extended inventory appeal to shoppers, Dollar Tree and Family Dollar never had the same image. Once could say that Dollar Tree’s brand equity continued to flourish while Family Dollar did not. Shutting down non performing and low performing stores makes sense. Bolstering the Dollar Tree name as the best dollar option is also important, if the overall impact of the changes is to improve revenue and profitability. On a personal note, I’m not sure out-of-stock and inconsistent inventory are motivation for the FOMO shoppers or a lost opportunity to generate more sales. However, I think this is an area that Dollar Tree has to address.
The thing about pursuing scale in retail: Seemingly minor flubs multiply up to large consequences.
This is not a new story in retail, where investor value is tightly linked to total square footage. The irony, of course, is that leaders of large chains succumb to this fallacious strategy again and again. Hubris is a major factor.
In its zeal to win the bidding war, Dollar Tree prioritized scale in 2015. Family Dollar had lots of stores, but it was a weaker operation that dragged down overall performance over the ensuing years.
It’s high time the dead wood was pruned. I have a suspicion that 1,000 locations is just the first cut.
This is one of those overlooked opportunities at retail. When looking at the Family Dollar/Dollar Tree conglomerate, we have to remember that it represents almost 17,000 stores. The still poorly managed (and acquired) Family Dollar stores are dragging down this entire business model and performance. Closing poor performing FD stores, while enhancing margins on the remaining, better performing, stores seems like a no-brainer. The real question is what other stores need to be closed, and what are the next steps to improve the remaining stores. If anyone has ever visited any of the 17,000 Family Dollar/Dollar Tree stores they all share several things in common. First, they have a major issue with out of stocks. This is part of the basics of retail and from the onset FD/DT, cannot manage this issue. The consequences of this are obvious….lost sales, lost customers, and an overall poor perception of the retail environment that should be attracting customers and not losing them. Add to this the understaffed stores (hire 2-3 more people for each store), and there will be an immediate return on this investment as check-out wait times are eliminated, OOSs are reduced because inventory is current, and customer loyalty is driven higher and higher after each visit. FD/DT should do these 3 things immediately and watch their stock turn-around, their employees become happier, and the customers tell all of their friends what a great experience they have whenever they go to the FD/DT store closest to them to shop for incredible bargains! Oh yeah, once they have done these 3 things, FD/DT should reward all of their current employees with an increase in pay, so that they feel that they are part of the team, part of the solution, and want to show how loyal they are to the company who is taking care of them.