June 10, 2024
iStock.com/Althom
Should Dollar Tree Break Up With Family Dollar?
Dollar Tree is exploring strategic alternatives, including a possible sale or spinoff, of Family Dollar, its chronically underperforming banner bought in 2015 for about $9 billion.
J.P. Morgan Securities will lead the review.
Rick Dreiling, Dollar Tree’s chairman and CEO, said last week on the retailer’s first-quarter analyst call that the process will explore whether “separate, dedicated leadership teams” will help address “the unique needs of each banner at this time — transformation at Family Dollar and growth acceleration at Dollar Tree.”
The Family Dollar acquisition was expected to help Dollar Tree reduce costs to better compete against Dollar General, which also bid on the chain, as well as other discounters such as Walmart. The synergies behind the acquisition, however, were less than envisioned.
Dollar Tree’s stores cater to middle-income suburbanites with a focus on party favors and seasonal decorations. Family Dollar offers a wider range of items, from groceries to cleaning supplies, while catering to lower-income consumers in urban and rural areas. Most of Dollar Tree’s products are priced at $1.25, while Family Dollar offers a wide price range.
The focus on urban markets as well as a broader merchandise mix meant Family Dollar had to battle against a more price-competitive set than the better-performing Dollar Tree banner. The chain was also in poor condition at the time of the acquisition.
“Efforts to fix Family Dollar have been costly,” wrote the Financial Times in an article from March. “Many stores were in poor shape, bad locations and suffered from logistics problems.”
Lately, Family Dollar’s lower-income customers have been squeezed by inflation and the end of pandemic-era government aid. In the first quarter, Family Dollar’s operating margins were a measly 1.1% compared to 12.5% for the Dollar Tree banner.
Dollar Tree is finding early success with the introduction of a More Choices program, involving higher prices on certain products, which is helping extend its customer reach. Dreiling said on the analyst call, “Multi-price has never been about raising prices on existing items. It’s about adding new items at new price points that are incremental to our core assortment.”
Store openings for Dollar Tree are being accelerated, supported by the recent acquisition of up to 170 stores out of the 99 Cents Only bankruptcy.
Meanwhile, Family Dollar is in the process of closing 970 stores, representing 12% of its store base. Dreiling said he’s “confident that Family Dollar’s best days are ahead” with the streamlining efforts and other growth initiatives in place, including the installation of more coolers for refrigerated and frozen foods.
“We have not lost faith in Family Dollar and the progress it’s making,” Dreiling told analysts. “The team has done a great job of implementing many initiatives that are designed to drive the long-term growth. What we’re wrestling with and trying to figure out is we have two different brands at two different stages of where they’re at in their development. And while we want to accelerate Dollar Tree, we want to position Family Dollar’s transformation where it has the chance to grow.”
BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Richard Hernandez
Merchant Director
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Discussion Questions
What factors should be weighed into Dollar Tree’s decision to divest Family Dollar?
Why has the Family Dollar merger failed?
Is the Dollar Tree banner positioned well for growth on its own, including its expanded multi-price offerings?
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When Dollar Tree acquired Family Dollar back in 2015 it paid $8.5 billion for the business – an almost 23% premium over the share price at the time. Over the period that Dollar Tree has owned Family Dollar, the business has made a total operating loss of $2.9 billion. It has also sapped management time and energy. The division is still not optimized and needs a lot of work and further capital to turn it around. Basically, the whole thing is a distraction from the Dollar Tree business and depresses the value of that division.
Against this backdrop, cutting the losses seems sensible. However, the issue is finding a buyer and getting a valuation that’s reasonable. Both are very tall orders. It might be that Dollar Tree can spin off the business via an IPO but, again, that is not without issues. These practicalities will dictate what’s possible.
I think cutting losses makes sense. IMO, Dollar Tree overpaid for Family Dollar in 2015, which was puzzling, except maybe Dollar Tree assumed Family Dollar would enjoy the same growth and success Dollar General enjoyed and continues to enjoy. For a variety of reasons, it didn’t happen. Db
Clearly the Family Dollar acquisition fell far short of Dollar Tree’s expectations. This outcome isn’t all that surprising when you consider the outcomes of many acquisitions. I suspect that part of the motivation to acquire Family Dollar had to do with preventing other players (like Walmart), from buying it and creating an even more formidable competitor. The question is, now what? Dollar Tree management says that they’re still committed to Family Tree, but I wonder if Family Tree will only ever be dilutive and distracting to what they’re doing with Dollar Tree? With Family Tree’s 1.1% operating margins, I’m not sure this business is worth saving ‘as is’. Closing stores and tightening up the financials is an important step for Family Dollar – regardless of whether it’s to prepare for divesture or to position for a turnaround.
Yes, this is a cautionary tale regarding acquisitions. Seventy percent to 80 percent of all horizontal mergers and acquisitions fail, as this one has.
This might serve as a cautionary tale against all the “efficiencies” hype used to justify mergers. And the lesson is that merging a troubled retailer with a good one, will drag down the latter, rather than raise the former. (Many will note the similarity to Federated’s purchase of May in 2006; not so much in that May was troubled, but more in that the businesses weren’t as compatible as claimed). I don’t know what the best advice here is…as is sometimes the case when you purchase junk, it’s just best to eat the loss, rather than try and return it.
I do believe cutting their losses is the right thing to do here. The second thing they should do is rename the format. Unfortunately, very little is a dollar these days. The format should be renamed Value Stores. It’s kind of renaming the 5 and 10 stores from yesteryear.
That did, in fact become a problem for Woolworth et al as well. 5 and 10 became 5, 10 and 25c. Then I guess they just stopped publicizing the price points – harder to do when it’s part of your name!… a lesson not learned, apparently.
Even when Dollar Tree won the M&A competition to acquire Family Dollar, questions were raised regarding who really “won” – Dollar Tree or Dollar General. The answer is fairly clear at this time. Dollar General has continued to grow and expand, while Dollar Tree / Family Dollar has struggled to define its future strategy and value proposition, and has experienced a complete change in its leadership team over several years. Dollar Tree has its own competitive challenges with the likes of Five Below and others, and the assortments and consumer profiles of Dollar Tree and Family Dollar will continue to be different enough that operational synergies will be limited. Cutting their losses is a no-brainer.
The companies do not been able to execute a clear and consistent strategy on customer cannibalization and rationalization of central operations and logistics. If this is not achievable in the next 12 months then they need to cut their losses and move on. however, given the Real-estate foot print in many cases they might be better of continuing to just close locations to avoid Dollar General or other competitors eating into their local market share of wallet.
It was an ill-advised acquisition in the first place. What is at least partly telling, is that the management of Dollar Tree could not fix Family Dollar. Why buy the company then?
Mr. Dreiling said he’s “confident that Family Dollar’s best days are ahead…” So, why does he want to dump it?
It appears that the aquisition was naive to begin with. Apparently, the chain needed a lot of work, and they didn’t have the desire to turn it around. Nine years later, Family Dollar is worth less than when Dollar Tree acquired it. I don’t know what the Family Dollar balance sheet looks like, but if there is no real estate value on it, the chain is wothless on the market.
If Dollar Tree wants to minimize this embarrassment, it should convert and upgrade the viable Family Dollar locations and close the rest. There is not much to strip from Family Dollar, so the private equity guys are not likely interested.
Yet another retail saga of one retailer buying a weaker competitor, and getting dragged down in the process. It’s overly simplistic, but why not shutter even more FD stores and rebrand the rest as Dollar Tree?
They can separate fairly easily. Family Dollar is still on many separate systems and IT.
There is some integration. Fsmily Dollar shelf tags at Dollar Tree. Various Dollar Tree private labels at Family Dollar. Combined distribution centers in some regions, separate in others, both somehow but still on two different systems.
“They can separate fairly easily. Family Dollar is still on many separate systems and IT.” Did they ever have the intention of integration?
They have done terrible with Family Dollar. My guess is they’ve already converted the stores to Dollar Tree that they want to do that with and I suspect those are also some of the worst performing Dollar Tree locations.
Family Dollar was always a terrible chain. Terrible stores, terrible locations, and the weakest merchandising and operations I’ve seen ever. Dollar Tree has fixed nothing and perhaps made things even worse.
If they cleaned up these stores, actually stocked the shelves, and ran some stronger promotions they may actually be able to get them to perform at least somewhat well. But they’ve never been able to make that happen.
It is important to note back in the merger the Family Dollar upper management was mostly given executive positions within Dollar Tree. That was likely part of why they accepted that offer.
“Proper pruning encourages strong growth.”
Whether Dollar Tree elects to shed Family Dollar or simply decides to continue pruning underperforming units, it will require thoughtful and intentional deliberation. Consistently serving and delighting consumers must remain at the center of this decision. Although not easy, growth should follow if the pruning is properly done.
Dollar Tree should consider several factors in deciding to divest Family Dollar. These include Family Dollar’s ongoing poor performance, the high costs of fixing its issues, and the differing market demographics each brand serves. The merger failed because Family Dollar’s stores were in poor shape, had bad locations, and faced logistics problems, making it hard to compete with other discounters.
I think Dollar Tree is positioned well for growth on its own. Its focus on middle-income suburban customers and the success of its More Choices program, which introduces higher-priced items without raising prices on existing ones, show promise. The accelerated store openings and strategic adjustments demonstrate that Dollar Tree can thrive independently.
The acquisition did not work. So divest, regroup, figure out a path to profitability and stop the naval gazing that almost always comes when investment banks or consultants lead “a review”.
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When Dollar Tree acquired Family Dollar back in 2015 it paid $8.5 billion for the business – an almost 23% premium over the share price at the time. Over the period that Dollar Tree has owned Family Dollar, the business has made a total operating loss of $2.9 billion. It has also sapped management time and energy. The division is still not optimized and needs a lot of work and further capital to turn it around. Basically, the whole thing is a distraction from the Dollar Tree business and depresses the value of that division.
Against this backdrop, cutting the losses seems sensible. However, the issue is finding a buyer and getting a valuation that’s reasonable. Both are very tall orders. It might be that Dollar Tree can spin off the business via an IPO but, again, that is not without issues. These practicalities will dictate what’s possible.
I think cutting losses makes sense. IMO, Dollar Tree overpaid for Family Dollar in 2015, which was puzzling, except maybe Dollar Tree assumed Family Dollar would enjoy the same growth and success Dollar General enjoyed and continues to enjoy. For a variety of reasons, it didn’t happen. Db
Clearly the Family Dollar acquisition fell far short of Dollar Tree’s expectations. This outcome isn’t all that surprising when you consider the outcomes of many acquisitions. I suspect that part of the motivation to acquire Family Dollar had to do with preventing other players (like Walmart), from buying it and creating an even more formidable competitor. The question is, now what? Dollar Tree management says that they’re still committed to Family Tree, but I wonder if Family Tree will only ever be dilutive and distracting to what they’re doing with Dollar Tree? With Family Tree’s 1.1% operating margins, I’m not sure this business is worth saving ‘as is’. Closing stores and tightening up the financials is an important step for Family Dollar – regardless of whether it’s to prepare for divesture or to position for a turnaround.
Yes, this is a cautionary tale regarding acquisitions. Seventy percent to 80 percent of all horizontal mergers and acquisitions fail, as this one has.
This might serve as a cautionary tale against all the “efficiencies” hype used to justify mergers. And the lesson is that merging a troubled retailer with a good one, will drag down the latter, rather than raise the former. (Many will note the similarity to Federated’s purchase of May in 2006; not so much in that May was troubled, but more in that the businesses weren’t as compatible as claimed). I don’t know what the best advice here is…as is sometimes the case when you purchase junk, it’s just best to eat the loss, rather than try and return it.
I do believe cutting their losses is the right thing to do here. The second thing they should do is rename the format. Unfortunately, very little is a dollar these days. The format should be renamed Value Stores. It’s kind of renaming the 5 and 10 stores from yesteryear.
That did, in fact become a problem for Woolworth et al as well. 5 and 10 became 5, 10 and 25c. Then I guess they just stopped publicizing the price points – harder to do when it’s part of your name!… a lesson not learned, apparently.
Even when Dollar Tree won the M&A competition to acquire Family Dollar, questions were raised regarding who really “won” – Dollar Tree or Dollar General. The answer is fairly clear at this time. Dollar General has continued to grow and expand, while Dollar Tree / Family Dollar has struggled to define its future strategy and value proposition, and has experienced a complete change in its leadership team over several years. Dollar Tree has its own competitive challenges with the likes of Five Below and others, and the assortments and consumer profiles of Dollar Tree and Family Dollar will continue to be different enough that operational synergies will be limited. Cutting their losses is a no-brainer.
The companies do not been able to execute a clear and consistent strategy on customer cannibalization and rationalization of central operations and logistics. If this is not achievable in the next 12 months then they need to cut their losses and move on. however, given the Real-estate foot print in many cases they might be better of continuing to just close locations to avoid Dollar General or other competitors eating into their local market share of wallet.
It was an ill-advised acquisition in the first place. What is at least partly telling, is that the management of Dollar Tree could not fix Family Dollar. Why buy the company then?
Mr. Dreiling said he’s “confident that Family Dollar’s best days are ahead…” So, why does he want to dump it?
It appears that the aquisition was naive to begin with. Apparently, the chain needed a lot of work, and they didn’t have the desire to turn it around. Nine years later, Family Dollar is worth less than when Dollar Tree acquired it. I don’t know what the Family Dollar balance sheet looks like, but if there is no real estate value on it, the chain is wothless on the market.
If Dollar Tree wants to minimize this embarrassment, it should convert and upgrade the viable Family Dollar locations and close the rest. There is not much to strip from Family Dollar, so the private equity guys are not likely interested.
Yet another retail saga of one retailer buying a weaker competitor, and getting dragged down in the process. It’s overly simplistic, but why not shutter even more FD stores and rebrand the rest as Dollar Tree?
They can separate fairly easily. Family Dollar is still on many separate systems and IT.
There is some integration. Fsmily Dollar shelf tags at Dollar Tree. Various Dollar Tree private labels at Family Dollar. Combined distribution centers in some regions, separate in others, both somehow but still on two different systems.
“They can separate fairly easily. Family Dollar is still on many separate systems and IT.” Did they ever have the intention of integration?
They have done terrible with Family Dollar. My guess is they’ve already converted the stores to Dollar Tree that they want to do that with and I suspect those are also some of the worst performing Dollar Tree locations.
Family Dollar was always a terrible chain. Terrible stores, terrible locations, and the weakest merchandising and operations I’ve seen ever. Dollar Tree has fixed nothing and perhaps made things even worse.
If they cleaned up these stores, actually stocked the shelves, and ran some stronger promotions they may actually be able to get them to perform at least somewhat well. But they’ve never been able to make that happen.
It is important to note back in the merger the Family Dollar upper management was mostly given executive positions within Dollar Tree. That was likely part of why they accepted that offer.
“Proper pruning encourages strong growth.”
Whether Dollar Tree elects to shed Family Dollar or simply decides to continue pruning underperforming units, it will require thoughtful and intentional deliberation. Consistently serving and delighting consumers must remain at the center of this decision. Although not easy, growth should follow if the pruning is properly done.
Dollar Tree should consider several factors in deciding to divest Family Dollar. These include Family Dollar’s ongoing poor performance, the high costs of fixing its issues, and the differing market demographics each brand serves. The merger failed because Family Dollar’s stores were in poor shape, had bad locations, and faced logistics problems, making it hard to compete with other discounters.
I think Dollar Tree is positioned well for growth on its own. Its focus on middle-income suburban customers and the success of its More Choices program, which introduces higher-priced items without raising prices on existing ones, show promise. The accelerated store openings and strategic adjustments demonstrate that Dollar Tree can thrive independently.
The acquisition did not work. So divest, regroup, figure out a path to profitability and stop the naval gazing that almost always comes when investment banks or consultants lead “a review”.