Will merger affect local discount stores?

by July 31, 2014

Buzzing around on a little road trip recently, I was intrigued by the number of dollar stores occupying prime real estate in the small Midwestern towns and villages along my route.  Then I got home, flipped open a mass-market women’s magazine and noted that the fashion spread not only featured ensembles from major department stores and established apparel retailers, but a whole outfit made up of dollar-store clothing items.

Cue Monday and the big announcement that the Dollar Tree chain will be acquiring rival Family Dollar in an $8.5 billion deal that will meld the two companies into an industry leader, with 18,000 stores, surpassing the Dollar General chain which currently has about 35 percent of market share.

Bloomberg Businessweek notes that the two chains have had complementary strategies, with Dollar Tree focusing on a well-heeled suburban clientele while Family Dollar aimed for rural and urban customers with moderate incomes.  Their pricing strategies differed, too, with Family Dollar using a wider range of prices.

Last fall in a news release, the market research firm IBISWorld called the dollar & variety store segment one of the fastest-growing in the retail sector. In an April 2014 update, IBISWorld says it expects revenue growth to slow after this year, following a recession-fueled boon, but interestingly notes that the recession opened this market up to an increasing number of middle-income shoppers as bargain-hunting became more common.

That might be one local angle to pursue: The location and clientele of your area’s dollar stores vis a vis more upscale merchants and big-box chains. How has the dollar-store landscape changed in the past five years?  I know some have sprouted near me in some surprisingly affluent areas (and I note that city planners required upscale design to the dollar stores’ exteriors, as well, an interesting juxtaposition.)

Another way to localize the big merger is to talk with independent dollar-store operators; what will they do to survive against increasingly ubiquitous national chains?  IBISWorld says it expects more consolidation and for smaller operators to prepare for lower revenue than they’ve been accustomed to in recent years. Are your area’s independent operators – often family businesses – bracing or seeking new strategies?  One near me, for example, seems to have a more sparse inventory and greater focus on being a greeting-card and special occasion store, with fewer housewares offerings.

Talk with real-estate developers, strip center operators, downtown development authorities and other related parties about what they’re hearing and seeing from independent operators.  Has the opportunity to own a stand-alone or franchise dollar store dried up for small businesspersons?

And here is a really interesting CNBC article about the dollar store supply chain and how the merged chains will have purchasing power that can intimidate and exert price pressure even household names like Pepsi, Clorox and Hershey.  (And scare big-box retailers like Walmart and Target, who will have to compete on price with the more  powerful dollar emporia.)

Other ideas:

Groceries.  What are the pros and cons of buying groceries at dollar stores?  Here’s a Business Insider piece on “Three reasons why dollar stores are a huge threat to supermarkets,” I’m not sure I buy the premise but it’s worth checking in with grocers and food distributors about trends in pricing and offerings.

Price gimmicks.  As this CNN money article points out, not all items at dollar stores cost $1.  Poke around area dollar stores, is cost creep taking its toll?  Can some items actually be purchased for less elsewhere.

Here’s a Forbes column by Walter Loeb with some interesting food for thought on dollar-store strategy.