Dollar stores are trying to strengthen their presence in the small-box store market for a reason that many people don’t understand. Contrary to popular belief, it might have to do with Wal-Mart Stores (NYSE: WMT).
Historically, this shouldn't be a surprise, as Wal-Mart has steamrolled many smaller retailers throughout its history.
Wal-Mart Strikes Back
When a person thinks of Wal-Mart, he or she likely thinks of those large supercenters in the suburbs. This makes sense since supercenters currently make up the vast majority of Wal-Mart's retail units. However, Wal-Mart has been involved in the small-box market for several years now, and it's succeeding.
Wal-Mart's Neighborhood Market saw 46 consecutive months of comps sales growth. Wal-Mart Express has also enjoyed strong results from its pilot locations.
Wal-Mart entered and expanded its presence in the small-box market because it was fed up with losing market share to the dollar stores. These smaller units can be placed in suburban, rural and urban locations, providing Wal-Mart with access to all consumers. In fact, while Wal-Mart reports that 90 percent of its supercenters are performing well, don't be surprised if Wal-Mart closes underperforming supercenter locations and uses the freed-up capital to invest in its small-box stores and eCommerce.
How is it playing out on the dollar store end?
Dollar Store Drama
Dollar Tree (NASDAQ: DLTR) surprised everyone by making an $8.5 billion bid to acquire Family Dollar (NYSE: FDO) last month. Most people expected Dollar General (NYSE: DG) to make a bid, which it did for $9 billion, but perhaps a bit too late.
Dollar General was quick to point out that the combination of Dollar General and Family Dollar would lead to 20,000 stores in 48 states, $28 billion in sales and 160,000 employees.
The quotes below play out the story.
- Richard W. Dreiling, Dollar General chairman and CEO: "It’s fair to say that the economy is creating more of our core customers, the middle-income consumer is getting squeezed."
- Family Dollar board referring to Dollar General’s offer: "It's not reasonably likely to be completed on the terms proposed."
- Dreiling: "Confident that we will be able to quickly and efficiently resolve any potential antitrust issues."
- Bob Sasser, Dollar Tree CEO: "We look forward to completing our deal as soon as possible."
What Does It Mean?
Dollar Tree appears in the driver's seat to acquire Family Dollar, at least for now. This would make the combined company stronger as a sum than as parts.
Dollar Tree is taking somewhat of a risk considering it has an established reputation as being the only true dollar store (everything sells for $1) and offering the most pleasant shopping experience of the group. But watch out when Wal-Mart is on the prowl.
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