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Discounter Dollar Tree buys rival Family Dollar

Dollar stores battle for business of lower-income shoppers
By CANDICE CHOI, Associated Press Published: July 29, 2014
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— The fight for penny pinchers is intensifying.

Dollar Tree said Monday it is buying rival discounter Family Dollar for $8.5 billion, broadening its reach as it looks to fend off Walmart, 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 eclipsing current leader Dollar General Corp., which has about 11,300.

Dollar stores grew during the recession as people 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 are facing persistent job instability and slow wage growth in the aftermath of the recession. Walmart Stores Inc. and Kroger Co. also have been opening smaller store formats to compete with dollar stores. During its current fiscal year, Walmart plans to open 270 to 300 smaller outlets.

Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, said 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 Walmart.

Dollar Tree is true to its name, with everything in its stores costing just a buck. The fixed pricing has helped attract more customers, 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.

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