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Will A Dollar Store Mega Merger Usher In The Post-Walmart Retail Era?

This article is more than 9 years old.

Are we entering the post-Wal-Mart era in retailing?

The retail industry has roiled through its share of mega-mergers — The May Department Stores Co. and Federated Department Stores (now Macy’s), Sears and Kmart.

But the factors underlying a potential Dollar Tree /Family Dollar union seem particularly charged with import.

Dollar Tree set plans this week to acquire competitor Family Dollar for $8.5 billion in a deal that could shake up a retail sector that’s been disproportionately dominated by a single player: Walmart, the world’s biggest retailer.

It’s not just that the combined chain will boast 13,000 stores, about 8,000 more U.S. stores than Walmart. The dollar store concept, which experienced a boon during the Great Recession, plays into a burgeoning shift in consumers’ shopping patterns and preferences.

The merger of Dollar Tree and Family Dollar would create a chain with more U.S. stores than Walmart.

The convenience of small-format stores with an edited mix are gaining popularity, just as football-field style shopping in big box stores a la Walmart’s supercenter format, appear to be losing their appeal.

“What’s Wal-Mart’s additional brand promise beyond just low prices? Their [mammoth] selection comes with the cost of navigating stores, and the whole hassle of the big-box experience is less of a compelling proposition these days,” Russ Meyer global director of branding firm Siegel+Gale, told Forbes.

With the combination of Dollar Tree and Family Dollar, “suddenly you’ve got a pretty compelling-footprint brand that is essentially offering the same fundamental low prices as Walmart, but an additional convenience in terms of shopping and location.”

Indeed, dollar stores are typically situated closer to where shoppers live than Walmart, for one.

What's more, a combined Dollar Tree/Family Dollar would leverage economies of scale that would grant the retailer purchasing power with vendors “that can suddenly get prices lower than they have in the past,” he said.

"Dollar Tree expects to realize the synergies, which amount to about 2% of sales, due to sourcing and procurement; distribution and logistics; and leverage of selling, general, and administrative expenses," said Ken Perkins, a Morningstar analyst, in a research note. "We think these targets are achievable given the benefits to establishing regional density with a small-store format, but given that other firms could also realize synergies in similar areas, we wouldn’t be surprised to see firms such as Dollar General offer competing bids."

Rebranding Under One Mega, Dollar Store Nameplate? 

A dollar store merger could also make Walmart more vulnerable to losing market share of a key demographic.

“Lower income, rural shoppers have traditionally been a pretty strong customer segment for Walmart,” Meyer said. “If shoppers feel that Dollar Tree or Family Dollar is more right for them, Walmart might find that a whole customer segment gets carved off from their stores.”

But the chains would more fully reap the benefits of economies of scale and clout with suppliers if they consolidated as a single brand under one nameplate, with one merchandising team and advertising budget, Meyer said.

Dollar Tree’s stated plan is to retain Dollar Tree and Family Dollar as separate nameplates. But in retailing, these initial pronouncements have been known to change.

In a bid to create "America's department store" in 2004, Terry Lundgren, CEO of Federated Department Stores (now Macy’s), initially hyphenated its regional department store names such as Burdines and Bon Marche, with Macy's , only to later drop the local nameplates altogether and rebrand all the stores Macy’s.

For Dollar Tree and Family Dollar, consolidating under a single nameplate would create “a national footprint,” and one dollar chain in a position to tout a marketing message of having “more locations than Walmart and being closer to shoppers, which would be a pretty compelling offer to this customer segment,” he said.

Good Things Come In Small Packages

 The dollar stores’ sweet spot is their in-and-out convenience. And that’s where the merger could hit Walmart where it hurts, said Craig Johnson, CEO of Customer Growth Partners.

Although “big basket trip missions, which dollar stores don’t play in,” generate most of Walmart’s sales, the merger is a compelling draw for the “deep-value shopper making small-basket trips,” he said.

“In the small-basket/convenience trip market, the key is proximity to the customer, and Dollar Tree and Family Dollar’s 13,000-store fleet is by far the biggest of any U.S. store, far exceeding Walmart, about 5,000 stores, and CVS and Walgreen, each 8,000-plus stores," Johnson said. "Absent accelerating its small format rollout, it will be much more difficult for Walmart to maintain — much less re-grow — its market share.”

Hence, a Dollar Tree/Family Dollar union  “only heightens the motivation of Doug [McMillon, Walmart Inc.’s CEO], and Greg [Foran, the incoming CEO of Walmart U.S.], to sharply ramp up Walmart’s smaller format fleet – both its Neighborhood Market and Express [spin-off chains], and possibly make a more bodega-style format since the fast growing Latino market over indexes in value/small basket segment of the market,” he said.

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