These were strategic products that the chains could purchase and sell at prices competitive with those of grocery stores, in an effort to draw more customers from those types of channels. Even more recently, some dollar chains began selling tobacco products. Dollar stores historically catered to customers with lower incomes.
This demographic was much more price-sensitive than wealthier groups of people. In addition, middle- and upper-middle-class customers, made frugal by the recent economic downturn, were attracted to the convenience of the stores.
The dollar stores had made significant efforts to clean up, to standardize layouts, and to improve the shopping environment. In the process, they had begun to remake their brand image. This represented a consumer making a quick errand to fill up on a few daily household items. A fill-in trip involved a trip that was short in time duration and relatively small in terms of total money spent. However, since dollar stores carried a wide range of products, a fill-in dollar store trip could be accomplished in one location.
The fast growth and success of the dollar store segment in the late s brought these stores into competition with the large discount department stores and superstores. Some customers, tired of making the minute drive to a Walmart on the edge of town, instead opted for the five-minute drive to the nearby dollar store, which stocked most of the products they needed on a more frequent basis. By , there were nearly Neighborhood Market stores and plans to open approximately per year going forward.
Wal-Mart was presenting a significant competitive threat to the continued success of the dollar store model. Ten-year share price performance is shown in Figure 1. Dollar General had long been the largest of the dollar stores. Turner and his son, Cal. Cal Turner took over leadership of the company in the s upon the death of his father. The mids were a difficult period for Dollar General. Overexpansion and poor use of store space led to slowing sales and declining net income.
The company was taken private by the private equity firm KKR. Through store closures, optimized product mix, increased shelf productivity, and reduced costs, the chain improved both profitability and growth and once again became the segment leader. Dollar General was clearly the largest company of the dollar stores, with sustained financial performance and a strong balance sheet.
Through the s, the company, renamed Dollar Tree, grew organically and via acquisitions of other dollar store brands. The business model caught on and the company grew quickly. There were 50 stores open by when the company went public. By the end of the s, there were 1, Family Dollar stores in the United States.
The company continued to grow steadily through the s and s. While already pursuing a strategy of aggressive store openings, the Family Dollar leadership announced its intention to triple its number of stores, including more stores in existing markets and expansion into middle- and upper-middle-class suburban markets. They believed these new store openings would be a huge source of new revenue, to complement revenue growth in existing stores in lower-income markets.
Dollar General soars, Dollar Tree slips as retailers raise forecasts, despite looming tariffs ahead
Between and the end of , the number of Family Dollar locations increased by nearly 1,—the most openings in company history. This aggressive strategy quickly backfired. The new locations cannibalized sales from existing locations, causing a drop in comparable store sales growth, eventually reaching negative same-store sales in late and continuing into During this time, Family Dollar also adopted a pricing strategy different from that of its competitors.
However, the price differences on nonpromotional products became much higher than those at Dollar General and at Walmart. Moreover, Family Dollar had experienced four consecutive years of declining gross margins as the percentage of product sold at deep discounts grew. Companywide operating margins fell to just 4 percent compared to 9.
When the financial numbers for FY came out, it was obvious the company was in trouble: net income had declined by 35 percent. The dollar store segment was fiercely competitive, and Family Dollar was rapidly falling behind. In , believing he could restructure the company and then sell it at a profit, Nelson Peltz attempted to take the company private with his investment firm, Trian Fund Management.
In the summer of , another activist investor, Carl Icahn, announced that he had acquired a 9. If Family Dollar, Dollar General, and Dollar Tree combined in any way, they could consolidate their geographic footprint. A combination of their supply chains and other infrastructure also would lead to savings of expenses in the hundreds of millions. Finally, consolidation would leave the purchaser of Family Dollar as the leader of the dollar store channel, in terms of raw store count. By midsummer, a fifth of all Family Dollar stock was owned by multiple activist investors, all seeking to force Family Dollar to sell.
Dollar Tree was the first to make an offer for Family Dollar. But in an unanticipated series of events, Carl Icahn acquired a 9. This jump forced Dollar Tree to up its offer and go public. Dollar Tree announced that it would borrow the full amount of the cash component of the purchase price, and that this debt financing had already been committed.
Purchasing Family Dollar would allow it to enter this market more effectively. However the most immediate financial benefits of the merger would be in the form of cost savings from company synergies. It estimated savings would reach this level three years after the merger was completed. Here's why it's legal. Believe it or not, Sears once revolutionized retail. Why Walmart wants robots, not workers, stocking shelves. Old Navy is doing so well it's splitting up with Gap.
Analyst: Volatility is another word for retail. How cosmetic brands use virtual makeovers to sell real makeup. You can thank this man for expensive yoga pants. Costco is succeeding despite retail woes. Dollar General DG has become a dominant force in retail by offering everyday items at rock-bottom prices, often in remote areas of the country. But Dollar General's reliance on selling cheap consumables has pinched its profit.
So the company is introducing a new lineup of higher-margin merchandise.
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DG's share price doesn't recover quickly after dividend payments. Expected earnings growth is modest and is more representative of a top dividend stock. Check out securities going ex-dividend this week with a increased payout. Sector: Services. Industry: Discount Variety Stores. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice, and is delayed. Dividend Investing Ideas Center. Have you ever wished for the safety of bonds, but the return potential Go Premium Now.
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