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The US dollar store — and its UK cousin the pound shop — is a place for cash-conscious shoppers to get cheap-as-chips basics. But sometimes it’s the store itself that comes at a knockdown price.
Dollar Tree, an American discount retailer, this week agreed to sell its struggling Family Dollar chain to a pair of private equity firms for $1bn. That is a fraction of the $9bn that Dollar Tree paid a decade ago following a fierce bidding war with rival discount store Dollar General. Despite their similar-sounding names, the two brands are different. Dollar Tree mostly caters to middle-income suburban shoppers, whereas Family Dollar serves low-income urban consumers.
Back in 2015, Dollar Tree’s management hailed its deal with Family Dollar as “a transformational opportunity” — one that would give it the heft to better compete against Dollar General and Walmart. But efforts to fix Family Dollar have been costly, involving down-at-heel stores, bad locations and a legal settlement over rat-infested warehouses.
As for the $300mn of annual cost savings that Dollar Tree expected at the time of the tie-up? Management conceded in an analyst call on Wednesday that the two chains were “two different businesses with limited synergies.” Family Dollar racked up nearly $4.5bn in operating losses over the past two years, while its parent brand brought in $3.2bn of operating profit.
One issue is that Family Dollar is a bet on spending by the poorest urban Americans, and they are not doing so well. Inflation and an end to pandemic-era government aid have resulted in them spending less.
Breaking up will at least allow Dollar Tree to focus on its own stores. The stock is down 45 per cent over the past year, and trades on 12 times forward earnings, roughly half Walmart’s multiple. Dollarama, a Canadian dollar store chain, has a market capitalisation of nearly 33 times earnings.
American consumers are more cautious and competition from Walmart and online discount retailer Temu continues to intensify. Donald Trump’s trade wars could become another headwind given Dollar Tree sources around a quarter of its products from China, according to Citigroup analysts.
Family Dollar, under its new owners, will face the same challenges. But at least that is baked into the deal struck by new owners Brigade Capital Management and Macellum Capital Management, known as value buyers. They are paying the equivalent of less than a tenth of the chain’s 2024 revenue. At least nobody could fault Dollar Tree’s commitment to low prices.
pan.yuk@ft.com
