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Do Dollar Tree's Combo Stores Spell the End of the Dollar Store Concept?

By Rich Duprey - Mar 16, 2021 at 8:00AM

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It's the best of both worlds, and it might be too good for a pure-play chain to survive.

Dollar Tree (DLTR 1.35%) was for a long time the only dollar store chain that actually only sold items for a dollar. It was only after acquiring the Family Dollar chain that the deep discounter experimented with putting higher-priced items in an aisle or two.

There were some very good reasons for Dollar Tree to add slightly higher-priced products to its shelves, such as bringing in more brand name goods and offering better value to its customers for only a little extra. 

Interior of combined Dollar Tree-Family Dollar store

Image source: Dollar Tree.

Now, though, it's breaking down the barriers even more between the two concepts by building combination stores that house both Dollar Tree and Family Dollar under one roof, blurring the line completely between the chains. It might have two signs out front, but there's just one store inside.

It might just signal the end of the true dollar store concept, but both consumers and investors will be better off for it.

Pennies on the dollar

It was only a matter of time before Dollar Tree "broke the buck." Inflation alone would limit the products the discounter could sell and still offer quality to consumers, and by just inching up the price point -- to $2, $3, or $5 per item -- it would open up more opportunity for the retailer.

Both Family Dollar and rival Dollar General (DG 2.81%) sell most of their goods under $10 each, and around $5 is probably the sweet spot for both. Yet you can find a number of products that are well above that threshold too.

So even though Dollar Tree introduced a number of items that were slightly above the $1 limit in an initiative it called Dollar Tree Plus!, it remains the deepest value chain of the three national outlets. As noted earlier, it allows Dollar Tree to increase the number of name brands, the size of products sold, the value, and to bring in new items too.

It's continuing to expand on the program, expanding it from 120 stores to 500 stores this year, but by essentially also opening up a Family Dollar store inside a Dollar Tree chain, it blows out the whole concept, and probably for the better.

All in the family

After winning the bidding war for Family Dollar over Dollar General, paying $8.5 billion in 2015 for a chain that was broken, Dollar Tree languished trying to get the business functional again. The drag was so great that activist investor Starboard Value began agitating for the retailer to sell the chain.

Management, however, convinced the private equity firm it could change the retailer's trajectory through a combination of store closures and remodels -- a new format called H2 that has, among other features, more freezers and refrigerators with a broader selection of products. 

The refresh worked, too, consistently producing double-digit comps growth when the stores were remodeled. Family Dollar actually became the top chain for Dollar Tree, especially over the past year. Where comparable store sales rose 6.1% on a constant currency basis companywide, it was Family Dollar's 10.5% comps gain in 2020 that really carried the business forward. Dollar Tree's comps were up just 2.2% for the full year.

Two is better than one

While there were a number of factors that played a role in Dollar Tree underperforming last year, the COVID-19 pandemic was a key driver for the chain, and bringing together the two chains helped minimize the impact one store or the other might face alone. 

For one, Dollar Tree can save money by having combo stores. Instead of having to build two stores, it's able to have just one in the same size building. Two, customers get more for their money and won't have to travel to different locations to complete their shopping. By making the trip more convenient, it should increase customer visits, total ticket, and profits.

Right now the combo stores are targeted to very small communities, towns with just 3,000 to 4,000 people where it doesn't usually build a Dollar Tree store, but the results speak for themselves and it's a concept that could easily be expanded. 

The new combo stores are recording comps growth of 20% where they've been introduced, so it's no wonder Dollar Tree sees as many as 3,000 stores for the format.

Don't discount future growth

There's really a lot of moving parts in today's Dollar Tree. It's expanding the higher price points of Dollar Tree Plus! to more stores, it's updating and renovating a large number of Family Dollar stores to its H2 format (1,250 more this year), and it is rolling out more combination stores. Its partnership with Instacart for Family Dollar deliveries could also be huge.

Dollar Tree has a lot going for it that it didn't have going into the pandemic, but even if the conjoined Family Dollar-Dollar Tree format does eventually kill off the true dollar store concept, investors can still be happy about the retailer that survives after.

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