It's a dollar store. Who would think pricing mattered so much when it comes to competing dollar store chains?
Dollar Tree recently came out and stated publicly that the trade agency is, as part of its approval process for the merger, closely examining Family Dollar's "pricing rules" and how the competing merger bids would affect store prices.
Turns out, Family Dollar's pricing remains pretty consistent regardless of whether there's a competing Dollar Tree store present in the area. When it competes head-to-head with Family Dollar, only 150 of its rival's stores lower their prices. When it's not in the same market, fewer than 50 Family Dollar stores raise their prices by more than 2% on averageA relative handful of stores lower their prices when a Dollar Tree is around, and even fewer raise them when it is not.
In contrast, when Dollar General doesn't have stores in the same market as Family Dollar, Family Dollar is hiking prices left and right. When those two stores compete against one another, about 5,400 Family Dollar stores adjust their prices. When there's no Dollar General nearby, more than 3,300 Family Dollar stores operate in zones where prices would rise by more than 2% on average under its pricing rules.
Family Dollar operates more than 8,000 stores in 46 states, while Dollar General has over 11,500 locations in 40 states. Dollar Tree, the smallest dollar store chain of the three, has about 5,300 stores in 48 states.
Dollar Tree says how Family Dollar acts to competition makes its bid a better deal for the consumer, as prices likely won't rise, but may end up going up with Dollar General because of the number of stores it will have to close due to overlap.
Dollar Tree argues Dollar General refuses to make a "hell or high water" commitment to do whatever is necessary to make the deal happen, including divesting an unlimited number of stores. Dollar Tree says the number of store closings necessary for Dollar General get the regulatory green light to do the merger will far exceed the 1,500 it has publicly said it would be willing to close.
While that sounds damning, pure "hell or high water" commitments requiring unlimited divestitures are rare. A company must be able to assign an economic value to the transaction; while a certain number of divestitures might be required, there's usually a cap of some sort.
Dollar General shot back that Dollar Tree's spin is well off the mark, and that its own "documents and data tell a very different story.
First, it is Wal-Mart (NYSE:WMT) that is driving the acquisition bid and impacts its pricing decisions, not Family Dollar, according to Dollar General. It said more than 90% of its stock-keeping units are priced at a national level, so they're not subject to zone pricing. And it is not about to adopt a pricing strategy that will impair its ability to compete against Wal-Mart, either, whether before or after the acquisition.
Dollar Tree is right. The businesses of Dollar General and Family Dollar are much more similar than its own. While Dollar Tree prices its products at $1 across its stores, its rivals offer multiple price points, with Dollar General having only about a quarter of its products priced at $1 or less and Family Dollar offering even fewer items at that level.
Which is exactly why I think Dollar Tree's pursuit of Family Dollar is misguided. A merger would triple Dollar Tree's footprint and dramatically change the makeup of the pricing policy that has served it so well. Add in the fact that Family Dollar is stumbling badly these days, and Dollar Tree plans to keep current management in place when the deal is done, and there are a lot of reasons for Dollar Tree investors to hope their company loses the battle.
Dollar Tree's smack talk does have a certain validity, but it also underscores why its takeover offer is a bad deal for its shareholders.