The $8.5 billion merger of Dollar Tree (NASDAQ:DLTR) and Family Dollar created a deep-discount behemoth with nearly 14,000 stores in 48 states and Canada, which generates about $18 billion in annual revenues. It puts it firmly in a head-to-head battle against Dollar General (NYSE:DG), which, while operating fewer stores (about 11,000), has made nearly $20 billion in sales during the past 12 months.
Part of the rationale behind Dollar Tree winning the bidding war for Family Dollar over Dollar General was that it would need to divest fewer stores than its competitor. Dollar Tree only had to shed some 330 stores compared to the estimated 4,000 or so that Dollar General would have been required to get rid of to satisfy antitrust concerns.
Now, Dollar Tree has done so. In the process, it created a new national competitor, Dollar Express.
Sold to private equity firm Sycamore Partners for an undisclosed sum, the former Family Dollar stores had some $500 million in annual revenues, and represented about $45 million in operating income for Family Dollar. Obviously, it's much smaller than the two industry stalwarts, more on par with 99 Cents Only Stores, which runs 389 stores, with $1.9 billion in sales last year.
The deep-discount market has become a vibrant challenger to Wal-Mart (NYSE:WMT), which briefly flirted with running its own small-footprint stores to take on the dollar-store outlets. It opted, instead, to focus on a somewhat larger model that would go up against local grocery stores, but the dollar chains still see an opportunity to steal customers and share away from the retail giant.
Although all the dollar stores are adding more food items to their inventories in order to make their stores a destination for more than just fill-in shopping, Dollar General, in particular, has been going out of its way to take on Wal-Mart by opening more than 100 Dollar General Market stores, which are essentially full-service grocery stores with very low prices.
Dollar Tree maintains a $1 and under price point throughout all of its stores, and recently announced its intention to rebrand all of its Deal$stores, which had higher price points, under its corporate banner. The $1 and up field will be given over to Family Dollar, where more than three-quarters of its products sold have a price higher than a dollar.
That's the same "sweet spot" of sales that Dollar General has said it prefers to operate in, where a similar percentage of its goods are sold for $5 or less.
Dollar Express, which will also offer a mixed-price platform -- but one which promises "innovation" -- has the potential to be a thorn in the side of Dollar Tree, which is tasked with integrating the Family Dollar chain and its completely different business model. As that chain now accounts for more than half of Dollar Tree's revenues, and is also a lower-margin, struggling enterprise, this new competitor could present more trouble than its size would suggest.