Consolidation in the “dollar” stores continues as on Monday, July 28th, 2014 Dollar Tree announced they were going to acquire Family Dollar for $74.50. This was a premium of 25% to the stock price as of Friday’s close. Dollar stores have been a very hot topic lately as most retail investors are seeing there is plenty of room in the high end market or the low end market but there is very little in between. In essence, there is a large separation of what would be known as the “middle class” of retail stocks.
Dollar Tree has been one of the strongest of the dollar store stocks. Other companies that are in competition with Dollar Tree include Dollar General, Big Lots, Fred’s and Five Below. All of these retailers look to offer basement pricing for items that are disposable. The thought is that a pencil is going to be replaced anyway so why go to a high end retailer and pay $10 for a pack of pencils when you could go to Dollar Tree of Family Dollar and get the same type of pencil, maybe not the best in quality, for only a buck.
One of the main reasons Dollar Tree decided to gobble up Family Dollar is the real estate and locations of the southern dollar store. Family Dollar has locations in many small towns in the south. Some would argue they are in locations that are too small as there are less than 1000 residents in the towns in which there is a Family Dollar. WalMart is rolling out Express stores in an attempt to compete with dollar stores but that has not gone over as well as they would have liked. Moving forward, it will be interesting to see how WalMart, Target, Best Buy and other big box retailers compete with these small and nimble dollar stores that hold inventory that is much less in value. Even if you have 10,000 items that is still going to be less than $10,000 in inventory.