Family Dollar creates problems for Dollar Tree: store tour

Family Dollar feels a lot like Dollar General.Business Insider/Mary Hanbury

• Family Dollar was acquired by Dollar Tree in 2015.
• Analysts say Family Dollar has proven to be a drag on Dollar Tree’s earnings. In its most recent quarterly results, reported on Thursday, same-store sales at Dollar Tree stores alone were up 3.7%, while Family Dollar was flat, sending the company’s share price down by 5%.
• “Family Dollar remains the weaker part of the business,” Neil Saunders, managing director at GlobalData Retail, said in May. “A far higher proportion of its shopper base goes there out of necessity rather than because they particularly want to.”
• We visited one of its stores to find out what it is like to shop there.

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It has been three years since Dollar Tree bought Family Dollar, and so far, it’s been a disappointing run. 

The discount chain, which has more than 8,000 stores in the United States, has pulled down its parent company’s earnings. In its most recent quarterly results, same-store sales at Dollar Tree were up by a modest 1.8%, but breaking this number down, it becomes clear that there is a weak link in the mix. While Dollar Tree same-store sales were up by 3.7% in the quarter, Family Dollar sales were flat at 0%.

“Family Dollar remains the weaker part of the business,” Neil Saunders, managing director at GlobalData Retail, said in a note to investors in May.

“It is more of a needs-based experience which caters for customers’ basic, everyday requirements. A far higher proportion of its shopper base goes there out of necessity rather than because they particularly want to.”

Dollar Tree acquired Family Dollar in 2015, after undergoing a bidding war with Dollar General, its main US rival. Dollar Tree and Dollar General are almost neck-and-neck in terms of store count and annual sales. Both dollar chains have about 14,000 to 15,000 locations. Dollar Tree generated $22 billion in sales in 2017 compared with $23.5 billion at Dollar General.

The bidding war may have distracted Dollar Tree and led them to “gloss over some of the glaring problems at [Family Dollar],” Credit Suisse analysts wrote in June. 

“Family Dollar clearly preferred Dollar Tree as the acquirer (since the Family Dollar name was more likely to survive), and Dollar Tree likely wanted to prevent Dollar General from nearly doubling its size overnight,” the analysts wrote.

We decided to check out what it was like to shop at Family Dollar:

This did mean that some areas were fairly disorganized, however.

According to Credit Suisse analysts, the store’s shopping experience is one of the main reasons why Family Dollar has struggled to appeal to customers. They argued that store renovations could be the ticket to success. 

“The store base was in complete disarray three years ago. Incremental remodel activity will go a long way toward stabilizing the same-store sales,” the analysts wrote.

Family Dollar is expected to remodel 450 stores this year.

Our verdict: The store was definitely easy to shop and in better condition than what we encountered at one of its sister Dollar Tree locations when we visited earlier this year. However, the mix of bulk and normally sized items made the pricing feel confusing and, ultimately, expensive.