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US dollar store, and its British cousin The Pound Shop, is where cash-conscious shoppers get cheap basics as chips. But sometimes it’s inside the store that comes at knockdown prices.
American discount retailer Dollar Tree agreed to sell its struggling family dollar chain to a private equity company this week for $1 billion. This is just a small portion of the $9 billion that Dollar Tree paid 10 years ago in the wake of a fierce bid war with rival Discount Stored Dollar General. Despite the names of similar names, the two brands are different. While dollar trees primarily cater to middle-income suburban shoppers, family dollars serve low-income urban consumers.
In 2015, Dollar Tree executives welcomed the contract with Family Dollar as a “transformational opportunity.” However, efforts to correct family dollars are expensive and involve legal settlements with stores under the heel, bad places and rat awarded warehouses.
What about the annual cost savings that Dollar expected during the partnership to $300 million? Management confirmed in an analyst’s appeal on Wednesday that the two chains are “two different businesses with limited synergy.” Family Dollars have won nearly $4.5 billion in operating losses over the past two years, while its parent brand has generated an operating profit of $3.2 billion.
One problem is that family dollars are betting on spending by the poorest urban Americans, and they’re not doing that well. The end of government aid in the era of inflation and pandemics led them to spend less.
The disbandment will at least allow Dollar Tree to concentrate on their store. The stock has declined 45% over the past year, trading at 12 times the forward revenues, about half of Walmart’s multiples. Dollarama, a Canadian Dollarama store chain, has a market capitalization of 33 times revenue.
American consumers are more cautious, and competition between Walmart and online discount retailer Temu continues to intensify. According to analysts at Citigroup, Donald Trump’s trade war could be another headwind given the tree sources of about a quarter of products from China.
Under the new owner, family dollars face the same challenges. But at least it’s burned into deals struck by the new owner’s brigade capital management and Macellum Capital Management, known as the Value Buyer. They are paying less than a tenth of the chain’s 2024 revenue. At the very least, it was not possible to mismatch Dollar’s commitment to low prices.
pan.yuk@ft.com
