New Economic Realities   //   June 7, 2024

Why Family Dollar is struggling while other dollar stores thrive

Nearly a decade ago, Dollar Tree beat out rival Dollar General to absorb Family Dollar for $8.5 billion. Now, after months of rocky returns, the chain says it is considering a “a potential sale, spin off or other disposition” of Family Dollar.

Dollar Tree CEO Rick Dreiling told analysts and investors on Wednesday that Dollar Tree is evaluating whether separating the two brands “could enhance the performance of each one individually and allow them both to reach their true valuation potential.” The announcement came as Dollar Tree reported that same-store net sales at Family Dollar remained essentially flat from the first quarter of 2023 to the first quarter of 2024. Same-store net sales at Dollar Tree, meanwhile, were up 1.7% year over year.

The move isn’t a done deal — Dollar Tree hasn’t made “any prejudgments” regarding this process, and the overall assessment will take time, Dreiling said. “We do not intend to provide any further updates unless and until the board has approved a specific course of action,” he said.

Still, the fact that Dollar Tree is considering severing ties with Family Dollar at all reveals the fragmented state of dollar stores.

The current state of dollar stores

Dollar stores tend to do well in inflationary environments. But appealing to budget-conscious customers doesn’t guarantee success, especially when shoppers are cutting back on discretionary purchases. Two months ago, 99 Cents Only filed for bankruptcy protection in Delaware, saying that inflation had made business untenable. In fiscal 2023, Family Dollar logged an operating loss of $2.6 billion, compared to an operating income of $127.5 million for fiscal 2022.

What ultimately makes a dollar store successful comes down to a mix of factors, analysts say. One is the customer base. Dollar Tree, for instance, mostly caters to middle-income consumers in suburban areas, while Family Dollar tends to cater to lower-income consumers in urban areas. Research suggests that consumers in the latter group are more likely to feel the brunt of inflation.

Store count also plays a factor. Dollar Tree is moving into 170 vacant 99 Cents Only stores, which will increase its footprint in the western United States. Meanwhile, Family Dollar is closing more than 900 stores over the next several years.

Family Dollar stores are often in areas with few supermarkets or big-box stores, per ABC News, so closing them means fewer retail options for the surrounding community.

How Dollar Tree and Family Dollar differ

There’s also the matter of merchandise mix and pricing strategy. Dollar General, which has outperformed Family Dollar, recently boosted its private-label offerings, pointed out Sujeet Naik, an analyst at Coresight Research. Last year, Dollar General added 100 new items to its grocery line Clover Valley. “I think those kinds of investments really make them stand out among consumers,” Naik told Modern Retail. “They also stock some higher-priced items so that some middle- to higher-income consumers can come shop at them.”

That multiple-price-point strategy has also been key to Dollar Tree — something it can’t necessarily afford to do at Family Dollar. Earlier this year, Dollar Tree added some 300 items at price points above $1.25. Frozen and refrigerated foods, many of which are in the $4 and $5 range, have performed particularly well, Dreiling, the CEO, said this week. Already, Dollar Tree stores with multiple price tiers are outperforming Dollar Tree stores without them, he explained. “The confidence I have in Dollar Tree as we move through the year is the impact of multi-price point,” he said.

When Dollar Tree bought Family Dollar in 2015, it positioned the move as a way to expand its audience and thus its sales. “This is a transformational opportunity for our business to offer broader, more compelling merchandise assortments, with greater values, to a wider array of customers,” Bob Sasser, then-CEO of Dollar Tree, said in a statement at the time. “This acquisition will extend our reach to low-income customers while strengthening and diversifying our footprint.”

However, this hasn’t played out as Dollar Tree had hoped. Instead, Family Dollar’s problems have mounted over the last decade. In February, it was fined more than $40 million for a rat infestation at a warehouse, the biggest criminal penalty in a food safety case, per NPR. Dollar Tree’s CEO has said Family Dollar customers are feeling the effects of expired pandemic-era SNAP benefits. And the brand continues to grapple with competition from Walmart and Temu.

“The harsh reality is that Family Dollar is a problematic business which is a millstone around Dollar Tree’s neck, dragging down overall performance and the company’s valuation,” Neil Saunders, managing director of GlobalData Retail, wrote in a note on Wednesday. “It is clear to all in the market that Family Dollar is a chain that needs a lot of work and investment, a fact which will also thin out the number of interested parties.”

What’s ahead

Dollar Tree’s decision to explore a sale of Family Dollar has surprised some analysts. “While we knew Family Dollar has been struggling to improve operating performance, we were under the impression… Dreiling and his new management team were particularly well-suited to turn around the segment based on their past success leading Dollar General and other retailers,” Joe Feldman of Telsey Advisory Group said in a note on Wednesday.

However, he conceded, “We believe the review of strategic alternatives for Family Dollar is overdue and the best course of action, given the company has tried reviving the segment multiple times and has failed to show much progress, despite store closures, remodels and changes in merchandising and leadership.”

Still, Family Dollar’s possible sale isn’t a death knell for dollar stores, many of which have managed to hang on, sources told Modern Retail. Dollar General’s net sales for its most recent quarter increased 6.1% year over year to $9.9 billion. Discount stores are now the fastest-growing food retailers in the nation, according to January 2023 research from the American Journal of Public Health. 

Attendance is also strong at some dollar chains, according to data that supplied to Modern Retail. May foot traffic was up 14.2% year over year at Dollar General and 12.2% year over year at Dollar Tree.

“I think the dollar store will likely experience significant growth over the coming years,” Coresight Research’s Naik told Modern Retail. “These retailers have successfully tapped into growing demand for value-driven shopping experiences… We expect this movement towards greater frugality to be a trend that will outlast economic disruptions.”