On Monday, a number of US consumer goods companies saw their shares dip in value. Why the flashes of red on the boards and screens of the New York Stock Exchange? Another deal to consolidate the US retail sector was announced, this time in a channel to which FMCG companies had been paying greater attention in recent years – the dollar-store channel.
Dollar Tree, a Virginia-based retailer with 4,900 stores in the US and Canada, struck a deal to buy North Carolina-based rival Family Dollar Stores, which has around 8,100 stores in the US.
Should the transaction, which values Family Dollar at US$9.2bn, go through, it will create a retailer with around 13,000 stores and generating more than US$18bn in sales.
The combined sales might of the Dollar Tree/Family Dollar entity would be “roughly comparable” to the annual revenue of the largest dollar store retailer in the US, Dollar General, Morningstar analyst Ken Perkins says.
In the wake of the announcement, some industry watchers speculated Dollar General could table a rival offer for Family Dollar. Perkins, for one, says a competing bid would not come as a surprise. Activist investor Carl Icahn took a stake in Family Dollar last year and is said to have proposed a combination between the company and Dollar General as a way of arresting what some industry watchers believed was Family Dollar’s under-performance.
Either way, FMCG manufacturers operating in the US are set to face, on paper, a stronger customer with which to do business, following other deals across the US grocery sector, including Albertsons’ takeover of Safeway and Kroger’s purchase of Harris Teeter.
The downturn of the last six or so years prompted US consumers to shop around for their groceries and they added dollar outlets to their repertoire of stores. Dollar retailers responded by investing more in the food ranges and food manufacturers, looking for opportunities for growth in a broadly slow-growth market, have sought to gain a toehold in the cut-price stores. Dollar stores, alongside convenience outlets and online, have been held up by some food manufacturers as an avenue for growth.
However, consolidation involving Family Dollar could give the enlarged retailer greater bargaining power when dealing with FMCG manufacturers.
“As the unified buying teams at Dollar Tree/Family Dollar sit with suppliers, and others, they will boast a store base totaling in excess of 13,000 and undeniably be an advantageous negotiating position for merchandise prices,” Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, wrote in an op-ed for CNBC this week.
That consolidation is likely to equal more a more powerful customer is often held up as a rule of business.
However, other retail industry watchers are less sure about the buying power a combined Dollar Tree/Family Dollar could wield. Neil Stern, senior partner at retail consultants McMillanDoolittle, points to the different ranging strategies at the two retailers.
“Dollar Tree prices everything at a dollar, is about half consumables and less nationally brand driven. Family Dollar is over 70% consumables, more nationally brand focused and sells at variable price points. Certainly, there is an opportunity for the combined entity to leverage buying power and best practices but it’s not a slam dunk deal,” Stern tells just-food.
For the savvy manufacturer, the transaction could lead to some opportunities. Dollar Tree, Stern argues, could increase its range of FMCG products. Dollar Tree is also likely to keep Family Dollar’s strategy of different price-points but throw in more US$1 products, Stern believes.
Private-label food manufacturers in particular could benefit, analysts argue. Bill Bishop of retail consultants Brick Meets Click argues both retailers have “put great emphasis” on building own-label ranges of FMCG products. “This means that while the national brands can use the large dollar store count to move inventory to the point of sale, they typically can’t expect a lot of merchandising support to actually sell the products,” Bishop says.
With the less brand-driven Dollar Tree as the acquirer – and it planning to keep both banners – the scope for more private-label FMCG products on sale across the enlarged business could grow.
“Private label will probably grow and consolidate as [Dollar Tree] looks for opportunities across both brands. Family Dollar has more opportunity with floating price points,” Stern says.
That said, not all brand owners that do business with dollar stores in the US are looking on anxiously. US snacks group Wise Foods, which sells products through Dollar Tree and Family Dollar, is sanguine about the prospects of the two retailers combining.
“We see that as a big opportunity,” Miguel Bostock, Wise’s CEO, insists. “We are very successful in Family Dollar and we have contributed importantly and helped them increase their foot traffic with their salty snack sales.
“We also sell in Dollar Tree in the stores on the East Coast. I think there is a key opportunity for all of us with our relationship we already have with Family Dollar and we have a good relationship with Dollar Tree.”
Asked if Wise has any concerns about doing business with a retailer that could be in a better bargaining position, Bostock adds: “We see it more as an opportunity to increase our reach and sales. Since we do business with both of them and been successful, we see it as a win-win.”
Dollar Tree’s Canadian chain could also present a opportunity for food manufacturers. The takeover of Family Dollar could also see Dollar Tree expand its FMCG ranges in its Canadian stores, not just those in the US.
Customer consolidation, of course, can present challenges and US grocery manufacturers, so keen to up their presence in dollar stores, may have frowned a little at news two dollar chains are set to combine.
However, the deal could give the savvy manufacturer an opportunity or two.