Dollar Tree’s plans to buy rival discounter Family Dollar will shake up the North American small-box market.

The combination will create a 13,000+ store network with annual sales of USD18+ billion. It now becomes a two-horse race – as Dollar General and Dollar Tree jockey for the US value channel’s top spot. Dollar Tree could conceivably leapfrog long-time market leader Dollar General.

The combination also signals that dollar stores aren’t about to relinquish their small-box turf to the likes of Walmart Express. A bigger, stronger Dollar Tree will provide more formidable competition for Walmart as it accelerates its own small-box expansion.

In addition to shifting the landscape, Planet Retail views the following as some of transaction’s most compelling points.

  • Synergies from combining the two firms are estimated to be USD300 billion annually by the end of the third year. Increasing operating efficiencies and driving down costs are crucial to dollar store success. Being a single-price point operator with an “Everything’s a Dollar” mantra, Dollar Tree can ill afford creeping costs or else it hits the bottom line. Bringing multi-point Family Dollar into the fold and anticipated synergies makes all-around good business sense.
  • Despite operating in many of the same states, there’s really very little overlap in geographic coverage. The two companies’ respective site strategies bring complementary rather than competing locations to the table. Dollar Tree focuses on locating in strip shopping centers anchored by mass merchandisers (e.g. Walmart, Target) in suburban areas of large and mid-sized cities. It targets primarily a middle-income shopper.
  • Picking up Family Dollar Stores expands Dollar Tree’s reach into more small towns and rural areas, as well as the urban core. This means capturing low-income shopper segments and additional dollars Dollar Tree probably hadn’t previously captured. Thus, we don’t anticipate big regulatory issues or large number of store disposals as a result.
  • Maybe most importantly is the first-mover advantage, i.e. beating the competition in making a play. Competitors not only in the value channel, but across all of US grocery must take heed. The deal sets Dollar Tree up as an increasingly formidable competitor – more directly pitting it against Dollar General, Walmart, and others (e.g. Aldi, Save-A-Lot) in the value space. Suppliers now have a much larger Dollar Tree in which to partner as well.