Two major U.S. dollar store chains, Family Dollar and 99 Cents Only, have faced challenges.
Family Dollar recently announced plans to close nearly 1,000 stores, while 99 Cents Only is on the verge of quitting business.
Both companies are dealing with rising inflation and a surge in shoplifting, but these aren’t their only problems.
The Bigger Picture: Strategic Mistakes
Retail experts point out that the troubles of these dollar chains didn’t start overnight. Years of poor decisions, lack of investment, and bad ownership transitions have left both companies struggling.
Family Dollar’s Decline
- Acquisition Issues: Family Dollar, which operates around 8,000 stores, was bought by Dollar Tree in 2015 for $8.5 billion. Dollar Tree hoped this acquisition would help it compete with rivals like Dollar General. Unfortunately, it has turned into a major headache for the company.
- Operational Challenges: According to Neil Saunders, managing director at GlobalData, the acquisition has been a constant challenge for Dollar Tree, and even a decade later, it’s still facing fallout from the deal.
- Store Conditions: Many Family Dollar stores were in much worse shape than Dollar Tree anticipated. Efforts to improve sales, such as introducing beer, didn’t make a big difference. Additionally, many stores were located too close, causing them to cannibalize each other’s sales.
99 Cents Only’s Downfall
- Flawed Business Model: Operating mainly on the West Coast and Texas, 99 Cents Only faced issues with too large and inefficient stores. According to former Dollar General executive David D’Arezzo, the company never had a sustainable business model that would allow it to thrive in a competitive market.
Family Dollar’s Struggles Continue
- Store Closures: Family Dollar plans to shutter 600 stores this year and another 370 in the coming years as leases expire. Dollar Tree CEO Rick Dreiling stated that these stores have become unprofitable due to the current economic conditions, although the challenges at Family Dollar date back much further.
- Long-Standing Issues: Family Dollar has faced issues such as poor store conditions, higher prices, and over-expansion. Kelly Bania from BMO Capital Markets highlighted that the chain has underinvested in its stores for decades, leading to a steady decline.
- Activist Investors and Acquisition: In 2014, investors like Carl Icahn and Nelson Peltz pressured Family Dollar to sell itself. The following year, Dollar Tree, which was much smaller at the time, acquired the company. However, Family Dollar’s focus on lower-income shoppers in urban and rural areas didn’t align well with Dollar Tree’s strategy of targeting middle-income customers. This misalignment has continued to cause problems for Dollar Tree in managing Family Dollar’s larger store network.
The company struggled to handle its larger store format and lacked a clear business direction. It couldn’t keep up with its competitors or adequately respond to changes in the market.
Looking Ahead
Despite the numerous challenges faced by Family Dollar and 99 Cents Only, there are signs of potential recovery.
Nuvama, a global brokerage, mentioned that similar to how government support helped Vodafone Idea overcome financial difficulties, strategic measures could help these dollar store chains turn things around.
Nuvama predicted that with the right moves, Family Dollar’s parent company could see positive growth in the long term, much like the telecommunications sector.
Conclusion
The road ahead for both Family Dollar and 99 Cents Only will be tough. Years of underinvestment, strategic errors, and external economic pressures have taken a toll on these businesses.
However, understanding these challenges is the first step toward finding a way forward. If they can address their operational inefficiencies and adapt to the current retail environment, these chains might still have a chance at recovery.
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