Should Dollar Tree Break Up With Family Dollar?

Dollar Tree is exploring strategic alternatives, including a possible sale or spinoff, of Family Dollar, its chronically underperforming banner bought in 2015 for about $9 billion.

J.P. Morgan Securities will lead the review.

Rick Dreiling, Dollar Tree’s chairman and CEO, said last week on the retailer’s first-quarter analyst call that the process will explore whether “separate, dedicated leadership teams” will help address “the unique needs of each banner at this time — transformation at Family Dollar and growth acceleration at Dollar Tree.”

The Family Dollar acquisition was expected to help Dollar Tree reduce costs to better compete against Dollar General, which also bid on the chain, as well as other discounters such as Walmart. The synergies behind the acquisition, however, were less than envisioned.

Dollar Tree’s stores cater to middle-income suburbanites with a focus on party favors and seasonal decorations. Family Dollar offers a wider range of items, from groceries to cleaning supplies, while catering to lower-income consumers in urban and rural areas. Most of Dollar Tree’s products are priced at $1.25, while Family Dollar offers a wide price range.

The focus on urban markets as well as a broader merchandise mix meant Family Dollar had to battle against a more price-competitive set than the better-performing Dollar Tree banner. The chain was also in poor condition at the time of the acquisition.

“Efforts to fix Family Dollar have been costly,” wrote the Financial Times in an article from March. “Many stores were in poor shape, bad locations and suffered from logistics problems.”

Lately, Family Dollar’s lower-income customers have been squeezed by inflation and the end of pandemic-era government aid. In the first quarter, Family Dollar’s operating margins were a measly 1.1% compared to 12.5% for the Dollar Tree banner.

Dollar Tree is finding early success with the introduction of a More Choices program, involving higher prices on certain products, which is helping extend its customer reach. Dreiling said on the analyst call, “Multi-price has never been about raising prices on existing items. It’s about adding new items at new price points that are incremental to our core assortment.”

Store openings for Dollar Tree are being accelerated, supported by the recent acquisition of up to 170 stores out of the 99 Cents Only bankruptcy.

Meanwhile, Family Dollar is in the process of closing 970 stores, representing 12% of its store base. Dreiling said he’s “confident that Family Dollar’s best days are ahead” with the streamlining efforts and other growth initiatives in place, including the installation of more coolers for refrigerated and frozen foods.

“We have not lost faith in Family Dollar and the progress it’s making,” Dreiling told analysts. “The team has done a great job of implementing many initiatives that are designed to drive the long-term growth. What we’re wrestling with and trying to figure out is we have two different brands at two different stages of where they’re at in their development. And while we want to accelerate Dollar Tree, we want to position Family Dollar’s transformation where it has the chance to grow.”