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Analysts say Family Dollar has proven to be a drag on Dollar Tree's earnings.
"Family Dollar remains the weaker part of the business," Neil Saunders, managing director at GlobalData Retail, said in May. "A far higher proportion of its shopper base goes there out of necessity rather than because they particularly want to."
We visited one of its stores to find out what it is like to shop there.
It's been three years since Dollar Tree bought Family Dollar, and so far, it's been a disappointing run.
The discount chain, which has more than 8,000 stores in the United States, has pulled down its parent company's earnings. In its most recent quarterly results, same-store sales at Dollar Tree were up by a modest 1.4%, but breaking this number down, it becomes clear that there is a weak link in the mix. While Dollar Tree same-store sales were up by 4% in the quarter, Family Dollar sales dropped by 1.1%.
"Family Dollar remains the weaker part of the business," Neil Saunders, managing director at GlobalData Retail, said in a note to investors in May.
"It is more of a needs-based experience which caters for customers' basic, everyday requirements. A far higher proportion of its shopper base goes there out of necessity rather than because they particularly want to."
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Dollar Tree acquired Family Dollar in 2015, after undergoing a bidding war with Dollar General, its main US rival. Dollar Tree and Dollar Tree are almost neck-and-neck in terms of store count and annual sales. Both dollar chains have about 14,000 to 15,000 locations. Dollar Tree generated $22 billion in sales in 2017 compared with $23.5 billion at Dollar General.
The bidding war may have distracted Dollar Tree and led them to "gloss over some of the glaring problems at [Family Dollar]," Credit Suisse analysts wrote in June.
"Family Dollar clearly preferred Dollar Tree as the acquirer (since the Family Dollar name was more likely to survive), and Dollar Tree likely wanted to prevent Dollar General from nearly doubling its size overnight," the analysts wrote.
We decided to check out what it was like to shop at Family Dollar:
The Family Dollar store we visited was located in Brooklyn, New York. On average, its stores are around 7,000 square feet in size.
At the entrance of the store was a selection of seasonal products. This tactic is also used by its sister store, Dollar Tree, to grab the attention of the shopper and make sure items with a shorter shelf life don't go unnoticed.
The layout of the store and assortment felt a lot more similar to a Dollar General store than a Dollar Tree.
In fact, Credit Suisse analysts say it would likely have made more sense for Dollar General to acquire Family Dollar. The offering is more in line, and there is a limited overlap in terms of where stores are located.
Family Dollar stores are generally found in urban areas while Dollar General stores are typically located in rural places.
The majority of its products cost more than $1 ...
... and there is a much wider selection of well-known brands.
Dollar Tree, on the other hand, stays true to the dollar-store model, offering all items for $1. It offers a larger number of lesser-known brands, which enables it to keep prices low.
Similarly to Dollar General, Family Dollar is designed to cater to everyday and basic requirements.
There was a limited selection of fresh food that included milk, eggs, and cheese — but no fruit or vegetables.
"Family Dollar stores stock a higher mix of consumables, and satisfy fill-in trips between visits to a mass merchant," Credit Suisse analysts wrote in June.
There definitely wasn't enough here to do your weekly grocery shopping, but it could be enough to grab some essentials midweek.
However, it was a confusing mix between doing a quick shop and a monthly stock-up. In some areas of the store, it felt more like a warehouse club.
Items were being sold in bulk, clearly as a way to keep prices down. However, buying in bulk doesn't lend itself to frequent visits.
It also made the store feel more expensive, as even though you are likely getting a better deal if you buy in bulk, you are in two different mindsets when shopping — is this a dollar store or a warehouse club?
We were impressed with the wide selection of items overall. In this relatively small space, they also had kitchen and bathroom supplies as well as some underwear.
This did mean that some areas were fairly disorganized, however.
According to Credit Suisse analysts, the store's shopping experience is one of the main reasons why Family Dollar has struggled to appeal to customers. They argued that store renovations could be the ticket to success.
"The store base was in complete disarray three years ago. Incremental remodel activity will go a long way toward stabilizing the same-store sales," the analysts wrote.
Family Dollar is expected to remodel 450 stores this year.
Our verdict: The store was definitely easy to shop and in better condition than what we encountered at one of its sister Dollar Tree locations when we visited earlier this year. However, the mix of bulk and normally sized items made the pricing feel confusing and, ultimately, expensive.
