Posted but not written by: Lou Sheehan
September 12, 2014
Good Times for Dollar Stores, Bad Times for Shoppers
By Vauhini Vara
Every three years, the Federal Reserve conducts a survey to get a measure of how American families are doing financially. In the latest results, which were published last week, the Fed revealed that, between 2010 and 2013, the disparity between the rich and the poor had widened. This conclusion wasn’t all that surprising; other research has shown more or less the same thing. But the Fed’s report offered some striking new statistics about the nature of the income gap. Last year in the United States, more than thirty per cent of the income brought in went to the top one per cent of earners, up from twenty-eight per cent three years earlier. And across the surveyed period the share earned by the bottom ninety per cent fell, from fifty-six per cent to fifty-three per cent. Median incomes dropped, on average, for every income group except the top ten per cent, with ethnic minorities, those without college degrees, and older people seeing disproportionate declines.
The ninety per cent may not have as much to spend, but they still have to eat, brush their teeth, and wash their clothes. It’s no wonder, then, that Dollar General and Dollar Tree, which sell household products at steep discounts, have been doing brisk business. In its most recent quarter, Dollar General’s sales rose more than seven per cent compared to the same period last year, while Dollar Tree saw an increase of more than nine per cent. However, another discount store, Family Dollar, has struggled, experiencing only a three per cent rise in sales in its most recent quarter. In recent years, the chain has tried to raise prices on some items, a move that has come across to many of its customers as counter to the point of a dollar store.
Now Dollar General and Dollar Tree are both out to acquire their laggard rival. The situation has attracted attention partly because of the personalities involved: Howard Levine, the C.E.O. of Family Dollar, is the son of the chain’s founder; Carl Icahn, the famously activist investor, amassed a nine-per-cent stake in Family Dollar and agitated for a sale. (He later got rid of all his shares.) In July, Family Dollar agreed to be acquired by Dollar Tree for $8.5 billion; soon after, Dollar General made a higher bid. Family Dollar rejected Dollar General’s offer, as well as a later, more generous one. With the original agreement with Dollar Tree still in place, Dollar General is initiating a hostile takeover by going directly to Family Dollar’s shareholders with a $9.1 billion offer.
This boardroom drama is less interesting—or, at least, less relevant to most people’s lives—than what’s happening inside the stores themselves. Dollar stores are doing more business not because the economy is improving but because low-income people are seeing their financial situations worsen. According to a report from Deloitte, about two thirds of dollar-store shoppers have household incomes of fifty thousand dollars or less; the average customer spends eleven dollars per trip. As these shoppers’ incomes have fallen, their purchasing habits have changed. In July of 2011, Ann Zimmerman, writing in the Wall Street Journal, notedthat Dollar General and Family Dollar had recently fallen short of their quarterly financial targets. The stores explained that customers weren’t buying as many high-priced items, such as clothes and home decorations—products that bring the stores bigger profits than value items like detergent and dish soap. At Dollar General, executives could have tried to raise prices on basic items to make up for the shift, but they decided against it. “This sounds almost silly, but a dollar item going to $1.15 in our channel is a major change for our customer,” he told analysts.
Family Dollar’s strategy of discounting some items and raising the prices of others backfired. Shoppers noticed the markups. “What I have seen is most important and relevant to our customers is maintaining great everyday low prices,” Levine told analysts in January. “We have gotten away from that.” He vowed to return to a more straightforward everyday-low-prices approach (known in retail circles as E.D.L.P.), but by then it was too late: the company was vulnerable to a takeover.
At issue, now, is whether a Dollar General takeover of Family Dollar would lead to higher or lower prices for shoppers. This is relevant to the companies, because the question would surely come up in a Federal Trade Commission review of the antitrust implications of any deal. It also matters to cash-strapped shoppers. Family Dollar said in a press release that, at many of its stores, pricing decisions are “based solely on the presence of local Dollar General stores”—implying that the competition has been good for consumers, and that the removal of the rivalry would be bad. People familiar with Dollar General told me that executives there believe that Family Dollar’s price hikes have done it little good, while Dollar General’s steadfast E.D.L.P. approach has been successful. If so, why would Dollar General adopt Family Dollar’s failed strategy of raising prices after an acquisition?
Dollar General has also put forth another interesting argument. According to the company’s research, Dollar General stores aren’t primary shopping destinations; they are “fill-in” stores that customers visit in addition to grocery stores, Wal-Marts, and convenience stores. Dollar General claims that, partly owing to this, its pricing is influenced mostly by Wal-Mart’s prices, not by those of Family Dollar. The argument follows, then, that a bigger dollar-store company, created by combining Dollar General and Family Dollar, could lower prices for customers over all by presenting Wal-Mart with a formidable competitor in the discount-shopping sector.
With families’ incomes dropping, it makes sense that these stores—and the U.S. government, in the event of an acquisition—would focus on keeping prices low. It’s worth noting, though, that families’ financial troubles have less to do with what they’re spending than with what they’re earning. Cheap imports from low-wage countries, along with stagnant wages for U.S. retail workers, have kept store prices from rising much over the years, and, as long as people are having a hard time making ends meet, it makes good business sense for dollar stores to keep prices as low as possible. If a merger takes place, the F.T.C. will likely go through the motions of investigating the deal’s effect on prices—but the government as a whole might do better to focus on helping dollar-store shoppers earn more income in the first place.
vara Vauhini Vara has been the business editor at newyorker.com since 2013.
[ My intention with my blog is to simply collect articles of interest to me for purposes of future reference. I do my best to indicate who has actually composed the articles. NONE of the articles have been written by me. – Louis Sheehan ]