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Why turning Family Dollar stores into Dollar Trees may help Dollar General

It’s possible that Dollar General could benefit from the conversion of some Family Dollar stores into Dollar Tree stores after Dollar Tree closes its $8.5 billion acquisition of Matthews-based Family Dollar, an analyst said in a research note Wednesday.
It’s possible that Dollar General could benefit from the conversion of some Family Dollar stores into Dollar Tree stores after Dollar Tree closes its $8.5 billion acquisition of Matthews-based Family Dollar, an analyst said in a research note Wednesday. AP

Dollar General could benefit from the conversion of some Family Dollar stores into Dollar Tree stores after Dollar Tree closes its $8.5 billion acquisition of Matthews-based Family Dollar.

That’s because Dollar Tree and Family Dollar have different products and prices, and when a Family Dollar store turns into a Dollar Tree, customers may opt instead to shop at a nearby Dollar General, RBC Capital Markets analyst Scot Ciccarelli said in a research note to clients Wednesday. He noted that Dollar General is similar to Family Dollar in its offerings and prices.

The Family Dollar to Dollar Tree store conversions could lead to an incremental sales boost of $200 million to $400 million for Dollar General, Ciccarelli wrote. He and his team estimate that about 800 Family Dollar stores will be converted to Dollar Trees.

Dollar General, like Family Dollar, caters to a lower- to-middle-income customer and carries national brands. Dollar Tree, on the other hand, sells all its merchandise for $1 or less. In the research note, Ciccarelli and his team found that roughly 6,000 of Family Dollar’s 8,000-plus stores are within 3 miles of a Dollar General.

“In other words, from a shopping perspective, Dollar General is a decent proxy for Family Dollar and vice versa,” Ciccarelli wrote.

Since the stores to be re-bannered are “underperforming,” Ciccarelli and his team estimate that they generate just over $1 million in annual sales, about 20 percent less volume than the “average.”

In a recent earnings call, Dollar Tree CEO Bob Sasser called the two companies “complementary”: Dollar Tree tends to perform better in more suburban markets, while Family Dollar does better in rural and urban markets and with low-income shoppers.

Dollar Tree has said converting “hundreds” of Family Dollar stores into Dollar Trees is one of the ways it plans to improve the combined company once the deal closes. Another way will be to streamline vendor relationships to get the best prices.

Last month, Dollar Tree said it reached an agreement with federal regulators to sell 330 Family Dollar locations for competitive reasons to a private equity firm, which will operate the stores under the name Dollar Express.

The combined Dollar Tree company will have about $20 billion in revenue and over 13,000 stores, making it the largest U.S. dollar store chain by store count. The deal is expected to close in early July.

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Twitter: @katieperalta

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