I am intrigued by the strategies underlying corporate buy-outs. Dollar Tree's $8.5 billion acquisition of Family Dollar, for example, is a case study of a company with smaller market share paying a premium to buy their larger competitor: $74 per share versus the closing price of $60 per share.
Dollar Tree now has the potential to operate at a peer level with Dollar General. It will go from having 4,812 stores to 12,728. Dollar General has 11,132. Combined revenues of Dollar Tree, $7.6 billion, and Family Dollar, $10.4 billion, are $18.0 billion (2013). Dollar General's revenue is $17.5 billion. But, the merger by itself does not produce revenues at the combined levels.
What might be the strategies behind this buy to achieve competitive performance?
First, buy outs should be about price, product to market, and profit margin. The merged companies should enjoy better buyer power down the supply chain. This is leverage to negotiate lower prices from the merchandise sources or at least more favorable arrangements for Dollar Tree. Thus, better margins and improved efficiencies in inventory management.
Second, a cost differentiation strategy is paramount in this highly competitive discount store market. This space includes Walmart. There are different merchandise and product lines between Dollar Tree and Family Dollar. Pruning the large SKU count relative to consumer demand will be a priority. Similarly, Dollar Tree will need to optimize the blended SKU mix relative to the competition within each of their store trade areas.
Finally, there is a market segmentation strategy that accounts for macro trends. The economy is showing signs of an uneven recovery. While there is job growth, fewer people are in the labor force. Real wages are stagnant. And the next big shift in consumption is being driven by the population of 18 to 34 year olds and aging Baby Boomer's. The Millennials have lower incomes and the Boomer's are on fixed incomes. Dollar Tree's segmentation should be localized to have better control matching inventory and pricing to local consumer segments.
History is the ultimate record keeper of both the strategies management will employ and their competitive effect. There are many stakeholders that can emerge as winners from this merger. Two that come to mind:
- Shareholders and their return on stock investments; and
- Consumers in the form of retaining more of their disposable income from discount-price merchandise.
This money-tree should produce more fruit from this merger. That fruit is in the form of more dollars in the wallets of both groups.