An $8.5 billion merger creating North America's biggest dollar store chain could mean increased competition for mass discounters such as Wal-Mart Stores Inc. but less choice for shoppers.
In the Baltimore area and elsewhere, retail experts said, Dollar Tree Inc.'s planned purchase of Family Dollar Stores Inc., announced Monday, likely will lead to some store closings, though the companies have not identified any locations.
Dollar Tree, which runs mostly suburban stores and sells a mix of consumables as well as items such as gifts, party goods and greeting cards for $1 or less, has about 55 stores in the Baltimore area. Most are scattered throughout Anne Arundel, Baltimore, Carroll, Cecil, Harford and Howard counties, with only about a half-dozen in Baltimore City.
Family Dollar, which mostly sells lower-margin consumables such as food and household products priced between $1 to $5 and targets urban shoppers in lower-income neighborhoods, has 26 stores in Baltimore City and about 16 others in the region.
The deal would give Dollar Tree more than 13,000 stores in 48 states and Canada and more than $18 billion in sales, vaulting the chain ahead of larger rival Dollar General Corp., which has 11,338 U.S. stores and reported sales of $17.5 billion in its latest fiscal year.
It also would help the dollar variety stores be more competitive with big-box chains such as Wal-Mart, which have gone after cash-strapped consumers by offering more items priced at $1 or less.
If the proposed merger is completed, as planned, by early next year, it would be a win for both companies' shareholders but may be a loss for consumers, experts said. Shares of Family Dollar climbed nearly 25 percent to $75.74 Monday, higher than the $74.50 per share offer from Dollar Tree, perhaps in anticipation of a competing offer.Dollar Tree shares were up 1.2 percent at $54.87.
"Mergers by companies in the same consumer retail business are generally not good for the consumer," said Jerry Reisman, a partner in the law firm of Reisman Peirez Reisman & Capobianco in Garden City, N.Y., and a mergers and acquisitions financing expert. "It diminishes competition, and it's competition that drives prices down. If we have fewer retailers in the same price category, we're going to find that those dollar prices maintained by the Dollar Tree may no longer be just that — a dollar."
Family Dollar had been struggling to reverse declining sales and earnings despite overall strength in the discount retail category, experts said. It has also faced pressure from activist shareholder Carl Icahn to sell itself.
Experts on Monday said a higher counterproposal was possible from Dollar General or even from Wal-Mart, which has explored opening smaller urban stores, though analysts believed that to be a less likely scenario.
North Carolina-based Family Dollar said in April it planned to lower prices and close 370 underperforming stores, including one on Fort Avenue in South Baltimore, which has already closed. Family Dollar also had said it expects to open 350 to 400 new stores in fiscal 2015, fewer than the originally planned 525 new stores in the current fiscal year.
The proposed merger would increase competition with Wal-Mart at a time when the "extreme value" convenience segment is growing fast, catering to a shrinking middle class and growing numbers of Americans living in poverty, said Howard Davidowitz, CEO of New York-based Davidowitz & Associates, a national retail consulting and investment banking firm.
"This will be a bigger threat to Wal-Mart — these companies in extreme value have been eating their lunch, taking business away from Wal-Mart and expanding their food selections and underpricing Wal-Mart," Davidowitz said.
Canaccord Genuity analyst Laura Champine agreed that "It's not great news for Wal-Mart, and said "Dollar Tree is generally better run than Family Dollar was, so it could mean that Family Dollar has better products and more consistent merchandising."
"With a new sheriff in town, Family Dollar will be a much sharper competitor," Sterne Agee & Leach analysts wrote in a note.
Family Dollar has slashed prices on 1,000 basic items, cut jobs and shut hundreds of stores to try and turn its fortunes around.
In the merger announcement, the companies said they would continue to run and develop both brands. Officials of Dollar Tree and Family Dollar said each chain will operate independently for the foreseeable future and that Family Dollar will continue with its planned store closings.
"This acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint," Dollar Tree CEO Bob Sasser said in a statement.