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These are tough times for two large US dollar store chains. In the last month, family dollar said it will close nearly 1,000 stores and 99 cents only He said he will close.
Both companies said inflation and theft have contributed to their problems. While inflation has put pressure on the companies' low-income customer base and theft has reduced their profits, those factors alone cannot explain their difficulties.
Years of strategic mistakes and lack of investment have hurt Family Dollar and 99 Cents Only, retail analysts say. Both brands were acquired by other companies and failed under their new owners.
Family Dollar has about 8,000 stores, mostly in cities, and the chain has struggled since Dollar Tree. I bought it in 2015 for 8.5 billion dollars. Dollar Tree believed that acquiring Family Dollar would help it compete against larger rivals. But he miscalculated the deal.
Since the โbotched acquisition,โ Family Dollar โhas caused nothing but problems for Dollar Tree,โ Neil Saunders, CEO of GlobalData, said in a recent note to clients. โBasically, almost ten years later, Dollar Tree is still sifting through the mess it inherited and hasn't been able to completely turn it around.โ
99 Cents Only, a West Coast and Texas chain, has also suffered from mistakes, including stores that were too large and inefficient to maintain.
โThey never had the right business model. They were never going to get there,โ said David D'Arezzo, a former top executive at Dollar General and other retailers.
Here's a look at what went wrong at both chains.
Family Dollar will close 600 locations this year and 370 stores over the next few years as store leases expire. These locations are not profitable for the company, Dollar Tree CEO Rick Dreiling said on a call with analysts last month.
"Family Dollar is a victim of the macroeconomic environment that exists," he said.
But Family Dollar's problems date back more than a decade. Messy stores, high prices and excessive expansion plagued the company, analysts say.
"It's no secret that Family Dollar's challenges go back a long way," said Kelly Bania, retail analyst at BMO Capital Markets. "They have massively underinvested in the store base over the last decade or two."
In 2014, activist investors (including Carl Icahn and Nelson Peltz) pushed Family Dollar to sell itself. A year later, Dollar Tree bought the company.
At the time, Dollar Tree was smaller than Family Dollar. While Dollar Tree and Family Dollar share similar names, they have different strategies.
Dollar Tree is largely suburban and caters to middle-income shoppers with party supplies and candy. It acquired Family Dollar, which sells more staple foods and household necessities, to grow with low-income customers in urban and rural areas.
The combined company hoped that by joining forces it could grow its customer base, reduce costs and fend off larger retailers like Dollar General, which is located primarily in rural areas.
But analysts say the combination between the two different chains was not a good fit, and Dollar Tree has struggled to manage the larger base of Family Dollar stores.
"When Dollar Tree bought Family Dollar, they didn't really know what they were doing," D'Arezzo said. "They didn't know how to run Family Dollar."
Family Dollar stores were in worse condition than Dollar Tree management expected, and early strategies to improve sales, such as selling beer, were not enough.
Many Family Dollar stores were located too close together and also cannibalized each other's sales, D'Arezzo said.
"Family Dollar's sales have been faltering, hurt by abandoned stores, poor product selection and disgruntled workers," The Wall Street Journal. reported in 2018. Family Dollar โneeds more work than the company originally thought.โ
A year later, an activist investor pushed for Family Dollar's โunderperformingโ business to be sold, and Family Dollar announced that close 390 stores.
Although Family Dollar has renovated thousands of stores in recent years, many of them are still in disrepair, analysts say. Family Dollar was fined a record $41.6 million by the Justice Department this year for violating product safety standards after selling items stored in a rat-infested West Memphis warehouse filled with live, dead rodents and decomposing.
However, Dollar Tree and Family Dollar executives say Family Dollar can still succeed.
The retail chain has a new CEO and a new management team, and has been lowering its prices to attract more customers, adding more private brands and investing in the supply chain.
"While we are in the early stages of our transformation journey under our new management team, we are proud of the progress we have made to date and see a long path of growth for our business," a company spokesperson said.
A โwell-managed and well-located Family Dollar store is a powerful retail force,โ CEO Dreiling said.
99 Cents Only said it filed for bankruptcy because โthe last few years have presented significant and long-lasting challengesโ to retail, including the impact of the pandemic, inflation and increased shoplifting.
But 99 Cents Only's challenges go back much further. The retail chain has not been profitable since 2015.
The company has more than 370 stores in California, Nevada, Arizona and Texas, 265 of which are in California. It went private in 2011 in a $1.6 billion leveraged buyout, and the company took on even more debt in the following years to stay afloat.
At the time of the deal, 99 Cents Only had the second-highest profit margin and most sales per square foot among its rivals, Bloomberg reported.
But 99 Cents Only quickly fell behind. The company introduced a strategy to raise shelf heights, known as Go Taller, but it led to an increase in spoiled food and broken products when merchandise fell to the floor, according to Bloomberg.
The company struggled to keep up with larger rivals like Walmart, Costco and Dollar General, and lost money every year starting in 2016. โThe increasingly competitive landscape of the discount retail industry continued to take its toll,โ 99 said. Cents Only filed for bankruptcy this week.
As competitors expanded, 99 Cents Only's high debt load left it unable to invest to improve stores, its supply chain or its digital strategy.
99 Cents Only was โdisadvantaged by limited financial flexibility and an inability to devote increased resources to achieving new store growth,โ the company said in its filing.
99 Cents Only was also hurt by the size of its stores, which were expensive to operate, and its focus on low-margin foods.
The company's stores average about 20,000 square feet, more than twice the size of a typical dollar store chain.
"It was like trying to run a McDonald's five times the size," D'Arezzo said. "They were doomed."
