Dollar Tree’s plan to draw more customers into its recently acquired Family Dollar stores is working. Wall Street investors had anticipated a 1.4% gain in revenue, but the company has far outpaced that. Instead, same-store sales has seen their earnings increase by 2.4%. This session the value of Dollar Tree stock has increased by more than 5% and this year the stock’s value is up about 11%. Dollar Tree has spent about $1 billion renovating its Family Dollar stores and giving them what Gary Philbin, CEO of Dollar Tree called the ‘Wow Factor’. It has paid off handsomely. Family Dollar stores generated cash flow of about $2 billion as a result.
Eliminating Underperforming Stores
One of the ways Dollar Tree has been able to make its investment in Family Dollar stores lead to more profits is by closing stores that were underperforming. That has enabled the parent company to focus its attention on Family Dollar stores that show great potential. This has turned out to be a brilliant strategy that has paid huge dividends. Sales at the remaining Family Dollar stores have begun to trend upward as customers are seemingly impressed by the changes Dollar Tree has made. And consumers are showing their appreciation of those upgrades by increasing the amount they spend.
More Dollar Items
Another strategy Dollar Tree has used to generate more sales and increased profits in its Family Dollar stores is to increase the number of items it sells for just one dollar. It is a strategy that has made Dollar Tree stores one of the fastest growing chains in the nation. Customers are snapping up both the one dollar items as well as Family Dollars’ other reasonably priced items. The increase in the number of items Family Dollar has for a dollar has served as a magnet to attract a growing number of consumers. And once they are in the stores and see how much farther their money goes, they spend more.
A Win-Win
Putting more items priced at a dollar in Family Dollar stores has been a win-win. Consumers are excited about getter more for their money and the Family Dollar stores are seeing their income grow incrementally. As word has spread about the wider range of one dollar products available at Family Dollar stores, both the number of bargain hunting customers and revenue have grown. That has made both customers and Dollar Store ownership happy. Consumers now have easy access to more stores where they can get food, clothing and household items for less and the Dollar Store management team can buy and sell larger amounts of their most popular items.
The ‘Wow’ Factor
Family Dollar has long offered good products at low prices. But since the chain was acquired by Dollar Tree, a number of eye-catching changes have been made to the stores to give them that ‘Wow’ factor that makes consumers excited. Customers are now pleasantly surprised when they walk into their local Family Dollar locations and see the large and growing selection of items at the price point of one dollar. Plus, some changes have been made to the layout of the stores that make them more attractive to consumers. As a result, customers visit the stores more often and spend more time and money there when they do.
An Effective Turnaround Plan
CEO Gary Philbin and the team at Dollar Tree have crafted a very effective turnaround plan to draw more customers into Family Dollar stores. Adding the ‘Wow’ factor has led to a word of mouth campaign among consumers and made Family Dollar stores more popular and profitable. In addition to adding more dollar items to the inventory of some Family Dollar stores, some Family Dollar locations have been transformed into Dollar Tree stores. The result has been a boon for both customers and the Family Dollar brand. It has also been a surprising yet welcomed turnaround story for consumers.
Getting The Basics Right
Dollar Tree’s plan to revitalize its recently acquired Family Dollar stores is to focus on getting the basics right. That means offering consumers great products, at low prices, in great looking stores and focusing on creating an excellent customer experience. The allure of great products, low prices and great value gets customers in the door, but it’s the great customer experience that keeps them coming back. Well-lit, properly organized stores where it’s easy to find everything customers want and warm, friendly, helpful staff has injected the ‘Wow’ factor in Family Dollar stores.
The Magic
Family Dollar stores have now been imbued with a vibrant new feeling. Ultimately, the magic has been the adding of a wide range of Dollar Tree items to the store. Consumers want more for their money and when they walk into Family Dollar stores these days, they are surprised that the prices are even lower and they have a wider selection of products. The change seems magical, but it’s really just economics 101. Give consumers more of what they want at prices they can afford and they will keep coming in droves. It turns out it isn’t magic that’s responsible for Family Dollar’s gradual turnaround, just a good business model.
The Mission: Renovate 1,000 Stores
The team at Dollar Tree has a mission, a mandate and a goal. The plan is to renovate 1,000 Family Dollar stores and increase their profitability. Part of the company’s plan includes closing the Family Dollar locations that are underperforming. That could be as many as 390 Family Dollar locations. But that frees up more capital to renovate the remaining stores. Plus, according to Philbin, Dollar Tree’s CEO, the company is also taking a ‘very methodical’ approach to paying down debt. This has helped to lower their rates. Philbin said so far, the Family Dollar stores that have been renovated or rebranded as Dollar Tree stores, have seen revenues increase by 10 percent.
An On-Going Process
The 8,200-store Family Dollar chain was acquired by Dollar Tree for about $9 billion worth of cash and stock in 2015. They now operate in excess of 15,000 Dollar Tree, Dollar Tree Canada and Family Dollar stores in markets across the United States and Canada. The company says it plans to transform 200 Family Dollar stores into Dollar Tree stores in 2019. Philbin says he’s confident the steps the company is taking to reposition the Dollar Tree brand are the appropriate ones. He explained that the company is working with landlords to get material rent concessions before deciding which stores to close and which ones to rebrand.
Stepping Up Turnaround Efforts
The reported fourth-quarter results for Dollar Tree were in line with Wall Street’s expectations and the discount retailer announced it’s stepping up its efforts to make the struggling Family Dollar chain profitable. Taking a write down of $2.73 billion on Family Dollar’s goodwill is one of the actions Dollar Tree will take. With the growth in same-store Family Dollar sales moving upwards, investors seem confident Dollar Tree’s efforts to revive Family Dollar stores will succeed. Dollar Tree shares rose 5.1% while the company had net sales of $6.21 billion as they invest in sprucing up their Family Dollar stores.
Pressure To Change
Starboard Value, an activist investor, has been pressuring Dollar Tree to sell off its Family Dollar stores. The investor has also been recommending Dollar Tree stores begin selling goods that cost more than a dollar. But the leadership at Dollar Tree has ignored those suggestions and instead is focused working to make Family Dollar more profitable. However, Dollar Tree has stated it will choose some Dollar Tree branded test stores in which to try multiprice merchandise. Still, Dollar Tree’s large investments in improving and renovating many of its Family Dollar stores shows its unwavering commitment to the brand.
A Challenging Task
Fixing Family Dollar has turned out to be more challenging than many believed. Moody’s has said Family Dollar’s weaknesses have persisted much longer than they anticipated and they see it taking the rest of the year before changes take hold. It’s been a drag on Dollar Tree’s profits and operating income margin. But the decline isn’t catastrophic. Even Gary Philbin, the CEO and president of Dollar Tree has acknowledged the process has been longer and more difficult than he expected. But the team at Dollar Tree is up to the challenge and in it for the long haul.
Tangling With Target, Walmart And Dollar General
Before Family Dollar was acquired by Dollar Tree, the brand had been damaged by years of poor merchandise selection and neglected stores. Activist investor Carl Icahn even encouraged Family Dollar to sell itself. In an effort to build up its assets to better compete with Dollar General head-on and with Walmart and Target and other major general merchandise chains, Dollar Tree purchased Family Dollar. But Dollar Tree’s customer base is primarily in the suburbs while most Family Dollar stores are in urban areas and their product pricing is dramatically different. These are some of the issues that have made making Family Dollar profitable a challenge.
Making Progress
Dollar Tree has been hard at work transforming Family Dollar. They’ve been tidying up stores, better stocking its shelves, preventing product shortages, brought in new executives and to motivate managers, they’ve introduced new compensation programs. Dollar Tree has even worked to improve Family Dollar’s private label products. Since acquiring Family Dollar almost 4 years ago, Dollar Tree has renovated 865 of the stores. Progress has been limited, but consistent and they are now accelerating the renovation program for Family Dollar stores.
Changing Its Image
GlobalData Retail managing director Neil Saunders says people tend to shop at Family Dollar only when they need to. Dollar Tree is redoubling their efforts to make shopping at Family Dollar more enticing. To be successful Family Dollar must be a shopping destination people choose, not one they’re forced to visit by default. The quality of the products, the stores and the customer experience must be high enough that even when people’s finances improve, they continue to shop at Family Dollar. The image of Family Dollar must change to a great place to shop for quality products at an affordable price.
Elevating The Entire Customer Experience
Dollar Tree is making progress towards improving the customer experience at Family Dollar. But the project is bigger than it initially seems. In fixing and repositioning a damaged Family Dollar, Dollar Tree still has a great deal of work left to do. But giving Family Dollar the ‘Wow’ factor has been a helpful first step.
