Dollar stores in battle to double down on the poor

Tue Aug 26, 2014 2:31pm EDT
 
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By Jilian Mincer and Lisa Baertlein

(Reuters) - Like millions of Americans, Darnel Ware needs to save money, even if it's 40 cents on a bag of flour.

    He searches for those savings during his daily visits to the Family Dollar Store near his home in Fraser, Michigan, sometimes stopping by as many as 10 times a week "if there are things I need," said the 51-year-old home care provider. "I buy a lot of everything; merchandise and food products."

    He said he typically spends about $30 a trip on items like the soft drinks, paper cups and cookies he bought on a recent afternoon at the small store in a strip mall alongside other discount retailers and small factories five miles from Detroit.

The small but frequent purchases of low-income customers such as Ware add up: Family Dollar Stores,, which operates about 8,200 stores in mainly urban sections of the U.S., is the target of an $9 billion cash takeover offer from rival Dollar General and an $8.5 billion cash and stock offer from Dollar Tree. Both competitors are betting not only on the health of the deep discount retail sector but also on the intractability of poverty in America.

Mid-market retailers like Wal-Mart Stores Inc, Macy's Inc and J.C. Penney Company Inc have been struggling in recent years as consumers have been slow to return to their pre-recession, freer spending ways. On Wednesday, Target said it was cutting its full-year earnings and slashing prices.

    But the popularity of so-called dollar stores is growing. Shopping by the 46.5 million Americans living below the poverty line poor helped boost the annual U.S. market for deep discount stores by 45.7 percent to $48.2 billion between 2008 and 2013, according to London-based market researcher Euromonitor International. The firm projects the sector to grow to $57 billion in 2018. The U.S. Census sets the poverty line at $24,000 a year or less for a family of four.

    Such forecasts help explain the battle over Family Dollar, the number-two deep discount chain. Market leader Dollar General Corp on Monday made its $78.50 a share bid, which Family Dollar rejected on Thursday, citing antitrust concerns. In July, the third-ranked chain, Dollar Tree Inc, bid $74.50 a share. Family Dollar has said it prefers Dollar Tree's lower offer.

The deep discounters' reliance on poor Americans, who made up 15 percent of the U.S. population in 2012, compared with 12.5 percent in 2007, has been validated by investors. From 2000 to now, as the poverty rate rose 11.3 percent to 15 percent, Family Dollar's stock price rose by about 300 percent.   Continued...

 
A Family Dollar store is seen in Chicago, June 25, 2012.  REUTERS/Jim Young