Consumers look to discount stores for relief during economically challenging times. But a rash of recent mergers may undermine consumer choice, particularly where grocery shopping is concerned. On Monday, Dollar General, the largest discount store chain in the United States, outbid the third largest, Dollar Tree, to purchase the second largest discounter, Family Dollar. Just three days later, Family Dollar rejected Dollar General’s bid, indicating that it would stick to the earlier deal with Dollar Tree.
Once you sort through the drama of these similarly named companies vying to acquire a key competitor (that also has a similar name), there are other aspects of this bidding war that offer a fascinating glimpse into the economics of our food system. This evolving deal continues a merger-mania bidding war trend that started in May when Tyson Foods outbid meatpacking giant JBS to merge with Hillshire Brands, and follows the acquisition of Safeway by the Albertson’s grocery chain, one of the biggest grocery store mergers in 25 years. Both the Tyson-Hillshire and Albertsons-Safeway deals are pending review by antitrust regulators.
Dollar General bid $9.7 billion to snatch Family Dollar away from Dollar Tree, which bid $8.5 billion in July. The General-Family proposed merger would result in nearly 20,000 stores in 46 states, with $28 billion in sales. This would be the largest retail merger in a year that has already seen about $31 billion in retail mergers.
The three major “Dollar” discount stores (Tree, General and Family) have prospered during the economic downturn and have rapidly captured sales from Walmart and Target. For consumers with modest, moderate or lower-incomes, these have been go-to retailers during the recession. Dollar General wants Family Dollar to expand its footprint in more urban areas, although there is already significant overlap between the stores. For example, in the Baltimore area, there are nearly 30 Family Dollar stores and nearly 20 Dollar General stores, compared to about 15 Safeway supermarkets.
Supermarkets like Albertson’s and Safeway claim they need to merge with their competitors to cope with competition from big box stores like Walmart. Likewise, Walmart’s biggest challenge is the rise of the dollar store chains. Walmart’s initial growth was fueled by its big-box supercenters — enormous warehouse retail outlets typically located on the outskirts of towns or cities. But in recent years, its supercenter revenues have flattened, and the only growth has come from its smaller, more conveniently located stores. The companies involved in the dollar store deal claim that the proposed General-Family merger would strengthen the company to fight Walmart for the “small-box” market. But while all these retailers are looking for an advantage in the grocery business, when communities end up with fewer players running their local grocery stores, consumers rarely win.
The Federal Trade Commission has antitrust oversight jurisdiction over this merger. Although Dollar General contends there are few antitrust concerns, it has already offered to shed 700 stores (only about 3.5 percent of the merged chain’s total) to get the deal approved, and one of the reasons offered by Family Dollar for rejecting the offer were concerns about “significant antitrust issues.”
The bidding war may not be over, but one thing is clear. The merger mania that has swept through the rest of the food system has arrived at the grocery store, and food shoppers need federal regulators to preserve some amount of competition in local grocery markets.
Today, Dollar General announced a new, bigger cash offer to acquire Family Dollar. The new offer is the carrot to encourage Family Dollar to take the deal, but Dollar General is prepared to take the offer directly to shareholders in a hostile takeover if the board of Family Dollar does not accept the new offer. Family Dollar rejected the earlier offer because of antitrust concerns, but Dollar General volunteered to double the number of stores it would divest (as many as 1,500) and hired the recent head of President Obama’s Bureau of Competition at the Federal Trade Commission to analyze the proposed merger. As we advised two weeks ago: Stay tuned.