There’s a fierce tug of war happening this month between Dollar General and Dollar Tree over the future of Family Dollar. In late July, Dollar Tree announced its intention to acquire Family Dollar. Not content to sit idly by and watch the two smaller chains combine forces, Dollar General extended a higher bid of its own for Family Dollar. Despite General’s offer being roughly $460 million richer, the Board of Directors at Family Dollar rejected the higher offer in favor of Dollar Tree’s lower offer. In doing so, Family Dollar’s Board claimed that a Dollar General-Family Dollar combination would face more significant antitrust hurdles with federal regulators. We are data geeks at heart over here at InfoScout, sitting on a treasure-trove of consumer shopping data, so we decided to put this antitrust claim to the test.
Though the official merger guidelines of the FTC are long, broad, and a better sleep inducer than a glass of warm milk, in practice antitrust concerns typically revolve around a few key principles relating to “market power”. The FTC seeks to limit mergers that would enhance market power in a manner that leads to higher prices, reduced output, less innovation, or reduced service for consumers. The FTC puts particular emphasis on anticipated pricing effects, and takes a negative view of mergers that they believe will lead to higher prices. So, how likely is it that a Dollar General acquisition of Family Dollar would lead to higher prices for consumers?
Dollars and Sense: What We Can Learn From Each Retailer’s Prices
Our consumer panel includes 78,957 households who have shared with us their receipts from over 470,000 shopping trips to the three major dollar store chains thus far in 2014. The first thing we looked at in our analysis was average item level pricing levels for these three major dollar chains across the country. We found that Family Dollar’s average price per item purchased was the highest, at $2.20 each. Dollar General came in next at $2.08, and finally Dollar Tree at $0.97. This isn’t too surprising given the business models of each chain, with Family Dollar and Dollar General offering plenty of merchandise above $1.00, while Dollar Tree tends to stick to the traditional dollar store model by offering a unique rotating assortment of smaller packaged items that can be offered at a price point below $1.00. Dollar General and Family Dollar carry a very similar assortment of products (as opposed to Dollar Tree), as they both sell a significant amount of grocery type consumable products. This allowed us to drill-down into specific, popular products where they overlap to compare prices. For most products, Family Dollar’s average sales prices were higher than Dollar General’s corresponding prices. Given Dollar General’s already lower pricing, it seems unlikely that the Federal Trade Commission could successfully argue that their acquisition of Family Dollar would result in higher prices at Family Dollar stores. If anything, we would expect Dollar General to leverage its purchasing power and economies of scale to drive down prices even further.
But what might happen if Dollar General did raise prices at Family Dollar stores after an acquisition?
Substitutes for Consumers and a Lack of Market Power
Do adequate substitutes exist for consumers? To answer this question, we looked at both shoppers’ opinions and their actual shopping behavior, and found overwhelming support that dollar store customers have good substitutes which they are already shopping.
When surveyed through our mobile platform, Family Dollar shoppers made it clear that low pricing is the primary reason for their patronage. So, given Walmart’s de facto status as America’s low price leader, we then asked Family Dollar shoppers if they consider Walmart a good substitute. Over 80% of those surveyed responded that yes indeed, they consider Walmart a good substitute. In fact, less than 10% of the Family Dollar shoppers surveyed said they would be unlikely to switch to Walmart if Family Dollar raised prices. Clearly, raising prices would be a very bad strategy for Family Dollar, and would likely send a slew of their shoppers Walmart’s way. It is interesting to note, however, that only 44% of Family Dollar shoppers consider traditional grocery stores to be a good substitute.
Of course it’s not just what consumers say, but what they actually do that really counts. When it comes to actual shopping trip behavior, the data is even more conclusive. We studied those consumers who have shopped at dollar stores so far this year and found that in any given month, over 90% of dollar store shoppers also shopped at supercenters such as Walmart, Target, or Kmart. Dollar store buyers do not appear to have a lack of access to stores they consider substitutes. Additionally, over 90% of dollar store shoppers also visit traditional grocery stores each month. Further, we found that for dollar store shoppers specifically, dollar stores as a whole have only accounted for roughly 2.5% of their total spend on fast moving consumer goods thus far in 2014. This tiny share of wallet across the industry, combined with consumers active shopping at potential substitute stores, means that it would be very difficult for a dollar store chain to raise prices and not lose customers en masse. Consumers, therefore, would not be trapped if prices were raised at Family Dollar.
Interestingly, although dollar store customers cross shop other mass and grocery retailers, most do not typically shop at more than one dollar store in a given month. Close to 80% of the shoppers at these three major dollar chains only shop one of the chains in a given month. Antitrust regulators would have a difficult time arguing that merged dollar chains will have an incentive to reduce customer access by consolidating or shutting down stores. By shutting down large numbers of stores, dollar chains would be unlikely to retain affected customers, and would instead be losing them to other retailers.
Whole Foods’ 2007 acquisition of Wild Oats is a useful and comparable case study. The FTC tried to challenge that combination on the grounds that Whole Foods and Wild Oats compete in a tightly defined natural food grocer market, but ultimately lost that fight because the reality is that natural food grocers compete in a larger price competitive grocery market. Our data conclusively shows that the same factors apply to Dollar General’s bid for Family Dollar. Simply put, the combined chains would still hold less than 4% of the US market for fast moving consumer goods – insufficient to justify an antitrust-based challenge by the FTC.
Although we find no basis for the Board of Family Dollar to reject Dollar General’s offer on the grounds that the acquisition could be blocked by the FTC for antitrust reasons, there may be other reasons why a merger with Dollar Tree could make more sense. Which suitor should the Family Dollar board ultimately pick? Stay tuned for Part Two where we will present more consumer insights around who’s the better business fit.