On Monday, the national discount store chain Dollar Tree announced that it would buy out its competitor Family Dollar for $8.5 billion in cash and stock:
Both Dollar Tree, which sells items $1 and less, and Family Dollar, which sells $1 items but also higher priced goods, have struggled amidst a weak economy. While years ago recession boosted deep-discount stores’ sales, Family Dollar reported in April declining second-quarter profits while announcing that it could cut jobs and close nearly 400 underperforming stores. Earlier this month, its third-quarter report noted a 33% drop in profit. Difficult economic conditions have become financial headwinds for discount store shoppers, who are forced to choose between discretionary and necessary items. … [A]verage shoppers have an annual income under $40,000, and 50% receive government assistance.
But the recession bonanza for discount stores has faded, Annie Lowrey observes, and now some of these chains are struggling:
So what’s happening in the consumer economy that might help explain the malaise? The answer is “not much” — that is, not much is happening, and that’s hurting retailers.
Unemployment is dropping, but consumers from the very low end of the market all the way through the middle remain skittish. Wages aren’t rising. Government support for strapped households has faded. As a result, retailers are struggling mightily to juice sales. The low end of the market is also seeing more competition for the penny-pinching customer, a result of the expansion of brick-and-mortar dollar stores through the Great Recession, retailers across the board offering lower-cost options and amped-up competition from online giants like Amazon.
To Matt Phillips, the Family Dollar/Dollar Tree merger is a perfect illustration of Thomas Piketty’s critique of contemporary American capitalism:
Let’s start with the backdrop: Essentially, the lower-income Americans that are the target customers of dollar stores have gotten too poor to buy anything other than food (a vivid illustration of Piketty’s point about income inequality). That has depressed margins and profits at these discount retailers. The fact that these poor Americans—and the retailers that serve them—are doing so badly attracted the attention of some of the richest and best-connected investors in the world. Funds associated with the activist investors Nelson Peltz and Carl Icahn have snapped up significant chunks of Family Dollar in recent months—as has the hedge fund manager John Paulson.
And they have been pushing for a sale. Which makes sense, from their point of view: Combined, they stand to earn hundreds of millions on the deal, at least on paper. (Again, the fact that financiers have done well on the deal, even as low-income folks struggle, squares with Piketty’s view that large fortunes tend to grow faster than overall income, resulting in mounting piles of capital owned by the wealthy.)
Extensive Dish cover of Picketty’s book here.
The Dish 