If Dollar General Succeeds in Family Dollar Takeover, Who Wins and Loses?

NEW YORK (TheStreet) -- If Dollar General (DG) succeeds in its hostile takeover of Family Dollar (FDO) , who wins and who loses?

TheStreet decided to find out.

The biggest loser in a takeover would be Family Dollar, its employees and executives. Dollar General has promised to close up to 1,500 stores over antitrust concerns, and its own management would likely run the combined company. Many stores, like this one in Colorado, might be closing anyway because they are situated very near Dollar General. On a recent tour around Atlanta we found that most Family Dollar stores have a Dollar General very close by.

Photo by Dana Blankenhorn

Another big loser could be this man, Warren Buffett. That may surprise you but Buffett's Berkshire Hathaway (BRK.A) is responsible for 11% of Family Dollar turnover through its McLane Co. distribution unit. Dollar General handles its own distribution and, assuming things stay that way after the merger, then McLane and Berkshire will lose the account. 


Berkshire Hathaway bought McLane, which is based in Texas, from Walmart (WMT) in 2003 for $1.5 billion. It is now Berkshire's largest unit, representing about 24% of Berkshire revenue, 30% of which comes through Walmart but 70% from other companies like Family Dollar.

Low-end merchandisers like Family Dollar and Dollar General became much more valuable after Family Dollar decided start selling tobacco, also distributed by McLane, in 2012. Dollar General quickly matched the move. The products are kept behind the cash register, as in this Georgia store. Where it's practical under local or state law, both stores now sell beer, wine and/or liquor.

Photo by Dana Blankenhorn

Family Dollar sells significantly more Coca-Cola (KO) products than Pepsi (PEP) . Coincidentally, Berkshire also owns a substantial block of Coca-Cola stock. Coca-Cola products are delivered directly to stores in marked trucks. There is one in the background, behind the newly delivered Coke merchandise in the foreground, at a Family Dollar in Decatur, Georgia.

Photo by Dana Blankenhorn

Dollar General, on the other hand, sells a lot more Pepsi than Coke, as in this display outside Atlanta. Should the takeover happen it could have a minor impact on the ongoing cola rivalry.

Photo by Robin Blankenhorn

Both Family Dollar and Dollar General share Procter & Gamble (PG) as one of their five largest suppliers. Dollar General, however, makes an effort to display house brands on center shelves, at lower prices, than its name brands, as in this Atlanta display. The house brands also carry a similar look-and-feel to national brands, and this might have an impact on P&G if the Dollar General takeover succeeds.

Photo by Robin Blankenhorn

While Dollar General and Family Dollar stores are often sited near one another, the Dollar General outlets, like this one outside Atlanta, are often integrated deep into neighborhoods while nearby Family Dollar units are custom-built at major intersections. A takeover would throw a lot of space onto glutted inner-city real estate markets.

Photo by Dana Blankenhorn

Should Dollar General succeed in its takeover and close many Family Dollar stores it will face a new challenge from Walmart, which has been developing stores as small as 15,000 square feet, just slightly bigger than Dollar General. This Neighborhood Market in Tucker, Georgia, about the size of a conventional grocery store, sits next to a Family Dollar store and across the street from a Dollar General.

Photo by Dana Blankenhorn

One thing even the smallest Walmart units have, that Family Dollar and Dollar General do not have, is fresh produce, as in this Walmart Neighborhood Market display. The small formats may be especially competitive in towns too small to support a standard SuperCenter but big enough to have a Dollar General. Fresh produce could make them very competitive.

Photo by Dana Blankenhorn

Most Dollar General and Family Dollar outlets in Georgia do not carry beer or wine. This Walmart Neighborhood Market, on the other hand, offers an extensive selection. One more reason for the winner in this battle to fear the nation's largest retailer.

Photo by Robin Blankenhorn

At the time of publication, the author was long KO, although positions may change at any time.

Follow @danablankenhorn

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates DOLLAR GENERAL CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate DOLLAR GENERAL CORP (DG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows weak operating cash flow." You can view the full analysis from the report here: DG Ratings Report

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