We visited Family Dollar, the store that analysts say is becoming Dollar Tree's biggest problem. Here's what we found.

Business Insider/Mary HanburyFamily Dollar feels a lot like Dollar General.
  • Dollar Tree announced Wednesday that it is closing as many as 390 Family Dollar stores in 2019. This follows 85 closings during the fourth quarter of 2018.
  • Analysts say Family Dollar has been a drag on Dollar Tree’s earnings and “remains the weaker part of the business.”
  • In its most recent quarterly results, reported on Wednesday, same-store sales at Dollar Tree were up 3.2%. Family Dollar saw a more modest increase of 1.4%.
  • We visited one of its stores to find out what it is like to shop there.

It has been three years since Dollar Tree bought Family Dollar, and so far, it’s been a disappointing run.

The discount chain, which has over 8,000 stores in the United States (Dollar Tree has 6,776 in the US) has pulled down its parent company’s earnings. In its most recent quarterly results, Dollar Tree’s same-store sales grew by 3.2% during the quarter while Family Dollar’s were up by a more modest 1.4%.

Dollar Tree is now taking decisive action to manage this. On Wednesday, during earnings, it announced that it would close as many as 390 Family Dollar stores in fiscal 2019. This follows the closing of 85 store at the chain during the fourth quarter of 2018.

It is “clear that Family Dollar is underperforming, both as a division and within the wider market,” Neil Saunders, managing director at GlobalData Retail, wrote in a note to clients on Wednesday.

He continued: “The continued problems at the Family Dollar division have resulted in an impairment of its brand value to the tune of $US2.73 billion. Such a deterioration undermines some of the economics on which the acquisition and integration of Family Dollar were based.”

Dollar Tree acquired Family Dollar in 2015, after undergoing a bidding war with Dollar General, its main US rival. Dollar Tree and Dollar General are almost neck-and-neck in terms of store count and annual sales.

The bidding war may have distracted Dollar Tree and led them to “gloss over some of the glaring problems at [Family Dollar],” Credit Suisse analysts wrote in June.

“Family Dollar clearly preferred Dollar Tree as the acquirer (since the Family Dollar name was more likely to survive), and Dollar Tree likely wanted to prevent Dollar General from nearly doubling its size overnight,” the analysts wrote.

In August, we decided to check out what it was like to shop at Family Dollar. Here’s what we saw:

The Family Dollar store we visited was located in Brooklyn, New York. On average, its stores are around 7,000 square feet in size.

Business Insider/Mary Hanbury

At the entrance of the store was a selection of seasonal products. This tactic is also used by its sister store, Dollar Tree, to grab the attention of the shopper and make sure items with a shorter shelf life don’t go unnoticed.

Business Insider/Mary Hanbury

The layout of the store and assortment felt a lot more similar to a Dollar General store than a Dollar Tree.

Business Insider/Mary Hanbury

In fact, Credit Suisse analysts say it would likely have made more sense for Dollar General to acquire Family Dollar. The offering is more in line, and there is a limited overlap in terms of where stores are located.

Family Dollar stores are generally found in urban areas while Dollar General stores are typically located in rural places.

The majority of its products cost more than $US1 …

Business Insider/Mary Hanbury

… and there is a much wider selection of well-known brands.

Business Insider/Mary Hanbury

Dollar Tree, on the other hand, stays true to the dollar-store model, offering all items for $US1. It offers a larger number of lesser-known brands, which enables it to keep prices low.

Similarly to Dollar General, Family Dollar is designed to cater to everyday and basic requirements.

Business Insider/Mary Hanbury

There was a limited selection of fresh food that included milk, eggs, and cheese — but no fruit or vegetables.

Business Insider/Mary Hanbury

“Family Dollar stores stock a higher mix of consumables, and satisfy fill-in trips between visits to a mass merchant,” Credit Suisse analysts wrote in June 2018.

Business Insider/Mary Hanbury

There definitely wasn’t enough here to do your weekly grocery shopping, but it could be enough to grab some essentials midweek.

Business Insider/Mary Hanbury

However, it was a confusing mix between doing a quick shop and a monthly stock-up. In some areas of the store, it felt more like a warehouse club.

Business Insider/Mary Hanbury

Items were being sold in bulk, clearly as a way to keep prices down. However, buying in bulk doesn’t lend itself to frequent visits.

Business Insider/Mary Hanbury

It also made the store feel more expensive, as even though you are likely getting a better deal if you buy in bulk, you are in two different mindsets when shopping — is this a dollar store or a warehouse club?

Business Insider/Mary Hanbury

We were impressed with the wide selection of items overall. In this relatively small space, they also had kitchen and bathroom supplies as well as some underwear.

Business Insider/Mary Hanbury

This did mean that some areas were fairly disorganized, however.

Business Insider/Mary Hanbury

According to Credit Suisse analysts, the store’s shopping experience is one of the main reasons why Family Dollar has struggled to appeal to customers. They argued that store renovations could be the ticket to success.

“The store base was in complete disarray three years ago. Incremental remodel activity will go a long way toward stabilizing the same-store sales,” the analysts wrote.

Dollar Tree also plans to remodel 1,000 Family Dollar stores in 2019.

Our verdict: The store was definitely easy to shop and in better condition than what we encountered at one of its sister Dollar Tree locations when we visited earlier in September 2018. However, the mix of bulk and normally sized items made the pricing feel confusing and, ultimately, expensive.

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