Family Dollar Stores (FDO)
Family Dollar Stores is a discount variety retailer operating 6,400 stores in 44 states. Most merchandise the company sells ranges from less than a dollar to around $10 dollars, with the majority under $1 per unit.[1] The company's strategy is to target low to lower-middle income households and the typical customer is a female head-of-household with an annual income under $30,000,[2] who spends about $10 per store visit.
This customer base makes the companies' sales more exposed to macroeconomic risk as low-income households are generally more sensitive to the rising oil prices and falling real estate values (see also Subprime Lending Crisis). The company competes for price-conscious shoppers in an intensely competitive and saturated market, which is dominated by big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as comparable companies Dollar Tree Stores (DLTR), Dollar General (DG), Big Lots (BIG) and 99 Cents Only Stores (NDN). It is, however, attempting to differentiate itself by focusing its growth strategy in highly populated urban markets, which have been traditionally shunned by larger competitors due to the higher overhead expenses and lower margins.
[edit] Financials
Below are relevant sales and store operating statistics for the company. The company has riven top-line growth through a combination of increased sales per store and new store openings, as evidenced by the metrics below.
[3]
[4]
[edit] Trends and Business Drivers
 Rising oil prices translates to lower sales for discount retailers, which depend on lower-income demographics - Low-income customers are more sensitive to macroeconomic changes. A discount retailer, FDO’s customer base is largely of the low-income demographic. Low-income families are generally more sensitive to rising energy prices and rising interest rates, which can negatively affect FDO’s sales as customers attempt to save and cut back on non-essential spending. While many of FDO’s products are considered essentials, low-income households often shift their spending to products that are lower priced/lower margin for the company during periods of high energy prices, high interest rates, and housing price crises.[5]
- Discounters experience difficulty passing on cost increases to customers. Because the company’s low-income customer base is so price sensitive and because the company competes largely on price, input cost increases (such as inventory, overhead, marketing) are difficult to pass on to consumers. Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation may lead to large margin decreases that cannot be offset by price increases.
- The company operates in a mature and saturated market, with stiff competition and low competitive advantages. FDO competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Family Dollar Store operating within a few miles of a nearby Wal-Mart, for instance, will struggle to compete on price and selection, and may depend instead gain customers via convenience and location. It also faces competition faces other “dollar stores,” that have similar or identical value propositions, such as Big Lots (BIG), Dollar Tree Stores (DLTR), Dollar General (DG), and 99 CENTS ONLY STORES (NDN). With some 6,400 stores, the company is approaching US saturation, and with low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores. While Family Dollar is attempting to both grow and differentiate itself by entering densely populated, higher traffic urban areas,[6] there is substantial risk of lower margins due to increased overhead expenses. The company, then, must offset margin contraction with higher volume.
- New focus on increased food offerings can be a risky undertaking. FDO has been increasing the square footage in its stores dedicated to inexpensive food items for customers[7] The company believes this will drive greater traffic to its stores. However, food retailing/groceries are typically very low margin, competitive businesses, so the company assumes something of an opportunity cost and risk in the use of its floor plan.
[edit] Competition and Market Share
Discount variety retailers nationwide account for some $420 billion annually in sales, and operate approximately 40,000 stores across the country.[8]
As a discount retailer, FDO faces significant competition from big-box sellers like Wal-Mart Stores (WMT) and Target (TGT), whose enormous scale allows them to extract value in their inventory purchases and pass these savings on to consumers. Family Dollar Stores, however, attempts to differentiate itself with its smaller-format stores that enable the company to open shop in most rural, small town, and urban markets while incurring less in overhead costs. Along these lines, the company is more focused on urban areas than Wal-Mart, which has traditionally focused on dominating rural and small-town markets. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale (though, to be sure, with 6,400 stores it has some). The company's growth going forward is highly dependent on finding attractive new urban stores to add to its existing base, while avoiding opening up in areas already dominated by major competitors, a challenging task given the market saturation of the U.S. discount retailing industry.
Below are sales, store, and market share metrics for comparable companies.[9]
2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
[edit] Footnotes
- ↑ FDO 2007 Annual Report, "Business," pg 1
- ↑ Nielsen’s 2007 Homescan company data
- ↑ Figures compiled from 2007 Annual Report, "Selected Financial Data," pg 16.
- ↑ Figures compiled from 2007 Annual Report, "Selected Financial Data," pg 16.
- ↑ FDO 2007 Annual Report, "Risk Factors," pg 8
- ↑ From 2007 FDO Annual Report, "Business," pg 2
- ↑ FDO 2007 Annual Report, "Business," pg 2
- ↑ First Research, Inc. (D&B) Discount Retail and Department Store Industry Report, Oct. 2007. Figures an estimate which exclude approximate sale of groceries and revenue of department stores, which compete very loosely with FDO
- ↑ All figures compiled from most recent company annual reports
- ↑ Market Share calculated as Company Sales/Total Industry Segment Sales nationwide as provided by 2007 First Research Report
- ↑ 11.0 11.1 NDN,2007,10-K,Item-6,Page-24
- ↑ BIG,2007,10-K,Item-7,Page-17
- ↑ BIG,2007,10-K,Item-6,Page-16
- ↑ 14.0 14.1 DLTR,2007,10-K,Item-6,Page-17
- ↑ FDO,2007,10-K,Item-7,Page-19
- ↑ FDO,2007,10-K,Item-6,Page-16
- ↑ morningstar
|
|
Edit Metric
Family Dollar Stores
Edit
History
Bookmark
