Business Success and Economic Failure
By
Phil Mattera, Dirt
Diggers Digest
What does it say that an all-out takeover battle is being waged
for a chain of no-frills stores selling cheap merchandise at outlets typically
located in the most downscale parts of town?
The answer is that deep-discount
retailing, which entered the mainstream during the recession of the late 2000s,
remains a lucrative business as much of the country struggles with stagnating
income levels.
The focus of the current bidding war is Family Dollar Stores,
the second largest chain of deep discounters, also known as dollar stores. A
couple of months ago, Dollar Tree, the third largest chain, announced plans for
an $8.5 billion purchase of Family Dollar, which had been targeted by several
corporate raiders such as Carl Icahn, who bought a 9 percent stake in the firm.
Dollar General, which long had its eye on Family Dollar, did not
take kindly to the prospect of being relegated to second place. It launched its
own fatter bid for Family Dollar, and after being rebuffed, it is now going
hostile. It has announced a tender offer under which Family Dollar investors
could sell their shares for $80 each, well above the $74.50 that Dollar Tree
said it would pay.
As interesting as this may be to analysts of mergers &
acquisitions, the takeover battle is not the most significant story here.
First, there is the alarming fact that it is taken for granted that the
marriage of two giant dollar-store chains can receive antitrust approval.
The
original Dollar Tree-Family Dollar deal has been promoted by the two companies
with the argument that it was likely to be blessed by the Federal Trade
Commission. Dollar General argues that its promise to sell off 1,500 outlets
would make its deal palatable to the federal regulators.
Why shouldn’t any
combination among the three chains be considered unacceptable? And what about
the even more controversial possibility, as has been widely rumored, that
Wal-Mart might try to take over one of the dollar chains to shore up its
faltering small-store strategy? Are we to assume that would get approved as
well?
At the same time, there has been surprisingly little discussion
of how these companies operate. For example, there’s the matter of their labor
practices. Dollar General, Family Dollar and Dollar Tree are not often
mentioned alongside Wal-Mart, yet they are also low-paying, non-union employers
that have been involved in numerous wage & hour controversies.
The dollar
stores, whose outlets have much smaller staffs than those at Supercenters, have
mainly been accused of improperly denying overtime pay to so-called store
managers and assistant managers who spend most of their time on non-managerial
tasks such as stocking shelves and unloading trucks. Family Dollar, for
instance, fought one such case all the way to the
U.S. Supreme Court, where it lost and finally had to pay a $33 million
judgment.
And then there’s the issue of the basic business model of the
dollar stores. This is a sector that to a great extent profits from economic
desperation. Although a small portion of its customers are middle-class people
looking for a bargain, most are lower-income individuals who cannot afford to
shop at the likes of Wal-Mart, much less non-discount chains.
The deep-discount chains were supposed to have shrunk once the
economy was in recovery. Their continued growth is a symptom of ongoing wage
stagnation, and their business success is a sign of a broader economic failure.