Price Wars: The Fall of Dollar Stores | Billionaire Tug of War | 1

0:072014, Las Cruces, New Mexico. Mimi Jacobs grabs hold of her seven-year-old son's hand before he runs off through the aisles of their local family dollar store. No. No toys today. We're just getting a couple of things that we need. Mimi checks the cash in her purse and grimaces at the few dollars that are left. She's got to survive on this until her next paycheck. They've run out of toilet paper and they've got nothing for dinner that night. She heads to the freezers and searches for something filling and cheap. Looks like it's frozen pizza again. She heads down the rest of the narrow aisles, edging around the stock trolleys full of boxes that haven't yet been unpacked.

0:50She prefers Walmart. It has wide aisles, bright lighting, and neatly stocked shelves. But the nearest Walmart is 20 miles away. She can't afford the gas to get there until she gets paid. So she's grateful there's a store like this close to home. Family Dollar sells items in smaller sizes too, so she can get just enough to last until the next big shop. She ends up spending more in the long run, but it's the only way she can make the money last. She picks up a four-pack of toilet paper. Price? $2. As she puts it in her basket, she spots a red tag indicating a further 50 % off some bars of soap. That should make it just a few cents.

1:32She sniffs at it and smiles at the thought that she might be able to have some nice-smelling soap in the bathroom for once. Mimi waits in a long queue at the single checkout. When it's her turn, she anxiously watches as the soap is rung through. To her horror, it comes up as full price. No, that's a mistake. It had a sticker saying there was 50 % off. It's not coming up here. Sorry. Mimi feels her face turn bright red, conscious of the long line of shoppers behind her. Okay, well then take the soap off please. Dylan, can you take the soap back to where it was for mommy? Her son obediently trots off with the soap while Mimi hands over the cash and tries not to cry.

2:17Just once, she'd like to be able to buy something nice and not worry about the price. But as Mimi struggles through another week, on Wall Street, investors are sniffing profits in the air. Dollar stores are booming, reaping major profits on the back of a recession that never really ended for America's poorest. And now, in Manhattan's plush offices and swanky restaurants, a bidding war is breaking out over family dollar. In the dollar store bidding wars, Dollar General has just put up the largest stack of bills yet in an attempt to snatch up competitor family dollar. $9.7 billion to be exact. It's a huge number for a business built on the smallest of margins.

3:06Billions are being bet on these companies' ability to profit from the nation's neediest. But are these hot stocks built to last? or will they crumble in the face of inflation and digital shopping?

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5:29From Wondery, I'm David Brown and this is Business Wars.

5:55you know it says something when the cost of living crisis gets so bad that even dollar stores are struggling. There are more than$38 ,000 in variety stores in the U.S. That's compared to just 4 ,500 Walmarts. But store counts can be misleading. Back in 2024, Walmart stock rose 15 % while dollar stores watched their stock implode and stores get shut down. Regional chains like the 99 cents only store and Bargain Hunt recently went bust. Ten years earlier, investors considered these value retailers sure bets for when times got tough. So what went wrong? How did dollar stores go from Wall Street darlings to the problem children of the stock market?

6:42And can the strategies that made them America's most ubiquitous retailers still work in a post-pandemic digital world dominated by rising inflation? This is Episode 1, Billionaire Tug of War.

7:02It's fall 2007, and in Phoenix, Arizona, Michael Calvert is searching the aisles of a Dollar General. He's a partner at the private equity firm KKR, and his anxiety is rising. He can't believe he's lost his companion in a store that's no bigger than two basketball courts. Calvert spots him near the freezers. This is the man he hopes will fix Dollar General. KKR spent$7 billion to buy the chain last year, and they've been looking for the right CEO ever since. Now, long-time listeners of Business Wars might remember KKR from the Toys R Us vs. KB Toys season. They're one of the private equity firms who loaded Toys R Us with debt, leading to its bankruptcy.

7:47KKR specializes in buying underperforming companies in the hope of fixing them quickly for a major profit. And in Dollar General's case, well, they need someone who knows retail inside and out. Calvert's pick is the guy standing by the freezers. His name is Rick Dryling, a slim, neat man in his 50s with a shock of thick white hair. Dryling's not excited about the idea of running Dollar General. But Calvert's convinced him to do a tour of the company's stores anyhow. Dryling turns to Calvert with a frown. He holds a green Gatorade bottle in his hand. Where's the orange-flavored Gatorade? Orange is the number two-selling flavor, and there's not even a tag here, so they clearly don't stock it.

8:32Why would you stock the number three flavor instead of number two? Calver looks around for the store manager. Dollar General gives store managers plenty of discretion about what to order. It's possible this store manager simply doesn't like orange Gatorade. But Dryling has already taken off into another aisle. He points to a clumsy stack of white plastic. Toilet seats. Unbelievable. Calvert is mystified. What about them? When was the last time you bought a toilet seat? I don't remember. A long time ago. Exactly. And look at all the space they take up. Space that could be used for goods that actually sell.

9:11Calvert can't help but smile. You know, dryling seems perfect. Just the kind of man who could turn Dollar General around.

9:23When KKR bought Dollar General in 2007, it was struggling. But it wasn't always this way. The first Dollar General opened in 1955 in Springfield, Kentucky. Its founders, J.L. Turner and his son Cal, owned the local department store. And at the department store, they used to hold dollar days to get rid of excess merchandise. These days proved so popular, the Turners decided it could be an all-year business. They bought excess merchandise from other retailers and sold everything for a dollar. That first store became a sensation. Within the year, they'd opened a second in Memphis. In 10 months, it did more than a million dollars in sales.

10:04And the chain just kept on growing. By 2007, Dollar General had just over 8 ,000 stores in 35 states. Most were in rural areas where rents were cheap. It was hard for people to get to department stores. The chain no longer sold everything for a dollar, but saw itself as a small box discounter. Walmart and Target, they're big box discounters. They build huge stores, big boxes, and sell a huge range of items and groceries. But Dollar General builds small boxes. These small stores allow Dollar General to open new stores quicker and locate them closer to where people live. And since the stores were smaller, so too was the choice on the shelves.

10:50Dollar General didn't sell low-profit, perishable food items like fresh fruit and vegetables. It sold frozen, canned, or dry food. And it was a winning formula. But after years of growth, Dollar General began sputtering. Off the back of a booming economy, shoppers preferred one-stop stores like Walmart. dollar generals lax inventory management meant favorite items were often out of stock seasonal items that didn't sell got put back on the shelves the following year instead of being cleared out to make space for new products that might prove more popular rising fuel costs rapid over expansion and the neglect of older stores also dragged down profits all of which led to dollar generals shuttering 400 stores in 2007.

11:39And that's when KKR moved in, convinced that with the right CEO in place, it could resuscitate the chain.

11:52A few months after the tour of the Phoenix stores, Rick Dreiling goes to lunch with KKR co-founder George Roberts in California. None of these meetings are ever billed as job interviews, but Dryling knows the score, and his resistance to taking the job is eroding. Seeing those stores up close has convinced him that Dollar General is exactly the kind of challenge he wants. But KKR's Roberts wants to be sure Dryling's resume fits. He's worked at the supermarket chain Safeway, and he's doing great work at the New York drugstore chain Duane Reade. But Roberts is less sure that he's a fit for a business whose core customers are people on low incomes in rural areas.

12:36So Roberts asks him a question he asks every person he thinks of hiring. Rick, on a scale of 1 to 10, how well suited do you think you are to this job? Dryling doesn't miss a beat. On a scale of 1 to 10, I'm 12. Roberts has never had anyone rate themselves off the charts before. He can't decide if it's arrogance or rock-solid confidence. In the end, he takes the risk. KKR hires Dryling on a salary of$1 million a year, a modest salary for someone to run a company this big. But the stock options sweeten the deal, promising Dryling big returns if he can live up to his 12 out of 10 post.

13:20Dryling does not waste time. Dollar General is a retailer built on tiny margins, and to thrive, it has to wring out maximum profit and efficiency from every square foot of its stores. Over the next year, store managers lose autonomy over how shelves are stacked and where products are displayed. Dryling opens three prototype stores to test new layouts and ideas. Sales figures are monitored closely. When the numbers show candles sell slowly, well, he halves their shelf space. He reduces the number of battery suppliers from four to two and pits them against each other in a price war to stay in stores.

14:02Dryling also improves the supply of consumables, products that households consume quickly like eggs, milk, toilet paper. These are the items that get customers visiting stores regularly. Once in the store, shoppers then remember they also need to buy other higher-profit items like birthday cards or school supplies. One sip of Dollar General's store brand Cola was all dryling needed to decide he had to overhaul the company's private label products. But Cola was so bad he instantly spat it out. He can't understand why clothing doesn't sell well, so he commissions extensive market research. The study reveals the stores need to stock more men's and children's clothing.

14:44The core customers might be women, but the research found that they buy clothes for their kids first, their husbands next, and themselves last. This rush of change coincides with the 2008 financial crash. The resulting recession drives more people into the arms of dollar stores. And as Dollar General grows, so too does its buying power. which helps it obtain better deals with suppliers. By 2009, Dollar General is doing so great that KKR decides to cash out earlier than planned. In November 2009, Dryling rings the bell on the New York Stock Exchange. The moment signals the return of Dollar General to the stock market.

15:32Two years earlier, KKR paid$22 a share to buy the company. When KKR sells its last Dollar General share in 2013, the price will have risen to$60. Dollar General is now a star performer that's making billions for KKR. And that's given KKR's Wall Street rivals severe FOMO. You know, fear of missing out. One of those rivals is Tryon Partners. Remember them from menacing Disney a few seasons back? The folks who bought a load of Disney stock and tried to force out CEO Bob Iger? Well, that's all still in the future for Tryon. Right now. It's September 2011. Tryon has seen what's happened at Dollar General and how much money KKR made.

16:23And it wants a slice of that action. Tryon takes aim at Family Dollar, the number two player in the dollar store market. Family dollars always had fewer stores than Dollar General, but in 2006, it had higher sales per square foot. But after Dollar General's dramatic turnaround, Family Dollar slipped behind. Family Dollar got its start when an ambitious young man named Leon Levine walked into a Dollar General store back in 1959. He was only in his 20s, but had already helped run a department store and co-owned a factory while studying business in his spare time. Levine immediately saw the potential of the concept and left determined to get into the dollar store business.

17:06So he borrows money and opens the first family dollar store in his hometown of Charlotte, North Carolina. As he expands, Levine scouts his locations for new stores by looking for oil stains in nearby parking lots. His theory? If people don't have enough money to maintain their cars, they'll shop wherever products are cheapest. What set Family Dollar apart from Dollar General was where it chose to open stores. Dollar General focused on rural locations where real estate was cheap and competition low. Family Dollar focused on low-income urban areas. And this strategy worked well for decades. But in the late 2000s, Family Dollar's city focus became a problem.

17:52Skyrocketing rents, shabby stores, poor product mix, and increased competition from big-box retailers squeezed its profits. The recession of 2008 and 2009 hid the problems as profits boomed across all dollar stores, but the problems never really went away. And by 2010, Family Dollar had had to slow down new store openings. Its sales per square foot now lagged 35 % behind those of Dollar General. But Tryon thinks these problems can be fixed, just like they were at Dollar General. So it buys 8 % of family dollar and threatens to stage a hostile takeover if the company doesn't agree to its demands.

18:36One of those demands is appointing its choice of President and Chief Operating Officer, Michael Bloom. Like Dreiling, Bloom's also a former drugstore man. He used to work for CVS. Bloom adopts a deep discounting strategy. Deep discounting? It works like this. Stores raise their core prices but offer huge discounts on selected items each week. The big discounts get people through the door, while the higher core prices boost more profits. It's a strategy that's worked wonders for the drugstore chains. But Bloom and Tryon are about to discover that what works in one type of retailer doesn't always work for another type.

19:19And that's going to push Family Dollar into a drastic move.

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22:17April 2013. Howard Levine, the CEO of Family Dollar, walks through Aretsky's Patroon, an upscale eatery in midtown Manhattan. He's in his 50s, in his thin, bespectacled face, wears a frown as he enters the private dining room at the back. Ed Garden from Tryon stands up slowly to greet him. The room is tiny, but it's ideal for confidential financial discussions like the one that's about to take place. After they order food, Garden cuts to the chase. Howard, our view at Tryon is the attempt to revive family dollars failed. You're losing customers to Dollar General every day. Levine shifts uncomfortably.

23:01He took over from his father, Leon, sixteen years ago. Seeing the family business hit choppy waters on his watch weighs heavily. Well, part of that is the strategy of deep discounting. Price promotions don't work with our customers. They need to know how much they'll be spending each week. Garden shrugs. I agree that your approach hasn't been as successful as we'd hoped. But you're the CEO, Howard. Your store's sales aren't good enough. You're making, what, on average$180 per square foot a year? Well, Dollar General makes 223. I agree we've lost our way. But these things, they take time to turn around.

23:41It'll happen quicker if we sell family dollar to Dollar General. They know what works. For Levine, the idea of selling the family business is a tough pill to swallow emotionally. But he knows Wall Street investors think he's a mediocre CEO. and he's only in place because dad gave him the job. Perhaps the best thing for the company would be a sale.

24:12Six months later, in October 2013, Levine finds himself in an elegant meeting room at the historic Hermitage Hotel in Nashville. Sitting opposite him is Rick Dreiling, the superstar CEO of Dollar General. They're here to discuss a merger of their companies. And Dryling seems interested. He tells Levine that he's sure that the changes he made at Dollar General would work at Family Dollar. Buying Family Dollar would also help Dollar General break into more urban markets. But Levine's here not just to sell Family Dollar. He's here to ensure it sells for a good price. So he's been briefed for this negotiation by the team at Tryon.

24:55and his instructions are to use his own position as CEO, as a bargaining chip. Levine points out that he's younger than Dreiling, so it would make sense for him to be the CEO after the takeover. Dreiling finds that idea ridiculous. He tells Levine that that's a deal-breaker. Dollar General is the one buying family dollar. Remembering his coaching, Levine shifts his position quickly. He tells Dryling that he might be prepared to step aside if Dollar General pays a premium for Family Dollar. Dryling narrows his eyes, but agrees to consider it, just as Levine and Tryon hoped. Levine leaves Nashville with a spring in his step.