2012. 2. 7. 07:51
[Business]
The story
Discount retail chain Family Dollar Stores, was founded in 1959 by the father of Howard Levine, the company’s current chief executive. Although listed on the New York Stock Exchange, the company is family controlled and it maintains a minimum debt/equity ratio.
Family Dollar Stores target women from low-income households who are value shoppers. Most shops are located in downtown areas in the US. Food, health, beauty aids and household items account for two-thirds of sales. Most merchandise sells for less than $10.
The challenge
In the mid-1980s, the company decided to expand its geographic reach, opening more than 100 new stores a year from an initial base of 500 in 1982 to more than 1,107 in 1986. But while preoccupied with expansion, the company failed to keep an eye on the competition’s pricing, possibly reassured by having successfully withstood competition from other similar discount stores.
Walmart in particular had crept up with a retail pricing plan up to 10 per cent lower.
The response
Family Dollar decided to refocus on providing convenience, product choice and value to its loyal customer base. It reversed its aggressive expansion plans to concentrate instead on existing stores and cut prices to match the competition. This choice shrank its margins, but the company was able to implement this decision quickly because it carried little debt.
At the same time, to limit the impact on margins, Family Dollar undertook a series of manoeuvres to source lower-priced and higher-margin goods. It began stocking more own-label products. It sourced manufacturer overruns and close-out sales at which products were available at greatly reduced prices. It started stocking branded goods, such as jeans and sweaters, that were available at a reduced cost from manufacturers because of minor flaws. The company also started selling higher-margin items such as seasonal sweets and costume jewellery.
To back these initiatives, the group launched an advertising blitz including mail-outs that highlighted weekly specials and emphasising the chain would not be undersold.
Family Dollar also installed an electronic Toshiba-Microsoft point-of-sale system that gave headquarters detailed information on which merchandise was selling well in each store and helped it to track regional competition.
Family Dollar also fine-tuned its procurement policy. It negotiated deals with factories to manufacture own-label products at lower rates during periods in which the factories would otherwise be idle.
To strengthen bulk sourcing and bargaining power, it also set up a new fully-automated distribution centre in Arkansas with more than 550,000 sq ft of storage, enhancing its existing capacity in North Carolina by more than 70 per cent.
What happened
Same-store sales went up by 10 per cent.
Setting up better logistics and procurement techniques not only reduced costs, but allowed each store to focus on stocking the products that sold best in their specific market.
The decisions also laid foundation for success even today. Annual sales last year were $8.5bn, and most of its merchandise still sells for less than $10.
The lessons
Family Dollar’s experience shows how a smaller company can fight back on several fronts to preserve its price leadership when a bigger rival with pricing advantages arising from economies of scale muscles in.
Leveraging advantages in its business model and structure that Walmart could not copy – such as the ability to respond rapidly because of a direct command chain and flexibility of operations because of a low debt-equity ratio and greater control over financial decisions – aided the company’s success in fighting back.
- Financial Times, 6 Feb 2012
Discount retail chain Family Dollar Stores, was founded in 1959 by the father of Howard Levine, the company’s current chief executive. Although listed on the New York Stock Exchange, the company is family controlled and it maintains a minimum debt/equity ratio.
Family Dollar Stores target women from low-income households who are value shoppers. Most shops are located in downtown areas in the US. Food, health, beauty aids and household items account for two-thirds of sales. Most merchandise sells for less than $10.
The challenge
In the mid-1980s, the company decided to expand its geographic reach, opening more than 100 new stores a year from an initial base of 500 in 1982 to more than 1,107 in 1986. But while preoccupied with expansion, the company failed to keep an eye on the competition’s pricing, possibly reassured by having successfully withstood competition from other similar discount stores.
Walmart in particular had crept up with a retail pricing plan up to 10 per cent lower.
The response
Family Dollar decided to refocus on providing convenience, product choice and value to its loyal customer base. It reversed its aggressive expansion plans to concentrate instead on existing stores and cut prices to match the competition. This choice shrank its margins, but the company was able to implement this decision quickly because it carried little debt.
At the same time, to limit the impact on margins, Family Dollar undertook a series of manoeuvres to source lower-priced and higher-margin goods. It began stocking more own-label products. It sourced manufacturer overruns and close-out sales at which products were available at greatly reduced prices. It started stocking branded goods, such as jeans and sweaters, that were available at a reduced cost from manufacturers because of minor flaws. The company also started selling higher-margin items such as seasonal sweets and costume jewellery.
To back these initiatives, the group launched an advertising blitz including mail-outs that highlighted weekly specials and emphasising the chain would not be undersold.
Family Dollar also installed an electronic Toshiba-Microsoft point-of-sale system that gave headquarters detailed information on which merchandise was selling well in each store and helped it to track regional competition.
Family Dollar also fine-tuned its procurement policy. It negotiated deals with factories to manufacture own-label products at lower rates during periods in which the factories would otherwise be idle.
To strengthen bulk sourcing and bargaining power, it also set up a new fully-automated distribution centre in Arkansas with more than 550,000 sq ft of storage, enhancing its existing capacity in North Carolina by more than 70 per cent.
What happened
Same-store sales went up by 10 per cent.
Setting up better logistics and procurement techniques not only reduced costs, but allowed each store to focus on stocking the products that sold best in their specific market.
The decisions also laid foundation for success even today. Annual sales last year were $8.5bn, and most of its merchandise still sells for less than $10.
The lessons
Family Dollar’s experience shows how a smaller company can fight back on several fronts to preserve its price leadership when a bigger rival with pricing advantages arising from economies of scale muscles in.
Leveraging advantages in its business model and structure that Walmart could not copy – such as the ability to respond rapidly because of a direct command chain and flexibility of operations because of a low debt-equity ratio and greater control over financial decisions – aided the company’s success in fighting back.
- Financial Times, 6 Feb 2012
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