| By: John S. Strong, CSX Professor, Raymond A. Mason School of Business, the College of William & Mary

  1. When growth slows in a retail sector, incentives and pressures for consolidation arise rapidly. There are both internal company incentives (acquisitions to sustain growth) and external pressures (shift from market growth to market share puts more emphasis on scale and cost reductions).
  2. In a slower-growth environment, there is more pressure on operational execution, productivity, and cost management. Generic strategies of cost leadership and differentiation come to the fore. However, cost leadership can likely be achieved by only one player. For the others, developing and executing a differentiation strategy is very hard, especially in sectors where price/value leadership is key. Meaningful differentiation is difficult to achieve, but easily lost.
  3. It is well-known that very few retailers have been successful in shifting from a high/low promotional strategy to an EDLP model. However, Family Dollar shows that the opposite also is true: it also is very difficult to change from a predominantly EDLP strategy to a high/low promotional model—especially for value retailers.
  4. More so than in the past, activist investors are seeking to drive company strategy. Sometimes the focus is on financial strategy (the amount of leverage, and distributing cash through share repurchases). Sometimes, however, the emphasis is on changing overall corporate strategy, in terms of both company management and prospective sale.
  5. Many (most) activist investors are short-term in focus; even for senior management with an excellent track record, it is hard to balance longer-term strategies with short-run initiatives to boost the share price or otherwise allow these new investors to cash out with short-term gains.
  6. Government competition/antitrust policy can radically alter deal contexts, even when there are good arguments to be made by all parties. Dollar General’s proposed acquisition was severely handicapped by speculation about prospective government action, even before any review had begun.
  7. Trying to create an auction is risky for all parties involved (except for the lawyers and bankers!). For the target, sometimes there’s only so much juice you can squeeze—the deal could go away, leaving you in a weak position with angry shareholders. For buyers, you could pay too much or agree to value-decreasing changes in deal terms. For losing bidders, consequences for reputation and market position can be significant, even if the deal would have been on unattractive terms.
  8. Once you decide you want to do something, it is very easy to continually revise your position/strategy even when it no longer makes sense to do so.
  9. In retail mergers, high drama is always followed by hard work. For Dollar Tree, the challenge is to learn how to manage a related but clearly different business model—and to do so while carrying a large debt burden. Family Dollar also needs to improve its operations to earn the premium paid for the company. For Family Dollar, the challenge is how to become an important subsidiary of a former rival that was both younger and smaller than you were. For Dollar General, the challenge is to face a tougher competitor that has advantages both in scale and in potential differentiation.