Family Dollar Stores, Inc. (FDO), Dollar General Corp. (DG): Would These Two Companies Benefit From a Merger?

However, even if the two companies decide to continue competing with each other, their cause is not lost. Wal-Mart plans to open only 500 Neighborhood Market stores between 2013 and 2016– a large percentage increase from its current size of fewer than 300 stores, but hardly a formidable competitor to the established dollar-store chains. Moreover, Wal-Mart’s deep-discount concept has been around for quite some time — since 1998 — and has yet to make a serious dent in Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG)’s profitability.

However, like Family Dollar and Dollar General Corp. (NYSE:DG), Wal-Mart’s concept uses food as the primary driver of traffic; it offers a full line of groceries. The target demographic makes twice as many trips to the store for food than the next-closest category (household items), making a wide selection of deeply discounted food the most important feature of these stores.

If Wal-Mart leverages its corporate buying power to lower its cost of food, there is little reason to believe it cannot compete with the traditional dollar stores in many of its markets.

Bottom line

Wal-Mart’s Neighborhood Market concept is so far behind Family Dollar and Dollar General that it will never equal either company in scale; in addition to a huge lead in store count, the latter two companies are opening far more stores than Wal-Mart each year.

However, as the companies expand westward at a rapid pace, they risk expanding too quickly and saturating the new markets. A combination of the two companies would slow expansion and allow management to focus on responsible growth without worry that a major competitor will reach a new market beforehand.

Even so, both companies have a long runway for growth, and shareholders of either company will be rewarded in the long run — even if a merger never takes place.

The article Would These 2 Companies Benefit From a Merger? originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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