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Supply Chain Management of Family Dollar Stores, Inc.

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Supply Chain Management of Family Dollar Stores, Inc.
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Netra Shetty
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Supply Chain Management of Family Dollar Stores, Inc. - January 4th, 2011

Family Dollar Stores, Inc., is a chain of discount stores that offer inexpensive merchandise for family and home needs to customers in 43 states located in mainly in the northeastern, southeastern, southwestern, and northwestern regions of the United States. The first Family Dollar store was opened in Charlotte, North Carolina, in 1959. Since that time, the company has grown to more than 5,000 units with $4.75 billion in annual sales. Family Dollar stocks its stores with a wide variety of products, ranging from food and housewares to apparel and linens--most priced at less than $10. Founder Leon Levine retired in 2003, handing over company reigns to his son, Howard Levine.

Company Origins

Company founder, Leon Levine, learned the retail business from his father. In fact, when his father Harry Levine died in 1947, Leon and his brother Al took over the store their father began; Leon was 13 years old at the time. The store, in Rockingham, North Carolina, billed itself as a department store, but was really more closely allied to the old-fashioned general store. By 1959, Leon was ready to strike out on his own, and he opened the first Family Dollar store in Charlotte. His target customer was the lower middle-income family who could not afford fancy name brands and was not a slave to high fashion, but did need good clothing and durable shoes.

The Family Dollar store proved popular among value shoppers, and soon new outlets were opened. By the early 1970s, the company had gone public and had opened its 100th store in Brevard, North Carolina. Although it was not the first in the self-service, discount variety field, Family Dollar secured a leading spot.

Overcoming Difficulties in the 1970s

One difficulty in targeting lower income consumers was that they were often the first hit during bad economic weather--whether due to inflation or recession--and were quickly forced to cut back on spending. Thus, whereas Family Dollar expanded and achieved record sales in the early 1970s, the mid-1970s presented a particular challenge. Clustered in the southern states, the chain was hard hit by fallout from the traumatized textile industry in 1974. Many of Family Dollar's customers in that region were textile workers; many others worked in the tobacco and furniture industries, and were similarly hard hit. Family Dollar saw its profits fall by as much as 50 percent in 1974 and 1975, which was especially shocking given the company's growth rate in the years before; earnings in the early 1970s had shot up 24 percent annually, on average.

To offset the effects of this economic downturn, the company began targeting some of its weaknesses, seeking to improve marketing and merchandising, as well as to diversify geographically. It also dropped its policy of pricing all merchandising at $3 or less, which, while it had appealed to shoppers, had proved too hard on store margins. Family Dollar also tightened inventory controls, adding an electronic data processing system. Although the economy continued to be volatile in the late 1970s, Family Dollar was able to exceed $100 million in sales in fiscal year 1978, and hit a record $151 million in sales in 1979. Same-store sales remained fairly flat around that time, however.

Family Dollar was operating about 400 outlets in eight states, all in the South, by 1980. Most of the sales gains over the next few years were from additional stores. In 1979, Family Dollar acquired 40 Top Dollar stores from Sav-A-Stop. That same year, it also opened 36 new units of its own, putting it ahead of its own expansion schedule.

Family Dollar's draw at the time was its bargain-priced goods--such items as toys, automotive equipment, and school supplies--all displayed within 6,000 to 8,000 square feet of store. Much of the company's merchandise had come from vendors or suppliers who had overbought, so the company's savings on those underpriced goods could be passed on to its customers. Another winning strategy was to gather up manufacturer's overruns. Size and strategy helped as well. When Procter & Gamble refused to give Levine a deal on Pampers disposable diapers, figuring he would have to stock them anyway, Levine stocked more Kleenex disposable diapers, as well as a Family Dollar brand, and soon Pampers became less necessary.

Another ingredient in Family Dollar's success was its efficient distribution system, handled entirely out of Charlotte, from which the company was able to make bulk deliveries to its stores. In 1980, the size of the distribution center was doubled so that the company could take further advantage of discounts on single, bulk deliveries, as well as open new stores without concern about stock shortages.

Although Family Dollar was branching out geographically at this time, with 70 to 80 outlets in Georgia, it was still primarily a Carolina chain. Soon, the company began investigating further opportunities in Alabama, Tennessee, the Virginias, Florida, Kentucky, and Mississippi. Because the company had no long-term debt--despite the recent Top Dollar stores acquisition--the cash flow freed Family Dollar to expand without too much risk in borrowing. In fact, it opened 33 new stores between September 1979 and September 1980, and was boasting a growth of about 30 percent per year since 1975. Family Dollar stores generally operated in leased buildings, which saved the company on capital investment. In March 1982, the company's 500th store opened, in Brunswick, Georgia.

Battling Competition in the 1980s

Family Dollar continued to thrive through the early 1980s, ringing up more record profits--in fact, it had a nine-year streak of them--and opening more than 100 new stores a year between 1982 and 1987. But while the company was becoming a more national presence, it failed to keep a close eye on increasing competition from Wal-Mart Stores. Suddenly, sales growth in recently opened stores tripped from 9 percent in 1984, to a dull 2 percent in 1985, then came to a dead halt the following year, and dropped 10 percent in 1987.

At the time, and, indeed, since the company's inception, Family Dollar shoppers were families making less than $25,000 a year. Most stores were rooted in rural areas, usually in towns of less than 15,000, often within walking distance or a very short drive from home. The average Family Dollar customer shopped there at least once a week, spending about $8 on average. The stores were about one-tenth the size of a Wal-Mart or Kmart, so product lines had to be meticulously selected and limited. Even though the bigger stores could offer more merchandise, the draw of Family Dollar stores was often location. Wal-Marts typically were planted outside or on the edge of town, while Family Dollars were downtown. The real problem arose when Family Dollar management, preoccupied with expansion, stopped checking on the competition's pricing. When it did check, only after sales slipped enough to cause alarm, it found that Wal-Mart was pricing sometimes as much as 10 percent below Family Dollar--often on such things as health and beauty products that Family Dollar was advertising heavily as on sale.

Therefore, in 1987, Family Dollar instituted a new pricing policy: they would not be undersold. Within two months, same-store sales were up 10 percent. Clearly, the lower prices wounded margins somewhat, but the company compensated by scaling back its expansion. It had been expanding as far north as Michigan, and as far west as Texas, and right into Sam Walton's Wal-Mart territory. In 1986, there were 1,107 Family Dollar stores in 23 states. At the same time, Wal-Marts were infiltrating Family Dollar's stronghold, the rural southeast. Wal-Mart was using its buying power to plunge prices while Family Dollar was using its profits to open more stores.

After catching itself and lowering prices to boost sales, the company faced another challenge in the form of a management shakeup. In the mid-1980s, Leon Levine was the company's chairman and chief executive; Leon's first cousin, Lewis E. Levine, served as president and chief operating officer; and Leon's son Howard Levine was senior vice-president of merchandising. In September of 1987, just as Family Dollar reported its fourth consecutive quarter of lower earnings, Lewis Levine abruptly resigned, and Howard Levine left as well. Lewis had been with the company for 17 years and was reportedly upset by salary differentials (CEO Leon Levine made an estimated $1.84 million in 1986, while Lewis made slightly more than $260,040). Moreover, the cousins had disagreed over strategy; Lewis felt that Leon was not responding quickly enough to changes necessary to defend against the encroaching Wal-Mart. Essentially, it come down to a standoff, in which Lewis asked for more control and the board asked for Lewis's resignation. Leon served as president until a successor was named, capping his own salary at $350,000 for 1987 and 1988. Leon's son, Howard Levine, the heir-apparent, seemed to have left the company for more personal reasons.

Meanwhile, the battle with Wal-Mart grew heated. Family Dollar's new "everyday-low-price" strategy was still hard on the margins. In 1987, the company was spending $2 million to renovate its 1,272 stores, to make the most of their compact size. When Family Dollar first began matching or beating Wal-Mart on prices for items like health and beauty aids and automotive supplies, same-store sales rose 9 percent for a few months, but then fell back to the levels of the year prior. Still, Family Dollar felt that it had two advantages: it could squeeze into urban store spaces without fear of a large Wal-Mart moving in next door, and Family Dollar was still virtually debt-free.

Back to Basics in the Late 1980s

After an intense headhunting mission, Levine appointed Ralph Dillon the new president and CEO of Family Dollar. Formerly the head of Coast American Corporation, Denver's retail franchise, Dillon joined Family Dollar in summer of 1987. Faced with rising sales, given the new store expansions, but essentially flat earnings, Dillon's strategy was simple: return to the basics that built Family Dollar in the first place, particularly in regard to pricing. The previous management's efforts at aggressive markdowns were pushed even further; a policy was now instituted requiring that any item tagged at more than $15 gain approval first from top management.

To assist margins, the company began stocking more of its own labeled products, as well as manufacturer's overruns and closeouts, practices that had been scaled back in the 1980s when the stores had tried to upscale merchandise. Also stocked were irregular brand-name goods, meaning jeans and sweaters that were slightly flawed. Other high-margin goods such as seasonal candies and costume jewelry were pushed. Coupled with an ad blitz stressing the chain's return to "everyday low prices," Family Dollar felt confident of a comeback. The cuts would bite into the company's overall margin for a couple of years. Still, because of its healthy cash flow and minimal debt, the company had the equipment to ride out a recession and get through its own changes.

Indeed, despite the tough economic weather of the late 1980s, Family Dollar was thriving again and, by 1991, was reporting another record year. Significantly, same-store sales were up, overall sales exceeded the $1 billion mark for the first time, and revenues increased 18 percent in 1992 alone. That same year, the company planned to open 150 new stores, concentrating in New England, where existing store sales were above average. By year-end, Family Dollar had opened 175 new stores and closed 25.

Meanwhile, the management concentrated on improving gross margins. A new point-of-sale (POS) system was installed, which gave detailed information on apparel styles, colors, and sizes selling well in each store. The POS system also helped stores track regional competition on certain products. During this time, Peter Hayes became the new president of Family Dollar.

By 1992, as Wal-Mart captured 26 percent of the discount store market and many smaller discounters were sent into bankruptcy, Family Dollar seemed to have survived by concentrating on its core strengths of convenience, solid stock, and low prices. Family Dollar stores were on average within three miles of shopper's homes and were still about one-tenth the size of Wal-Mart stores. Moreover, because its stocks were smaller per store, the price of staples such as toothpaste and laundry detergent at Family Dollar were often slightly more than one might pay at Wal-Mart. Nevertheless, many customers seemed willing to pay slightly higher prices in exchange for convenience of location and getting around more quickly in a smaller store. Family Dollar had faced the superstore threat head-on, and was, by 1992, even posting a better net margin than Wal-Mart.

Apparel represented about 45 percent of the Family Dollar stock in 1993, and "hard" goods made up the remainder. The company spread out its search for merchandise and took advantage of downtime in factories--contracting them to manufacture merchandise at cut rates during times they would usually be fallow. About 10 percent of the company's overall business was attributable to private-label sales, and most store merchandise was priced lower than $18. The company also was sprucing up its distribution system, installing a building in Memphis, Arkansas, of more than 550,000 square feet, which when combined with the North Carolina center, totaled about 1.3 million square feet of space. Both centers were fully automated.

In 1994, having regained its sales strength, Family Dollar focused on fine-tuning its strategy of centering itself as a neighborhood convenience store with low prices. It began phasing out low-margin items like tools, paints, and motor oils, replacing them with more popular, higher-priced items like toys and portable stereos. The pricing policy began allowing for items up to $25. Expansion was also a focus; 165 new units were added to the Family Dollar chain in 1993, and the same number was planned for 1994. Indeed, the rash of bankruptcies among regional discount chains provided Family Dollar with opportunities for growth.

In the spring of 1994, Hayes resigned as president and chief operating officer of Family Dollar Stores, taking a position as president of a Florida-based jewelry company. He was replaced by John Reier, who had been with the company since 1987, having been senior vice-president in charge of Family Dollar's merchandising and advertising. Leon Levine remained board chair and CEO. Given the highly competitive nature of the industry, Family Dollar sales and earnings failed to meet expectations in 1994. In the 1994 annual report to shareholders, Levine remained optimistic, however, noting that the company would continue its aggressive expansion plans and continue to pursue price reductions at Family Dollar stores.

Growth in the Mid-1990s and Beyond

A major focus for Family Dollar continued to be store growth throughout the 1990s. Howard Levine returned to the company in 1996 and became president the following year. His intentions to aggressively increase store count proved evident as the company opened its 3,000th location in 1998. As the company made its move into Arizona in March 1999, a Discount Store News article reported, "Family Dollar stores have been opening at a steady, methodical pace in recent years, quietly cropping up in cities and rural towns across the country." Indeed, the company's impressive growth coupled with its successful financial record put it in an enviable position among its competitors.

To keep up with product demand, Family Dollar opened a new distribution center in Virginia in 1998 and an additional facility went online in Oklahoma in 1999. That year the company celebrated its 40th anniversary by posting record sales and profits.

Family Dollar entered the new millennium on solid ground. The company focused on putting additional brand names on its shelves while cutting back on its apparel line, decreasing it to just 15 percent of its product mix. In 2000, sales broke the $3 billion mark and by 2001 the 4,000th Family Dollar store had opened its doors. The company's success caught the eye of industry observers and in 2002, the firm was named to the Fortune 500 list.

Family Dollar's successful business strategy appeared to be paying off handsomely. Overall, nearly 3,000 stores had been added to its arsenal over the past ten years and the company was operating in 43 states. By fiscal 2003, the firm could boast 30 consecutive quarters of record sales and earnings. Howard Levine--named CEO in 1998--took on the additional role of chairman in 2003. Under his leadership, Family Dollar continued its growth streak, opening its 5,000th store on August 28, 2003, in Jacksonville, Florida.

During 2004, the company planned to open more than 500 new stores as well as its eighth distribution center. It continued to focus on strengthening its supply chain, improving the quality of its apparel and housewares offerings, and bolstering its brand name product line. Although the firm had indeed come a long way from its start in 1959, the company's management team eyed continued expansion in the years to come. Levine firmly believed in Family Dollar's ability to succeed in the future, evident in the theme of the company's 2003 annual report--"We've still got a long way to grow!"

Principal Subsidiaries: Family Dollar, Inc.; Family Dollar Holdings, Inc.; Family Dollar Services, Inc.; Family Dollar Operations, Inc.; Family Dollar Trucking, Inc.; Family Dollar Merchandising, L.P.; Family Dollar Distribution, L.P.

Principal Competitors: Dollar General Corporation; Dollar Tree Stores, Inc.; Wal-Mart Stores Inc.

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