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Dollar General's $9.7B Bid For Family Dollar Reveals Walmart's Weakness

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Anyone looking for further evidence that the U.S. shopper is pressured financially and that Walmart's biggest competition are dollar stores, need look no further than the current bidding war for deep-discount chain Family Dollar.

Dollar General announced this morning it made an offer to acquire Family Dollar Stores for $78.50 per share in cash, in a transaction valued at $9.7 billion. That’s $1.2 billion more than Dollar Tree ’s previous offer to acquire the chain in a deal valued at $8.5 billion.

What’s driving this? Fear, on the part of Dollar General and the need for retailers to bulk up their presence in this most important retail channel.

Dollar Tree’s bid to acquire Family Dollar made sense. This was a channel ripe for consolidation and Family Dollar was the weakest of the chains in the sector. But the two combined would create an $18 billion powerhouse of a retailer, and that makes for a dangerous competitor, not just to Dollar General but Walmart, as well.

Walmart and Dollar General are arguably fiercer direct competitors than Walmart and Target . In a recent pricing survey Dollar General beat Walmart, and their small format stores are the model on which Walmart is banking for future growth.

Make no mistake, the deep-discount retail channel is among the most important today with small stores that serve an ever-poorer U.S. consumer. These inexpensive to build stores are conveniently located to the urban, suburban and rural poor. A group that is growing in spite of an economic recovery.

Dollar General’s stated reasons for its interest in Family Dollar revolve around the need for size. The merger would “solidify (Dollar General’s) position as the leading small-box discount retailer,” said the company in a statement. “The transaction would create the preeminent small-box retailer in the United States based on store locations, delivering convenience and everyday low prices to customers through nearly 20,000 stores in 46 states with sales exceeding $28 billion and over 160,000 employees.”

Together these chains can better compete with Walmart, and Walmart has got to be looking at its small store efforts as even more critical than ever.

Update: A Walmart spokesman has provided the following statement:

“We don’t comment on mergers and acquisitions. We like our position as it relates to small formats. Our focus remains on our business and what we feel works for the company.  We are focused on running our business and running it well, and we believe we’re in a position to serve our customers wherever and whenever they want.  We think our small format stores offer a winning combination with fuel, fresh, frozen and pharmacy, and that they put us in a good position in the small store sector.”

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