Family Matters Case Study: Dollar Tree

When all is said and done, it was important to do what was best for the family. With over half a century of experience and wisdom, the family behind K&K 5&10, K&K Toys and Dollar Tree reflects on lessons learned while navigating the toy industry and pioneering discount retailing. From the early days under the family patriarch to a new company and second generation leadership, and ultimately the decision to go public, the Perry family recounts how a dwindling industry, changing landscape and sudden growth led to necessary decisions – always made in the best interest of the family.

FROM A FRANCHISE TO INDEPENDENT OPERATION

Doug Perry grew up in Norfolk, Virginia, spending time with his father, Ken Perry, in his Ben Franklin franchise store. His father opened the store in 1953 and quickly developed a local clientele, particularly with the families of military servicemen who populated the Tidewater area. As veterans returned home and the baby boomer generation rose, the store’s toy department sales quickly surpassed sales in their other departments.

Seeking independence from the franchise business, his father set out on his own in the mid-1960s and renamed his store “K&K 5&10,” after himself, Ken, and his wife, Kathryn. As the surrounding areas grew, the store became the center of the growing population. In the late 1960s, Ken’s son, Doug, and his son-in-law, Macon Brock, joined K&K 5&10 as a parttime employee and a manager-trainee, respectively. Doug and Macon watched as the toy department’s sales continued to rise, the business gained even more popularity, and ultimately the family decided to segment the market and specialize exclusively in toys. In 1970, Ken, Doug and Macon opened K&K Toys, Inc. and the business became one of first retailers to discount toys and earned a reputation as one of the area’s best places to shop for children’s toys. K&K 5&10 remained open and managed by the family.

On his decision to join the family business, Macon recalled, “The reason the business was good for me was the family atmosphere. My wife worked in the business with me, we were raising children, it was always in a support role but we all got along really well and you didn’t have the pressures of corporate politics so I think that’s the advantage of a family business particularly when starting out.”

As K&K Toys, Inc. grew, Doug recruited Ray Compton in the mid-1970s to help the company. “We needed someone to help with our finances and technology upgrades. We were retailers. We were not that good in the back room. Ray fit like a glove. He brought us out of the Dark Ages,” Doug recalled. Ray agreed to join the company because he felt “good chemistry with Doug and Macon” and saw “a family with desire, energy and smarts.” Ray remembered, “They allowed me to run the finance department. There was no micromanaging by Doug and Macon; instead, they unleashed their talent. I felt 100 percent support.” Alongside Doug and son-in-law Macon, and with the addition of Ray, the businesses were in good hands and Ken slowly started to take a back seat.

AN INDUSTRY EVOLVING

As the 1980s approached, toy store chains began encroaching on the children’s toy market. Competitors such as Toys “R” Us and KB Toys had strong negotiating positions for their big box stores with attractive locations, while Walmart and other discount retailers established toy departments within their stores. Toy manufacturers were also giving preference to national toy store chains. In short, specialty stores like K&K Toys, Inc. struggled to compete.

Doug, Macon and Ray saw the shift, but Ken Perry’s conservative inclination discouraged the company from taking a national strategy, an approach that may have allowed them to capitalize on the manufacturer consolidation. The family disagreed but stayed the course as the industry continued to change. Learning from this experience, Doug vowed to never again allow the company to be squeezed out by market changes.

A (MILLION?) DOLLAR IDEA

When faced with shrinking margins, Doug, Macon and Ray began to seek ways to diversify their business. A story about a dollar discount store in the local newspaper caught their attention and the team was intrigued by the possibilities of the trendy idea.

Ray remembers “Doug was visiting one of our stores in Portsmouth, Virginia, when he noticed a neighboring Everything’s A Dollar store. Doug went into the store to check it out. He got all excited, buying whatever he could get his hands on. He came back to our office and dumped out everything in his shopping bag onto my desk. Then he exclaimed, ‘We’re going into the dollar business.”

With established relationships with toy manufacturers in Asia and experience gained from K&K 5&10, the team decided to compete in the dollar discount space. In 1986, using K&K 5&10 collateral to borrow $50,000, Doug, Macon and Ray formed a new company with their spouses and Dollar Tree (formerly Only $1.00) was born. Macon controlled the merchandise, Ray controlled the finances and Doug sought out real estate opportunities, in addition to serving as CEO from 1986 to 1999.

From the beginning, the team was surprised by their success. Ray remembers “We opened the Dalton, Georgia, store in November. By New Year’s, we knew we had something.” Within a year, they successfully opened four more stores and within the following year, they added another 16 locations. 

Their dollar discount business was booming, unscathed by the recession in 1991, but the niche toy business was on the decline. Mindful of the new opportunity and in the best interest of the family and their beloved retail legacy, Doug, Macon and Ray made the decision to sell K&K Toys, Inc. in 1991 to competitor KB Toys. Macon stated the sale of K&K Toys, Inc. was “a family reorganizing event”. It allowed Ken Perry to retire comfortably and the new partnership between members of the younger generation, eager to earn their fortunes, was now a single focused business: discount retailing.

THE NEXT LEVEL

Focusing solely on the dollar business, the young partners nearly doubled sales in 1992 and realized a 345 percent increase in net income from $2.2 million to $9.8 million. To maximize the growth potential of Dollar Tree while also lowering their personal risk, Doug, Macon and Ray considered selling a stake in the company. Convinced that a strong balance sheet was most important for a growing company, the partners were careful not to become excessively leveraged. So while business was indeed booming, the young entrepreneurs incurred loans and realized their financial and personal lives were tied up in the company. As their children grew older, Doug, Macon and Ray became less comfortable mortgaging their futures. “We decided to take some sheckles off the table,” Doug says.

As CEO, Doug was initially uninterested in taking the company public. “I’m not into role playing, nor do I want to be a public figure. I preferred to stay low key and out of the public eye,” he said. As they mapped out the company’s future, the idea of taking on partners appealed to the group. By then, Dollar Tree had grown to include 179 stores. “We had to be strategic,” Doug said. “We had to do this to take the company to the next level.” By late 1992, Doug, Macon, and Ray were committed to seeking a deal in order to do what was best both for the family and their business.

THE DEAL

Macon stated he was adamant that the deal be “a true partnership” with a 50/50 split in equity, an approach considered idealistic and unrealistic by most private equity firms. The team was also determined to find a partner that would not force them to give up control of the company. Ray remembers “We had 20 years of retail experience in the toy and dollar business and never had a year of losses. In seven years of operating Dollar Tree, we had 100 percent cash return on stores.”

Through John Megrue, a connection made in the sale of K&K Toys, the Dollar Tree team was introduced to Saunders Karp. As the former managing director of Morgan Stanley and chairman of the Morgan Stanley Leveraged Equity Fund, Megrue founded and directed the private equity investing activities at Morgan Stanley. In 1990, he had decided it was time to resign from the firm and launch his own investment fund.

The companies proved to be a good fit and formed a 50/50 partnership. Not long after, John Megrue became a partner. His initial was soon added to the firm’s acronym brand —SK became SKM and the firm catapulted Dollar Tree into a different league. Macon assumed the role of CEO in 1993 and they continued to grow to 260 stores. All three founders felt motivated, engaged, were working hard, and had a sense that their opportunities were elevating, knowing SKM’s exit strategy was to eventually go public with the company or sell it. Dollar Tree was on a new path, the right path, and one fully supported by the family.

INVESTMENT IN A PEOPLE-CENTRIC WORKPLACE

From the beginning, Dollar Tree executives took pride in knowing the people who worked for them. Doug, Macon and Ray offered people within the organization opportunities to show what they were capable of doing. Before long, promoting from within became a corporate principal. They worked hard to build a culture of respect throughout the whole organization. In an industry in which turnover was high, Dollar Tree had no retention issues. Ray remembers:

From the time we had 40, 70, then 120 stores across the nation, we needed an organization of good people to have success. People were our primary focus. We took pride in watching our people do well. We were never the top-paying organization in town, but people stayed. We never lost anyone we didn’t want to lose. We were able to foster a culture that people liked to be a part of.”

NEW TALENT

During an annual top management retreat in the mid-1990s each executive was asked to lay out their career path plan. Ray recalled:

“We trusted each other and shared our personal goals. My goal was that at age 55, I would work my way out of the business. That within seven years, I would find someone better — smarter, than me — to mentor. My plan was to let that person work on everything I did. I wanted to make sure my ego never got in the way. Macon told us that he loved being a retailer and was going to stay until he was 65. And Doug, if I recall correctly, was already mentoring Bob Gurnee to lead the real estate effort.”

With the plan for his own replacement in mind, Ray hired a new controller. Just as with Doug and Macon, it was always Ray’s intent to find his successor and have him or her shadow ahead of transition. For seven years, Ray provided his protégé with the opportunity to monitor meetings and go on road shows as his understudy. He then stepped back further as both a new chief financial officer and a new chief operations officer took over.

“The new people to the party changed our pressure points,” Macon said. “As technology was adopted, job requirements changed.” Although Macon wasn’t working on a timeline, when the time was right, he knew he wanted to follow the steps recently taken by Ray and phase out from his leadership role.

“My role as the CEO in this rocky but fun era is to plan for management development all the while, but the one thing that has changed so dramatically is the growth of the company from a few hundred stores to many thousands of stores. With that growth, you can’t run it the way you used to. We recognized that early on and the board advised me that the biggest job now is to find your successor and provide for the future.”

“The burden of realizing my partners were leaving the company and all their direct reports were coming to me,” Macon says, “was a watershed moment and defined the need for succession planning.”

As far as family continuing in the business, the team did not want to force their children to go into the family business. “We wanted them to get educated,” Doug said, “and if they thought they wanted to get into retail — go out and spend three or four years with another firm.” 

Macon’s son joined the business for three years as a buyer, and ultimately discovered his passion as a young entrepreneur. He decided to start his own venture and Macon provided his son with both his blessing to pursue his dream and emotional support.

LASTING LEGACY

Dollar Tree would not be the organization it is today without the original three founders. Even through retirement, their dedication, commitment and support of new leadership continued. Doug served as Chairman of the Board from 1986 –

2001, and Chairman Emeritus; Macon served as Chairman of the Board from 2001 – 2017 and Chairman Emeritus until his death in 2018, and Ray continues to serve as a member of the board since his retirement in 2002.

What started as a single family variety store evolved to an impressive +14,000stores in all 48-contiguous states. Every decision was made in the best interest of the family, and their desire to preserve yet grow their business. Today, Dollar Tree honors the family legacy and proudly celebrates its roots.