Dollar stores enjoyed big business during the recession. Now, with two of the deep-discount chains joining forces, other dollar stores could be ripe for takeover. And 99 Cents Only Stores in Commerce might be a prime target.

Dollar Tree Inc. of Chesapeake, Va., announced last week that it would buy Family Dollar Stores Inc. of Matthews, N.C., for $8.5 billion in cash. Billionaire investor Carl Icahn, Family Dollar’s largest shareholder, would make about $200 million profit from the deal. The combined company will become America’s largest deep-discount chain, taking the top spot from Dollar General Corp. of Goodlettsville, Tenn.

Some analysts think this could set off a wave of consolidation in the industry, as the dollar-store market has become increasingly crowded and margins have tightened. An added element: Wal-Mart Stores Inc. of Bentonville, Ark., has been opening up neighborhood stores with smaller footprints that compete directly with dollar stores.

Joan Storms, an analyst who covers dollar stores for downtown L.A. brokerage Wedbush Securities, sees 99 Cents Only, a regional chain, as one of the only targets that make sense for a company looking to bolster its position in the dollar-store market, given its track record and strength in the L.A. market.

“There aren’t any really big chains that I know of aside from 99 Cents Only that they could be interested in,” Storms said, although she doesn’t believe a deal is imminent. “99 has the expertise.”

Discount retailers were among the few winners during the recession as shrinking household budgets drove traffic to their stores. Now that the upper end of the economy has bounced back, with stock indexes hitting record highs, dollar-store sales are slipping. Sales increased every year between 2008 and 2012 before dipping 2 percent in 2013, according to data from the New York office of market research firm IBISWorld.

The Dollar Tree-Family Dollar deal might be a sign that these companies feel like they’ve tapped out most of their options for organic growth and need to join forces to compete. Profits in the industry have fallen from 4.1 percent of revenue in 2009 to 3.8 percent last year. A larger company with more market share, such as postacquisition Dollar Tree, could improve its margins by using its purchasing power to get more favorable pricing from suppliers. That would also help it compete with Wal-Mart’s smaller stores – and drive out some of the smaller independent competitors.

“This is an opportunity for them to sort of dominate the space at the current moment,” Storms said. “It probably puts more pressure on smaller mom-and-pops.”

Magic price

99 Cents Only was founded by David Gold in 1982, after he realized 99 cents was the magic price that made items in his liquor store fly off the shelves. The company was publicly traded until 2011, when it was bought by Century City private equity fund Ares Management and a Canadian pension fund for $1.6 billion. It currently operates 346 stores, with 246 in California and the rest in Arizona, Nevada and Texas. The company has long struggled with the Texas market, but it recently has been expanding its presence in certain cities there.

Both 99 Cents Only and Ares declined to comment for this story.

Dollar General is the largest discount retailer, with about 10,000 stores nationwide. It controls 35 percent of the U.S. market, which brings in more than $50 billion a year in revenue, according to data from IBISWorld. The postacquisition Dollar Tree would command a 37 percent market share and have about 13,000 stores in the United States (as well as some in Canada).

Dollar Tree sells everything for $1. Most of its stores are in middle-class suburban communities and it caters to customers looking to pick up items such as picture frames and art supplies on the cheap. While it sells some food and household products, that’s not Dollar Tree’s specialty. Family Dollar focuses on lower-income urban and rural customers, selling branded, consumable goods at a wide range of price points. 99 Cents Only is mostly a single price-point retailer like Dollar Tree, but has a longtime specialty in grocery items and produce.

However, Storms said 99 Cents Only’s strength in fresh foods might be fading as the company gets further away from the way it was run under its founder, who died last year.

“The Gold family had a hard learning process to get the produce right and they finally did,” she said. “I was just in some stores about a month ago and I don’t know what they’re doing. They sort of seem like they’ve gone downhill a little bit.”

Attractive target

But if 99 Cents Only can get that part of its business back to previous standards, it would make the company that much more attractive of a target. After all, Wal-Mart expanded its grocery business because it sees a lot of potential in putting cheap food on the tables of shoppers on a tight budget. And that’s been one of the company’s best performing segments, with sales in smaller-footprint neighborhood stores jumping 5 percent last year, even as overall U.S. sales declined. 99 Cents Only’s ability to deliver produce for under a buck is appetizing for a potential acquirer.

“If they can do it right, it definitely is a great model,” Storms said. “Supermarkets are so much more expensive.”

But 99 Cents Only is a bit player in the national industry. The company has less than 5 percent market share, as it only operates in four states. Its strength is its established place in California, a market where Family Dollar and Dollar General want a bigger presence.

Joe Feldman, an analyst who covers dollar stores for New York brokerage firm Telsey Advisory Group, said that dollar stores have been vocal about wanting to expand more into California, and 99 Cents Only might give them an easy entrée.

“You would have pretty quick access to an installed store base,” he said. “That being said, a lot of these retailers prefer to build on their own.”