9-210-041 REV:
APRIL 2, 2010
ANDRÉ F. PEROLD
Dollarama Inc. Our goal is to exceed our customers’ expectations of the quality and variety of products they can purchase for $1 to $2. -Neil Rossy In December 2009, Larry Rossy and his son Neil were contemplating Dollarama’s future. In 2004, they had sold an 80% stake in the company to Bain Capital Partners at a $1 billion firm valuation; and in October 2009, the company had successfully executed an initial public offering at $17.50 per share (symbol DOL on the Toronto Stock Exchange). The shares now were at $23.05, and the firm’s enterprise value was $2.1 billion. CEO and SVP Merchandising, respectively, Larry and Neil were as involved as ever in the day-to-day management of the business, and they were excited about the prospects for continued future growth. The retail industry was highly sensitive, however, to changes in the competitive landscape and global economic circumstances, and the Rossys wanted to be prepared for potentially new opportunities as well as threats to their business. Dollarama’s roots traced back to 1910 when Larry’s Lebanese-born grandfather founded S. Rossy, Inc., a general merchandise store in Montreal. The business remained in the family and grew into a discount chain. In 1992, Larry and his relatives in management created Dollarama by transitioning the retailer to a single price point dollar store chain. They grew stores from 44 in Quebec to 594 nationwide with minimal marketing and funded entirely by internally generated cash flow. (See Exhibit 1 for company financial information.) Dollarama was now the leading operator of dollar stores in Canada. It was larger than the next seven firms combined, some of whom had seen their fortunes diminish as Dollarama succeeded. (See Exhibits 2-4 for information on peer and other retailers.) As of November, 2009, the firm’s trailing twelve month revenues and EBITDA were $1.2 billion and $158 million, respectively. (All dollar amounts in the case are Canadian unless otherwise stated.)
The Dollar Store Industry Dollar stores offered items such as party goods, housewares, seasonal goods and snack foods at low price points, typically $1. They evolved from the “5 and dime” stores of the 1950s, and the goal was to offer significant savings over comparable items carried at other retailers. In Canada, discount general merchandise sales amounted to 25%, or $35 billion, of all retail sales ex auto. Walmart, Costco, Winners, and Zellers accounted for around $30 billion of these sales, and dollar stores only $2.3 billion. The dollar segment was growing rapidly, however, as dollar stores flourished in all kinds of locations and appealed to “treasure hunter” as well as economically constrained shoppers. Mass merchants tried to compete in the segment by offering dollar zones within their units. They needed to rely on brokers and jobbers to source dollar type merchandise, however, which eroded margins and quality. They also resorted to pricing existing offerings at even-dollar price points. ________________________________________________________________________________________________________________ Professor André F. Perold prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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Dollarama Inc.
Over time, mass merchants came to offer their dollar programs mostly on a promotional basis, and the result was to legitimize the category and to even improve the image of dedicated dollar stores. In the United States, the dollar store industry was more mature, with penetration of one store per 15,500 people versus only one per 32,000 in Canada. (As of 2008, the U.S. and Canadian populations stood at 304 million and 33 million, respectively.) The growth of the dollar segment in both countries had been driven by increased numbers of unemployed, underemployed or otherwise financially distressed consumers. This segment constituted about 40% of Canadian consumers, including the large immigrant population (around 7%) that typically arrived with few financial resources. Based on its store penetration in Quebec, Dollarama believed it could achieve a nationwide footprint of at least 900 stores.
Dollarama Larry Rossy described the decision to form Dollarama. “We noticed lineups at dollar stores and we were losing business to them. We thought their stores were junky, and they were buying poor products. Theirs were poorly lit and merchandised, and they were unprofessional. We concluded that this was our category, let’s do it properly.” The arrival of Wal-Mart in 1994 only hastened the transformation. “We found we were much better in the $1 niche than the general variety store.” Dollarama’s primary challenge was to procure a blend of merchandise at adequate margins while maintaining quality of product and consistency of supply. Larry and Neil were shrewd and disciplined buyers, and a constant source of product ideas. They and Jeff Robillard, SVP Import Division, would regularly shop higher-priced stores to look for product inspiration and would then develop new items that could be sold for a dollar. The firm’s culture was one of continually adding and re-sourcing goods, and utilizing numerous domestic and offshore suppliers in the search to provide compelling value. Being run by buyers was an important tradition at Dollarama. Dollarama’s stores at a given time would offer over 3,700 year-round and 700 seasonal SKUs, representing a core selection of party supplies, greeting cards and gift wrap, crafts and stationery, kitchen and housewares, cleaning supplies and hardware, basic health and beauty care products, toys, candy and food. The firm carried national brands, as well as an extensive range of private label brands many of which belonged to Dollarama. Private brands aided the company in finding the right item from the right factory – then custom labeling or packaging it. Even the national brands were often merchandised differently, with small or unique packages designed by manufacturers specifically for the dollar store segment. Dollarama believed its purchasing, scale, and sourcing capabilities constituted an important competitive advantage. Over half the merchandise was direct-sourced, largely from Chinese and other Asian manufacturers. Direct sourcing avoided the costs typically associated with importers. The buyers personally scoured through thousands of presentations from factories across Asia at the international trade shows held in Hong Kong, China, and Taiwan. The firm’s supplier base was well diversified, with the top 25 suppliers representing less than 40% of total purchases. As input prices fluctuated, the firm actively managed its sourcing portfolio with an eye on profitability. Neil Rossy described Dollarama as being about exceeding customers’ expectations of the quality and variety of products they could purchase for $1 to $2. A CIBC analyst had recently purchased a sample of nine items from Dollarama and compared prices at the chains Shoppers Drug Mart and Canadian Tire. The savings at Dollarama was 84% (Exhibit 5).
2 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
Dollarama Inc.
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Stores and Logistics Dollarama owned rather than franchised its stores so that it could better provide a consistent shopping experience. A store typically had 9,700 square feet (83% selling space), almost double that in 1998. Stores were staffed by at least three employees, and additional workers were utilized during busy times. Nearly all stores were in high-traffic areas and strategically located near leading mass merchants. Store density was highest in Quebec and Ontario (Exhibit 6). Dollarama leased the space because of the greater flexibility to pursue expansion and relocation opportunities as market conditions changed. Leases were typically for 11 years, and the average store had 5.5 years remaining on its lease. Analysts estimated that store rent was averaging around $13 per square foot. Larry was personally involved in location decisions, and he viewed rent as a critical consideration. He would sometimes favor more difficult sites such as basements if the terms were attractive. When opening a new store, Dollarama would invest about $400,000 in fixtures and leasehold improvements, and provide the store with $200,000 in initial inventory. Maintenance capital expenditures over time were minimal. A typical store would achieve about $1.8 million in sales in its first year, and reach sales maturity by the second or third year. The stores recently started taking debit cards, having previously accepted only cash. Debit card transactions were running at 29% of sales and averaged 2.5 times the size of cash transactions. There was no point of sale (POS) system in the stores but plans were under way to install one. The system would eliminate the manual counting currently necessary to monitor inventory and demand. With more timely and accurate tracking, Dollarama would be able to hold less safety stock. Dollarama resisted complex automation, preferring a simple logistics approach based on four warehouses and a distribution center. The warehouses stored imported goods and held 60% of the firm’s inventory. Transportation was outsourced. The five facilities totaled 1.3 million square feet, and were located near Montreal. They utilized approximately 400, mostly temporary, employees. Retail employees totaled 12,371 (full-time and part-time), and 164 employees worked at the head office. Store labor was the largest component of G&A and highly variable with sales. An analyst estimated that store labor costs were averaging $250,000 per annum per store. Store contribution margins net of transportation and all store operating costs (i.e., store EBIT with no allocation of corporate overhead) averaged 21% of sales (Exhibit 7).
Move to Multiple Price Points Commodity prices affected the production costs of most of Dollarama’s items, and rising prices posed the challenge of preserving margins while still charging only $1. The recently high Canadian dollar helped, but was not sufficient (See Exhibits 10 and 11 for macroeconomic data). Larry explained: “We continually strive to be the undisputed value leader. We can sometimes adjust quantities to counteract inflation—for example, we used to offer 12 erasers for a dollar but now offer only nine. As long as the customer is still getting good value, we can adapt as needed. We replace a material number of our SKUs every year, partly items that are selling poorly and partly out of the need to find new items. With input costs always on the rise, we need to source the same item elsewhere at a better price point or re-engineer an existing item at the current factory. There are limits, however, to what one can provide at a fixed price point.” In early 2009 after a few months of experimentation, and in one of the biggest decisions in its history, Dollarama decided to add price points of $1.25, $1.50, and $2.00. The firm changed its
3 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
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Dollarama Inc.
signage and banners featuring the $1 logo to now read “$1-plus” (Exhibit 8). For the first time, some items would be labeled with prices, and new buttons had to be installed on cash registers (Exhibit 9). The crucial question was whether the customer base would accept moving away from the strict dollar price. Larry remarked: “We felt a multi-price offering was the best solution because it allowed more flexibility on existing items with the added benefit of being able to offer new merchandise potential. We were keenly aware, however, that Buck or Two and Dollar Tree (U.S.) both lost significant business and have yet to recover after moving away from the $1 price point.” So far, Dollarama experienced a good response as the firm sourced new and better-quality items rather than simply raise prices on existing items. New merchandise that was previously unavailable—particularly in hardware and housewares—would hopefully broaden the appeal of the stores. Neil held up a white porcelain serving dish he called “amazing value for $2.” “If I took you to a boutique kitchenware store you’d be paying $17.99.” By late 2009, analysts estimated that 20% of SKUs were being offered at the new price points, accounting for around 25% of sales. The change increased same store sales growth from the historical average of 3% to over 7% in fiscal 2010. Pleased with these results, Larry noted: “Five and dimes evolved, and this will evolve. Sixteen years of giving tremendous value at $1 was quite an accomplishment. Why not another 16 years at $1 to $2?”
Looking Forward As Larry and Neil Rossy thought about the future, they first and foremost wanted to ensure the continuation of Dollarama’s long-term, steady, risk-averse development model. Their plan was to open at least 30 to 40 new stores per year for the foreseeable future, and they thought Dollarama’s brand recognition and sourcing, merchandising, and operational advantages would sustain the firm’s ability to offer compelling value and consistently available everyday products. The risks were many, however, and included:
Sourcing and merchandise costs The firm was vulnerable to supply disruptions and increases in merchandise costs from higher input prices and/or exchange rate movements. As the utilization of foreign vendors grew, these risks would only increase. The additional price points offered some flexibility, but customers’ appetite for purchasing products priced above $1 had yet to be fully determined. Labor costs These were of immediate concern. Consistent with industry practice, most of Dollarama’s retail workforce compensation was linked to the minimum wage—currently $8.75/hour. The minimum wage changed fairly regularly, and the recent trend of 7% p.a. increases was expected to continue. The firm was continually trying to gain greater efficiencies through improved prediction of labor utilization, but it expected its labor expense to rise in the foreseeable future. Financial leverage A legacy of the 2004 leveraged buyout was that Dollarama still carried significant debt (despite having recently retired $227 million of debt with IPO proceeds). A substantial portion of cash flows from operations were earmarked for the payment of principal and interest, and the firm could easily become financially constrained in the event of a downturn in its business. Larry and Neil knew that the retail business was highly competitive. Dollarama would have to remain on top of its game to repeat its past success.
4 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
Dollarama Inc.
Exhibit 1
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Dollarama Financial Data (For Fiscal Years Ending February 1) 2010:Q3 (11/1/09)
2007
2008
2009
463
521
564
594
Sales
888
972
1,089
889
Cost of Sales1
588
641
717
582
G&A2
156
188
222
195
Number of stores Income Statement Data
Depreciation and Amortization Operating Income (EBIT)
14
18
22
18
129
125
128
93
48
26
66
34
Balance Sheet Data Cash and Cash Equivalents Accounts Receivable Merchandise Inventories
6
3
3
3
166
199
250
256
Accounts Payable
16
22
40
21
Accrued Expenses and Other
36
43
38
52
Property and Equipment (Net)
85
112
130
135
Goodwill and Other Intangible Assets
848
845
843
842
Long-Term Debt (incl current portion)
820
679
822
475
Ownership Structure Post IPO Bain Capital Partners
Shares (millions)
%
42.2
58.0%
Rossy Family
8.4
11.6%
Other Company Insiders
2.3
3.2%
Public
19.7
27.1%
Total
72.7
100.0%
Source: Company records.
1 Includes cost of goods sold, rent, transportation, and certain supply chain costs. 2 Includes store labor and operating expenses not counted in Cost of Sales.
5 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
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Dollarama Inc.
Exhibit 2
Canada’s Largest Operators of Dollar Stores (Most Recently Available Data)
Company
Corporate/Franchise
Dollarama
Corporate
Your Dollar Store With More
# of Stores
Store Size Range
Price Point
594
2,500 - 10,000
$1 - $2
Franchise/Corporate
135
8,000 - 15,000
Up to $2
Great Canadian Dollar Store
Franchise
104
2,000 - 10,000
Up to $15
Buck or Two
Franchise
79
Up to 6,000
$1, $1.50, $2
Everything For A Dollar
Franchise
70
1,600 - 8,000
$1
Dollar Giant
Corporate
65
8,000 - 15,000
$1.25
Dollar Blitz
Franchise
40
NA
$1
The $1 Store Plus & Only Deals
Franchise
20
2,000 - 3,000
$1 - $3
Source: James Durran, “Dollarama Inc.,” National Bank Financial, Equity Research Report, November 18, 2009.
Exhibit 3
Dollarama vs. U.S. Dollar Store Peers (Most Recently Available Data)
Dollarama Total stores
Dollar Tree
99 Cents Only
Family Dollar
Freds
Big Lots
Dollar General
594
3,591
279
6,655
639
1,339
8,362
9,700
10,654
21,125
8,325
18,400
29,789
7,017
$1 - $2
$1 or less
$0.99
$10 or less
Multi
Multi
$10 or less
SKU count
4,400
5,000
NA
NA
12,000
20,000
10,500
Offshore sourcing
52%
43%
NA
46%
NA
27%
50%
Private label
52%
10%
Yes
19%
7%
NA
21%
Consumables mix
37%
49%
56%
64%
47%
30%
69%
Sales/selling sq ft
$251
$158
$273
$153
$184
$160
$180
EBIT margin
Average store size Price point range
11.8%
7.9%
1.8%
6.2%
1.5%
5.5%
5.6%
Inv./gross sq. ft.
$44
Inventory Days
112
$18 93
$25 76
$19 76
$27 101
$19 124
$26 71
Source: James Durran, “Dollarama Inc.,” National Bank Financial, Equity Research Report, November 18, 2009 and Casewriter estimates.
6 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
Dollarama Inc.
Exhibit 4
210-041
Data on Selected Publicly-Traded Retailers (Most recently available information)
5-yr Equity Beta vs. World Equity Mkt Portfolio
Last 12 Months Revenue
Last 12 Months EBITDA
Last 12 Months Gross Margin (%)
34
1,204
158
34%
NA
0.6
128
1,337
91
40%
0.45
2,377
1.0
46
4,630
348
40%
1.11
Dollar General (US$)
7,949
4,138
517
11,127
1,086
30%
NA
Dollar Tree (US$)
4,317
272
342
5,059
619
35%
0.52
Family Dollar Stores (US$)
3,914
250
445
7,401
617
35%
0.34
367
5
39
1,784
65
28%
0.85
Shoppers Drug Mart (C$)
9,648
1,463
59
9,994
1,149
12%
0.42
Canadian Tire (C$)
4,420
1,570
1,067
10,614
893
11%
0.58
Costco (US$)
25,863
2,303
3,727
71,422
2,565
13%
0.78
Target Corp (US$)
35,306
17,556
919
64,736
6,169
29%
1.12
TJX (US$)
15,693
994
1,524
19,727
2,173
25%
0.62
208,226
47,353
6,003
404,543
30,361
25%
0.24
Company
Market Value of Equity (Dec 11, 2009)
Debt
Dollarama
1,675
475
845
Big Lots (US$)
Cash & ST Inv
U.S. Dollar Stores/Discount/Off-Price Retailers 99 Cents Only Stores (US$)
Fred's (US$) General Merchandise Retailers
Wal-Mart (US$)
Source: Standard & Poor’s Capital IQ data, accessed December 7, 2009.
7 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
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Dollarama Inc.
Exhibit 5
Dollarama Price Comparison
Dove Beauty Bar 50W Halogen Axe/Max Body Wash Reading Glasses AAA Batteries Tongue and Groove Pliers Muesli Biodegradable Kitchen Sacs Wine Glass Total
Shoppers Drug Mart and Canadian Tire Price Adjusted to Dollarama’s Size Price Size 2x120g $4.99 $2.08 1 $5.99 $5.99 354ml $7.49 $7.41 1 $14.99 $14.99 4 $7.99 $7.99 6.5” $17.99 $17.99 350g $6.49 $3.71 20 $4.99 $2.50 4 $8.99 $2.25 $64.90
Dollarama
Size 100g 1 350ml 1 4 9.5” 200g 10 1
Price $1.00 $1.00 $1.00 $1.00 $1.00 $2.00 $1.25 $1.00 $1.00 $10.25
Savings
$ $1.07 $4.99 $6.41 $13.99 $6.99 $15.99 $2.46 $1.50 $1.25 $54.65
% 52% 83% 86% 93% 87% 89% 66% 60% 56% 84%
Source: Perry Caicco and Mark Petrie, “Dollarama Inc.,” Institutional Equity Research Initiating Coverage Report, CIBC World Markets Inc., November 18, 2009.
8 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
Dollarama Inc.
Exhibit 6
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Dollarama Store Network as of November, 2009
Source: Company.
Exhibit 7
Comparable Stores Contribution Margin
Comparable Stores Contribution Margin Contribution Margin 30% 20% 10% 0%
1,000
(10%)
2,000
3,000
4,000
FY09 Sales (000’s)
All comparables for full FY09.
Source: Company.
9 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
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Dollarama Inc.
Exhibit 8
Dollarama Logo, Typical Store Front, and Banner on Multiple Price Points
Source: Company.
10 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
Dollarama Inc.
Exhibit 9
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Photographs of Dollarama Products
Source: Company.
11 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
210-041
Dollarama Inc.
Exhibit 10
Macroeconomic Data
CRB Commodities Total Return Index (C$)
Toronto Stock Exchange 300 Total Return Index (C$)
28.44
5.1%
-14.8%
1.16
19.15
-4.4%
12.0%
3.3%
1.27
19.49
6.5%
-1.4%
1.7%
1.2%
1.32
14.19
10.3%
32.5%
6.9%
0.2%
1.5%
1.40
17.77
16.9%
-0.2%
1995
3.6%
1.8%
2.7%
1.36
19.54
6.0%
14.5%
1996
4.5%
2.2%
3.1%
1.37
25.90
12.6%
28.3%
1997
5.0%
0.8%
1.6%
1.43
17.65
8.8%
15.0%
1998
3.4%
1.0%
1.5%
1.53
12.14
-15.0%
-1.6%
1999
9.2%
2.6%
1.8%
1.45
25.76
-3.5%
31.7%
2000
8.7%
3.2%
1.3%
1.50
26.72
18.4%
7.4%
2001
-0.4%
0.7%
1.6%
1.59
19.96
-12.0%
-12.6%
2002
7.8%
3.9%
2.4%
1.57
31.21
17.0%
-12.4%
2003
3.8%
2.0%
2.7%
1.30
32.51
-8.2%
26.7%
2004
7.4%
2.1%
1.7%
1.20
43.36
4.3%
14.5%
2005
7.2%
2.2%
4.1%
1.16
61.06
14.8%
24.1%
2006
3.2%
1.6%
4.6%
1.17
60.85
-2.6%
17.3%
2007
6.9%
2.4%
5.0%
1.00
95.95
4.5%
9.8%
2008
0.7%
1.2%
5.3%
1.22
39.25
-20.7%
-33.0%
2009 (Sep)
-2.9%
1.2%
5.5%
1.06
75.41
4.9%
33.4%
Canadian Real GDP Growth
Canadian Inflation Rate (CPI)
Canadian Minimum Wage Increase
1990
1.8%
5.0%
4.0%
1.16
1991
1.5%
3.8%
7.9%
1992
2.5%
2.1%
1993
4.4%
1994
Source:
C$/US$
Oil Price Per Barrel (WTI, US$)
Thomson ONE Banker; StatisticsCanada, http://srv116.services.gc.ca/dimt-wid/sm-mw/rpt2.aspx?lang=eng&dec=1, accessed December 7, 2009.
12 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
Dollarama Inc.
Exhibit 11
Maturity
3-months 6-months 1 Year 2 Years 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years
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Canadian Treasury Yields as of December 11, 2009
Yield
0.13% 0.25% 0.53% 1.22% 1.68% 2.49% 3.34% 3.84% 4.08% 3.98%
Source: Bloomberg LP, accessed December, 2009.
13 This document is authorized for use only in Finance 1 (RC) by Professor Viceira from August 2011 to February 2012.
