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Rising demand for bargains from inflation-stricken consumers has been good business for Dollarama.
The Canadian discount giant is expected to open 70 new stores across the country as the public hunts for bargains amid rising prices. The Montreal-based chain announced the expansion last week, building on a strong fourth-quarter report that saw sales increase.
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“This is when stores like Dollarama shine,” said retail analyst and author Bruce Winder. “We saw it in the 2008 recession, when we’re in a period of high interest rates, inflation, with the threat of job losses, people try to stretch their dollar.”
In its outlook for its 2024 fiscal year, the company said it expects to open 60-70 net new stores and increase comparable store sales between five and six percent. The company has already opened 65 new stores in its fiscal 2023, taking its total store count to 1,486 as of January 29.
Experts say Dollarama is leveraging its success and adapting to the changing retail environment. Now, the chain offers a more diverse selection of food at cheaper prices than major grocery stores — enticing for shoppers who saw grocery prices rise 10.6 percent in February compared to the same period last year .
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And the company has studied changing buying habits that are here to stay, said Walid Hejazi, professor or economic analysis and policy at the University of Toronto’s Rotman School of Management.
“Their analysis clearly indicates that they think there is a permanent shift in consumer spending,” he said.
He said that while grocery stores such as Loblaw’s record profits as people continue to struggle to buy food, turning to stores such as Dollarama, where customers feel the chain is not “gouging,” So they become a much more attractive option, he said.
The company has a strong business model that is driving it forward, Hejazi said, as the stores are large, well-stocked, clean and efficiently run.
Retail analyst Lisa Hutchinson said they are cheap to build on for its expansion efforts.
“Discount stores are doing well, and Dollarama is using this (inflationary) time as an opportunity for growth,” she said. “More customers are coming through their stores, so it makes sense to open more.”
The company’s CEO Neil Rossi said in a Q4 earnings call with reporters that the company is interested in malls, strip centers and stand-alone buildings.
Other discount stores are also expanding, such as US-based Dollar Tree and Miniso, a diverse store focused on styles and designs popular with Gen Z, Winder said.
“More companies will jump into this space as it will prove to be very profitable,” he added.
Dollarama also introduced a new $5 price point last year, allowing stores to stock new products and restock other items taken off shelves due to inflation. It has enlarged its shelves with a greater selection of everything from cleaning supplies and kitchen products to personal care items and clothing.
The company’s rapid expansion, however, puts it at greater risk because too many stores can lead to a drop in productivity, Winder warned. He pointed to Starbucks where rapid expansion made labor and costs outweigh the financial benefits.
But company spokeswoman Lyla Radmanovich said the chain’s growth is in line with its previously announced long-term goal of 2,000 stores across Canada by 2031, opening 65 net new stores last year, in line with the number of stores opened in the six prior years.
“So, in fact, the pace of growth has been pretty steady and is being maintained,” Radmanovich said in a written statement.
Winder said another area of concern is a significant increase in inventory that could cut into profit margins and hurt cash flow. Inventories increased to $957.2 million at January 29, 2023, from $590.9 million during the same time last year. The company reports that the increase is mostly due to rebuilding of inventory at pre-pandemic levels which was reduced due to supply chain issues.
But the company is capitalizing, Hejazi said, on a strong value proposition at a time when the cost of living is high — cheap products and good deals.
“They’re successful because they’re disciplined with this business model,” he said. “Dollarama is doing incredibly well and they are adapting to the changing consumer shopping habits.”
With files from the Canadian Press
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Dollarama sales surge drives opening of up to 70 new stores across Canada next year
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