Another dollar store competitive threat

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Dollar General and Family Dollar aren’t the only discount retailers Walmart has to worry about. North of the border the Dollarama chain is growing nearly as fast.

Strong sales and surging profits at the 721-unit Dollarama chain in Canada are reminiscent of trends in the U.S. market where Dollar General and Family Dollar are expanding rapidly and gaining share in food and consumable categories. Dollarama said its first quarter same-store sales increased by a weather aided 8.1% and total first quarter sales increase 14.9% to $398 million for the period ended April 29. Earnings per share increased 40% to 56 cents from 40 cents. The gross margin rate increased to 36.3% of sales from 35.7% and expenses declined to 18.5% of sales compared with 19.7%.

“We are very pleased with our first quarter financial and operating results,” said Larry Rossy, Dollarama’s chairman and CEO. “Our business momentum remains strong as sales, operating margins and earnings continued to improve as our customers continue to appreciate our great merchandise value and conveniently located stores.”

As is the case with Dollarama’s U.S. counterparts, its store base is growing at a rapid pace. The company ended the first quarter with 721 stores, compared with the 667 units in operation at the end of the first quarter the prior year. An increase of only 54 stores, 17 of which opened during the first quarter, might not seem that substantial, especially when compared to the roughly 600 units Dollar General is adding this year. However, Canada’s population is roughly one tenth that of the U.S. so on a relative basis the pace of expansion is comparable to that of Dollar General and greater than Family Dollar.

And like Dollar General and Family Dollar, Dollarama is seeing its sales growth come from a combination of increased customer traffic and average transaction size. The 8.1% first quarter increase consisted of a 3.5% increase in average transaction size combined with a 4.5% increase in the number of transactions, according to the company.

The gains are also the result of a strategy introduced in 2009 to add price points above the one dollar level. As a result, 51% of the company’s first quarter sales were items that cost more than a dollar compared with 44% the prior year. The company plans to take its multi-price point strategy to a new level in August of this year when it begins the gradual introduction of non-grocery items at the $2.50 and $3.00 price points. The company current offering of seasonal and general merchandise goods are priced at 69 cents, $1, $1.25, $1.50 and $2. The majority of merchandise offered by the company will continue to be priced at less than $1 according to the company.

“Customers have responded very well to our multi-price point strategy and additional price points provide us with an opportunity to strengthen our value proposition,” said Rossy. “By selectively introducing items at $2.50 and $3 starting in August 2012, we will be able to enhance our customers' shopping experience while staying true to our dollar store concept and our commitment to offering compelling value.”