How Dollarama turns pocket change into billions
"Do you want a tour of my playpen?" asks the bespectacled gent in the grey corduroy blazer. "Come on, follow me." We're wandering down the aisles of what looks like a small discount store, and 69-year-old Larry Rossy has a deadpan delivery that would make him a great character in a Woody Allen movie. He waves his arm at a wall with wrapping paper, shiny bags and gift tags hanging on hooks: "I'm the seasonal buyer," he says. "I buy the stuff for Christmas, Halloween, Easter." Today happens to be February 14, and Rossy stops in front of a selection of artificial flowers. "I won't present you with a bouquet, even though it's Valentine's Day."
We are in a shop, but only in a sense: We're in the basement laboratory of Dollarama Inc., Canada's largest dollar store chain, with close to 700 outlets. And Rossy, holding forth in his avuncular way at the company's Montreal headquarters, is not only the gift-wrap specialist but also the CEO.
In many cities, Dollarama's glaring bright green and yellow signs are as ubiquitous as Tim Hortons, and new outlets are sprouting at the rate of one a week. Annual sales have surged by more than half over the past five years to $1.5 billion, and Dollarama's share price has more than doubled to $44 since the company went public in October, 2009. It's a standout performance in a Canadian retail sector that has been decimated in the big-box era.
Yet part of the chain's unerring formula for growth is that it allows Rossy to act like a single-store proprietor, the guy who's happiest puttering in the basement. This is quirky, to say the least: As businesses expand, they get more complex and outgrow their founder's vision. This typically leads to one outcome: Exit the founder. Not here.
Still, challenges in the marketplace are looming larger for this singular company. Some analysts say that Dollarama is getting close to saturating the market. And there's a new U.S. competitor in town-Dollar Tree , a much larger company that in 2010 established a beachhead by buying 86 Dollar Giant stores in Ontario and the three westernmost provinces.
Dollarama, meanwhile, is a place that still counts inventory by hand.
Dollarama's official company history boasts of three generations and 100 years of family retail experience. Rossy's 42-year-old son Neil, who is chief merchandising officer, makes it four.
Larry's grandfather, Salim Rossy, fled Turkish occupation in Lebanon in the early 1900s and started over in Montreal as a peddler. "He'd go out in the country and peddle whatever he could peddle," says Larry, including brooms, dishcloths and other everyday items. In 1910, Salim opened the first of several S. Rossy Inc. general stores on Craig Street (Rue Saint-Antoine), near Montreal's waterfront.
Salim's son George succeeded him as president in 1937, and concentrated on the five-and-dime model-literally; those were the only two price points in the store. "We were a mini-Woolworth's," says Larry. The chain grew to 20 stores. When George died at 55 in 1973, Larry took the helm. By the late 1980s, he had grown the chain to 44 outlets, which had broadened into general variety stores with a range of low-priced merchandise.
But Rossy saw big trouble on the horizon. In the first half of the 20th century, F.W. Woolworth Co. and S.S. Kresge Co. had maximized the five-and-dime concept to build themselves into two of the biggest retailers in the world. During the inflationary 1960s and 1970s, however, the chains bulked up and rebranded themselves as Woolco and Kmart discount department stores. The shift up-market was a disaster-it put them up against Sears and other long-established U.S. and Canadian department stores, not to mention the new big kahuna of discount, Walmart, which swooped into Canada in 1994 by buying the 122-store Woolco Canada chain.
Rossy's response to the crunch in discount was deft and counterintuitive: Get out of the way, by focusing on one low price point-$1. The decision was based in part on seeing how well small Quebec dollar-store chains had weathered the retail storms. "We started slowly in our Rossy stores-we had dollar sections," he says. Then, in 1992, a friend suggested he open an all-dollar store in Matane, a fishing village in the Gaspé. "He said, 'Look, no one will know about it if you go up there and it doesn't work,'" says Rossy.
The first Dollarama was just 2,000 square feet, and it was an immediate hit. Rossy soon added another store in nearby Mont-Joli, and then dozens more. "We went one store at a time," says Rossy. By 2001, there were more than 200 outlets, about three-quarters of them in Quebec.
Another key early decision was to source merchandise directly, rather than through wholesalers or other middlemen. That helped Dollarama keep costs low enough to earn a profit at the $1 price, and to maintain a diverse and consistent selection of merchandise. By contrast, competing dollar stores and discount retailers tended to stock whatever they could get cheaply at any given time from middlemen. "We thought their stores were junky, and they were buying poor products," says Rossy.
Rossy was also ahead of the globalization curve, travelling to China and other low-cost Asian countries in search of stock. "We started to import from China in 1992," says Rossy. He still travels to Asia two or three times a year, dealing with many of the suppliers he met on his first trip. Just over half of Dollarama's items come from outside North America, and most of those are from China.
Ever since that first store was opened in Matane, the goal has been to keep the focus as narrow as possible-operate clean, well-lit stores with a consistent inventory, hold prices at rock bottom and keep the family in charge. "We focus on the concept, making sure we maintain the simplicity of the business model," says Dollarama chief operating officer Stéphane Gonthier.
Looking back, that formula has produced astonishingly consistent growth over two decades in which just about every major Canadian retailer has been felled by the invasion of Walmart and other foreign-owned Goliaths, from the battered old Eaton's and Woodward's department-store chains down to such discounters as Bargain Harold's.
Why has Dollarama been the exception? "It's a rare combination of a lot of elements," says André Perold, a retired Harvard Business School professor who published a case study on Dollarama.
One of the elements is the company's relationship with Boston-based private equity behemoth Bain Capital LLC. By 2004, Dollarama had grown into a chain of 335 stores. The family retail saga might have ended that year, when Rossy sold an 80% stake in the chain to a group of funds controlled by Bain for a reported $1 billion.
In no small part because of former Bain principal Mitt Romney's run for the Republican presidential nomination, the firm has lately been synonymous with take-no-prisoners capitalism. But the five years of the Bain-Dollarama relationship are a textbook case of how a private equity takeover can strengthen a company.
Rather than easing out or firing existing management, Bain kept Rossy on as CEO. His son Neil remained chief merchandising officer.
It's true, as is often the case with leveraged buyouts by big PE firms, that Bain loaded up the acquired company with debt, bringing Dollarama's total to more than $800 million by early 2009. But that borrowing did what it was supposed to do: It fuelled the company's expansion, rather than crushing it with an unbearable burden and forcing it to sell assets and fire employees, as Bain notoriously did with several U.S. companies in the 1980s and '90s.
Bain also brought in new specialized and experienced managers at many levels-the people Rossy now fondly calls his "scientists." The most prominent is Gonthier, a former executive vice-president with the Montreal-based convenience store giant Alimentation Couche-Tard, who joined Dollarama in September, 2007. Among other things, Rossy and his executives say that reporting to Bain and to buyers of bonds that Dollarama issued in 2005 and 2006 got them used to the kind of detailed scrutiny they would receive from investors and analysts if and when they went public. "You have to show more information," says Gonthier.
The new brain trust decided to cross a threshold in 2009. Rising costs of merchandise forced Dollarama to introduce three new price points-$1.25, $1.50 and $2. Stores are now accepting debit cards, and the chain is replacing its thorough but cumbersome manual inventory system with an electronic one.
Bain's exit from Dollarama was smooth and measured. Rather than dump its shares at the first opportune moment in the stock market, it sold out in stages. The process began in October, 2009, when Dollarama went public by selling a 20% stake for $17.50 a share. Three more share offerings followed in 2010, at successively higher prices. Last June, Bain completed the process by selling its remaining 12% stake to an unnamed bank for $32.50 a share. Debt is now down to a very manageable $259 million.
So how is it that Rossy is still in charge, although he, his family and management now own just 7% of Dollarama's public share float? The short answer is that it appears that none of the shareholders wants it any other way. To Perold of Harvard and other analysts, Dollarama is an inspiring example of the kind of family control that works. "They sold their stake, yet they stayed and they still work their asses off," says Perold. "The fact is that they could be fired at any time. They're still there because they're the best people for the job."
And Mr. Hands-On, Larry Rossy, is happiest puttering around in the basement. The purpose of the ersatz store, he explains, is "archival." Here, he unpacks plastic boxes with samples that he and other buyers have purchased on trips to Asia. Most of the 4,000-odd items that a typical Dollarama stocks are on the shelves here too. When Rossy decides to add something, he also has to drop something. "We try to change 25% of the selection every year," he says.
Rossy takes the same personal approach out in real Dollarama stores. He has the final say on the location of each new outlet, and "I'd say I design-with the help of staff-99% of our sites. Where to put the counters, the cash registers, et cetera," he says.
So for the moment at least, the Rossys seem to have struck a rare balance between the camaraderie often found in family-owned companies, and the systems and discipline found in successful large corporations. "There's some science today and there's some intuition. It's a combination of both," says Rossy.
The science is apparent when you walk into just about any Dollarama. Seasonal merchandise is always to the right of the entrance-wrapping supplies, cards, toys, disposable plates and glasses, and so on. They are the kind of items that many other retailers try to shoehorn in as an afterthought. At Dollarama, keeping up with the seasons and the celebrations that go with them is a big priority-at one downtown Toronto store on Feb. 15, the last of the items festooned with red and white hearts were being replaced with fuzzy pastel Easter bunnies and the like.
On the far left wall are spatulas, spoons and other kitchen utensils. In the middle aisles in front of the cash registers are chocolate bars, pop and other snacks that tend to be impulse buys-but could also be impulse thefts if stocked elsewhere in the store. Further back are larger everyday items that customers know are there and will seek out-toilet paper and paper towels, canned and packaged food, plastic containers, and small tools and hardware.
Most stores are about 10,000 square feet, with annual sales of about $2.3 million. Dollarama has more than 14,000 employees, usually 20 per store, about a third of them part-time. The Dollarama formula relies on paying as little as possible on this front too. Almost all jobs pay the provincial minimum wage-about $8.75. Given its chosen labour niche, this year the company feels compelled to introduce biometric scanners made by Massachusetts-based Kronos Inc. to monitor employee attendance. Unlike a punch clock, these devices can't be gamed by sympathetic colleagues.
On the other hand, Dollarama offers the certainty and satisfaction of working for a company that's efficient and on a roll. Tony Campea oversees more than 200 stores as regional manager for Southern Ontario. Before joining Dollarama in 2001, he spent 16 years with the struggling BiWay chain. On a recent tour of several Toronto-area Dollaramas, he reminisced with managers and staff who'd worked for other ill-fated chains like Woolco and Zellers. "Staple items were always out of stock," Campea recalled. Dollarama's walls and shelves are always full. "If you're not full, you're going to lose business," he said.
As with overall strategy, the chain's site selection is a blend of method and intuition. It's Rossy's other personal passion besides sourcing merchandise. The key thing is to find sites that have plenty of consumer traffic passing by. Any store might like that, but to Dollarama, a store that doesn't advertise, it's critical.
"I've tried to use the science that exists today," says Rossy, especially as it relates to a location's customer catchment area. But out on the streets, it's often a matter of instinct and seizing opportunities. In downtown Toronto, for example, Dollarama will soon open an outlet on King Street West, amid glitzy new nightclubs, restaurants and condos. And yet there is already a Dollarama just two blocks away, and it's not a welfare crowd lining up at the cash-the manager says many of the trendy restaurants buy their wineglasses there. Both stores are in basements-cheaper than a ground-level location.
When it comes to the suburbs and smaller towns, Dollarama likes malls and power centres. It especially likes to be near Walmart and other discount retailers, because it doesn't see them as competition-consumers will shop at the bigger discounter and then come to Dollarama for lower-priced items. Indeed, in an earnings conference call with investment analysts last December, Rossy said he was looking forward to Target's arrival in Canada. "I think they're going to bring traffic," he said. "I don't think that organization is interested in competing with Dollarama. In fact, they're a notch higher, it's been said, than Walmart."
All of this isn't to say that Rossy and other Dollarama executives have never had doubts. Any change is risky. One of the most difficult decisions so far was adding the new prices up to $2. The $1 price point was a marketing totem, after all, not something to mess with lightly-and the shift also moved Dollarama closer to competing directly with Walmart, Canadian Tire, Shoppers Drug Mart and other big mainstream retailers. And the company took an efficiency hit: It's more difficult to label items and enter them at the cash register if you have more than one price.
But it was just getting too hard for Rossy and other buyers to hit the sweet spot: items that could be sourced at around 28 cents, and thus sold profitably for $1. There were also limits to how much more the chain could resort to sizing tricks-like offering nine erasers instead of 12 for $1, or further reducing the sizes of items like Pine-Sol below those sold in other stores (see chart, above). "You know, we're there negotiating not for Christian Dior type of stuff," Rossy says. "We're fighting for 30-cent items and 28-cent items. And now we can go to 40 cents," he says.
The higher sourcing ceiling has allowed the company to upgrade some products and introduce new ones, such as Fisher-Price toys, baby slippers and an expanded selection of pet supplies.
So far, the higher prices appear to be a success on the bottom line, too. For the third quarter of Dollarama's 2012 fiscal year, ended last Oct. 30, sales climbed by 12.5% to just over $400 million. Gonthier says this was fuelled largely by higher average sales per store, and bigger average purchases by each customer-both numbers rose by about 5%. And customers haven't suffered sticker shock. Roughly half of revenue now comes from merchandise priced above $1.
Another epochal transition is under way-the shift to electronic inventory control from a manual system. Dollarama introduced electronic scanners at its checkouts in 2010, and says that it will rely primarily on scan data for replenishing stock by this summer. But as things stand, shelf-stockers count 10 to 15 different items per day manually, and put the total for each on a card. They count another group the next day. It takes 27 days for each outlet-and the chain as a whole-to cycle through the 4,000-odd items in the store. The company has a very good idea of how many units of each item it sells over that period, but little detail about when.
Electronic checkout also paved the way for the introduction of debit cards last year. But credit cards won't follow, at least for the moment. The company experimented with accepting them in 60 outlets two years ago, but there was insufficient customer demand for an option that would affect a penny-watching vendor's margins.
Investors seem not to be that worried about Dollarama's idiosyncratic methods; the rapid appreciation of its share price made sure of that. Of 12 Bay Street analysts who track Dollarama, seven rate it a buy, four a hold and just one a sell. The lone bear is Kathleen Wong of Veritas Investment Research, whose target price is $35 a share. "I've been wrong about the stock so far," she concedes.
Nevertheless, Wong believes two threats loom over Dollarama. One is that it appears to be "approaching the point of saturation" in Canada. Customer traffic declined by 0.1% in the third quarter of fiscal 2012, the fourth straight quarterly decrease. She also says the proportion of merchandise sold above $1 appears stalled at 49%, meaning that average sales per customer may have peaked, too.
Gonthier shrugs off concerns about saturation. Different numbers tell you different things, he says. In Quebec, there are 229 Dollarama outlets, roughly one for every 35,000 people. Apply that ratio to Canada as a whole, he argues, and there would be 950 outlets rather than less than 700. "And we're still opening stores in Quebec."
Wong's other dark cloud is competition, and in particular the advent of Dollar Tree Canada, which has ambitions of opening 1,000 stores. The two chains will be competing for spaces of roughly 10,000 square feet, and the overall retail real estate market is tight, with a 1% vacancy rate. There's also, of course, the battle for customers. Dollar Tree is transforming the Dollar Giant outlets it bought last year into stores that, at first glance, look very much like Dollaramas-right down to the bright green colour scheme. But Dollar Tree's maximum price is just $1.25, a reflection of the buying power of a U.S. parent that has four times the revenue of Dollarama.
Gonthier points out that there are big differences between the two chains' product mix. Almost half of the items in a typical Dollar Tree store are consumables. Much of that is food and drinks, including perishable items such as milk and ice cream. In contrast, only about a third of Dollarama's product line is consumables, none of it perishable. Gonthier says there are no plans to go there-doing so, after all, would mean going head-to-head with Walmart and the supermarket chains.
Dollar Tree's product mix and $1.25 maximum also mean it targets a less moneyed demographic than Dollarama. While many stateside Dollar Tree outlets are festooned with signs proclaiming that they accept food stamps, Dollarama's customers appear to be more diverse-basically, just about anyone, it seems, in search of a bargain.
In a random walk down the lunchtime checkout line at a downtown Toronto outlet recently, I met Bob Richards, a 56-year-old phone technician who stops in at least twice a month to buy cleaning supplies and other household items; Kate MacDougall, a 42-year-old marketing consultant, buying toys and flip-flops for a family trip to Costa Rica; 21-year-old Jesse Williams, who works at a nearby clothing store and who buys a Coke and two bags of chips every lunch hour; and Naz Rahbar, a 28-year-old student teacher, who was buying materials for an art-class project.
Gonthier and Rossy say that they really don't worry all that much about the chain's size or the competition. They figure that if Dollarama sticks to its simple formula and focuses relentlessly on execution, it will keep thriving. "To me, there's no right size, there's no big enough," says Rossy. "If the opportunity is there, we'll take advantage. And if the opportunities close down, we'll contract. I don't want to be driven just by size. It's not my bag."
And with that, he heads back down to the basement.