Even the lowly dollar store feels the pressures of inflation.
Dollarama Inc. will be forced to consider raising the prices of its most expensive items to $3 from the current $2 if it's further pinched by rising costs in China, where the dollar store chain purchases most of its products.
The increase would come more than two years after Montreal-based Dollarama increased its maximum price to $2 from $1, a move that has helped improve its results.
"We'd like to stay at $2 as long as we can, as long as inflation is in control," Larry Rossy, chief executive officer of Dollarama, said Thursday after the retailer reported a better-than-expected first-quarter profit and unveiled its first quarterly dividend. "When we feel that we're a little squeezed, we'll, I guess, consider it ... We will of course expose ourselves - again with respect to the amount of inflation happening in China - to products over the $2 price point."
Inflation is forcing a wide range of retailers, from grocers to fashion specialists, to start moving up their prices to cover rising costs of Chinese-made goods. But Dollarama risks losing its bargain-hungry customers to Wal-Mart Canada Corp. if its prices start to get too close to those of the discount titan, whose prices generally are slightly higher.
By 2013, Dollarama will face even more pressure to differentiate itself with lower prices when yet another savvy discount giant - U.S.-based Target Corp. - opens its first stores here.
For now, Dollarama is benefiting from its higher pricing. In the first quarter, it helped its same-store sales - a key retail measure - rise 3.4 per cent even though the number of customers dropped. A 6.3 per cent rise in the value of purchases offset a 2.8 per cent decline in the number of purchases, as some shoppers stayed away because of unseasonably cool and rainy weather, the company said.
At the same time, to keep its own costs in check, Dollarama depends on simplified logistics and keeping its pricing as uncomplicated as possible. Introducing higher prices requires it to add new price tags on products, new signs and to make adjustments to its automated inventory tracking systems. It also raises new challenges for Dollarama's buying team, which is just getting used to juggling prices of up to $2.
"At this point in their evolution, a move to $3 strikes me as premature and an unnecessary risk," said Kenric Tyghe, retail analyst at Raymond James. "I don't think there's an urgency to get at that price point. It's too much complexity for their operation."
In any case, Dollarama's decision to raise prices would largely depend on how fast its expenses pick up in China, Mr. Rossy said. Some product categories have seen higher cost increases than others, he said. His suppliers in China are trying to offset the inflation pain by moving to more automation, he said.
"They're well aware that they're making it tough on the world to fully absorb their inflation and their new cost-of-living increases," said Mr. Rossy, who travels overseas for product purchasing trips.
"They're automating as fast as they can in many, many areas. But they're stuck with commodity price increases that are out of their control and they're doing what they can to control it."
But Mr. Rossy said he'd avoid moving up to prices that overlapped with those of Wal-Mart unless forced to by inflation in China.
"The speed of inflation in China will of course affect Wal-Mart, like everyone else," he added. "Whatever was at $3 or $4 or $5 at Wal-Mart will increase in price. Do I want to get into the $10 category? No. Then you're becoming, really, in their face. Even at $5 you're becoming in their face. But $5 today is not $5 in five years."
Despite the pressures, Mr. Rossy said he savours new competition from Target because it attracts shoppers who may also head to a nearby Dollarama. Target is buying up to 220 Zellers stores and converting them to its own banner. Already, the first 105 Zellers stores that Target has picked are close to a Dollarama, he said. "I'd like every Zellers that we're next to to become a Target."