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Dollarama turns up heat on Wal-Mart Add to ...

Dollarama Inc . will soon start selling gift cards, an unlikely offering from a lowly dollar store but also a sign of an emerging mainstream retail player stepping up the pressure on rivals.

The chain, which has consistently beat analysts’ profit targets since it went public two years ago, again outpaced a wide array of other retailers in its second quarter with a 4.7-per-cent spurt in same-store sales (which are an important measure of a retailer’s health.)

Same-store sales at discount giant Wal-Mart Canada Corp. – a much more established chain operating in almost every retail category, including some that are slumping – picked up 1.2 per cent in the same period.

In a widening retail divide, where purveyors of either low-end or high-end products are gaining traction, the dollar store is becoming a serious contender. In the U.S., dollar stores are major players, carrying a wide array of food and household products that draw shoppers more frequently – and, according to recent surveys, are viewed by many consumers as a low-price leader.

“In more difficult economic times, consumers are going to turn to more cost-effective channels – and the dollar store definitely provides them with that,” said Marion Chan, principal at TrendSpotter Consulting in Toronto.

Dollar stores offer aisles of common consumer goods, such as packaged candies and snacks, often cheaper than at rival stores, she said. “These are the kinds of things that will slowly start to eat away at Wal-Mart’s business.”

The rapidly growing Canadian dollar-store industry – estimated at roughly $35-billion in 2009 – will expand by more than 60 per cent over the next decade and double in size by 2025, Perry Caicco, retail analyst at CIBC World Markets, recently predicted.

The segment is consolidating, with U.S. dollar store chains looking to snap up domestic players. Last year, Dollar Tree Inc. of Chesapeake, Va. acquired Dollar Giant, which has about 90 stores in Canada today and envisions as many as 1,000 here eventually. At least one other U.S. dollar store chain will likely purchase a Canadian rival, Mr. Caicco projected. Even so, in the next five to six years, nothing in these scenarios “would impair the growth or depress the profitability of Dollarama,” the largest domestic chain, he forecast.

Wal-Mart Canada, for its part, has an estimated $20-billion of annual sales (compared with about $1.2-billion at Dollarama) and operates in categories such as consumer electronics, which as an industry is in a double-digit decline and, along with other segments, drags down the discount titan’s overall same-store sales.

And while Dollarama has set up shop close to Wal-Mart, the latter has responded by stocking some $1 items, such as gift cards. Wal-Mart executives say the moves have helped the retailer continue to make market-share gains, even with same-store sales have been relatively flat since the recession.

In a fragile economy, the battle among discounters will heat up as consumers become more focused on chasing bargains, Ms. Chan said. While shoppers are attracted to the low-cost “treasure hunt” experience at dollar stores, they are drawn to the sheer convenience of Wal-Mart, where they can find everything under one roof, she said. And Wal-Mart has the financial heft to fight off rivals by lowering prices.

Nevertheless, Dollarama is making gains from customers who are using their debit cards – a convenience introduced a few years ago by the formerly cash-only chain – to pay for larger quantities of goods priced at more than $1. In the second quarter, products that sold for more than $1 made up 48 per cent of the retailer’s sales, up from 39 per cent a year earlier, company officials said. And customers who pay with debit cards spend 2.5 times more than those who pay with cash.

Follow on Twitter: @MarinaStrauss

 
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