Dollarama Inc. built a cross-Canada empire with a strategy of lean operations and value-for-money retailing. Now with a health pandemic ripping away sales, it’s opening its purse strings at the expense of profit.
Nearly 30 years after CEO Neil Rossy’s father founded Dollarama with one store in Matane, Que., the fourth-generation retailer finds himself in an unfamiliar predicament. For the first time anyone can remember, Dollarama’s traditional corporate instincts have been upended.
“We’re doing everything we can to hurt our sales, to be quite honest,” Mr. Rossy said in an exclusive interview this month at Dollarama’s Montreal headquarters. “It’s a decision that we accepted to take, and have taken to the best of our abilities, because we accepted to be an essential business.”
After an initial sales surge as customers stocked up on goods ahead of social confinement measures, Dollarama’s revenue has declined about 10 per cent over the past five weeks compared with the same period last year, Mr. Rossy said. Stores in malls have been hardest hit, but the company has kept open all outlets that governments haven’t mandated shut. About 96 per cent of its 1,291 locations across Canada remain open.
Inside shops, consumers have stopped buying discretionary goods such as artificial flowers and party supplies. And with shoppers forced into one-way aisles and under pressure to exit as fast as they can to make way for others, they don’t have enough time to discover new merchandise. That has undermined what analysts say has always been one of Dollarama’s strategic advantages: a clever product mix and seasonal displays that generate demand.
In a frank and wide-ranging exchange, the CEO, who’s 50, spoke about the challenges his senior management team has faced during the crisis, such as keeping employees and customers safe while dealing with supply-chain issues. Mr. Rossy admits he’s made some mistakes so far, but he insists the company’s long-term business fundamentals remain intact.
Across Canada, Dollarama’s distinctive green and yellow signs have become familiar fixtures. Spending more on staff and equipment to keep stores open is the right thing to do, Mr. Rossy says – a necessary sacrifice to make sure Canadians have what they need. The company has also kept prices in check, even for items that are most in demand, such as hand sanitizer and wipes.
A core group of 70 employees at Dollarama’s head office, out of a normal total of about 300, are still coming in to work. That includes the boss, who says he’s been working more 10 hours a day for the past 39 days, a “new record, even for me.” At home, the avid gardener (he’s been known to tend to the vegetables at night with a lamp on his head) sleeps in a separate part of the house to protect his wife and four kids. He’s also the family’s designated shopper.
The company’s crisis leadership team consists of seven top executives, but three of them work offsite and online to ensure business continuity if their colleagues become incapacitated. Meetings take place in a second-floor “war room,” with chairs spaced three metres apart.
“The first decision the war room made was that our responsibility, as [a corporation] that the governments deemed an essential business, was that we needed to take care of our employees, we need to take care of our customers,” Mr. Rossy said. That meant creating operational protocols, continuing to sell goods at the same prices and not worrying about the bottom line, he said. Customers have thanked him for it.
Like other retailers, Dollarama has put in place additional cleaning and disinfecting procedures in stores while rolling out physical distancing markers for shoppers and reducing opening hours. It has also increased employee hours per store, added a full-shift health and safety co-ordinator in each location and introduced a 10-per-cent pay hike for all front-line employees until at least July 1.
Contingency plans have been refined for warehouse and distribution operations. Employees now pass through health checkpoints that include temperature monitoring before starting work.
With more than 5,000 products sold in a typical store, Dollarama has marked up the price of just two over the past month, Mr. Rossy said. In both cases, Dollarama’s own costs went up by more than 25 per cent as domestic suppliers charged more, but he declined to name the products.
“Part of our role being an essential business is that we do what we can at this time to be helpful,” Mr. Rossy said. “We’ve been lucky enough to be a well-run profitable business. If a quarter or two or three are not as profitable as the past, or potentially not profitable at all, then it’s a small price to pay in the big picture."
Dollarama has been extremely profitable in recent years as it continues to open stores in Canada. The company tallied net earnings of $564-million on revenue of $3.8-billion for its most recent fiscal year ended February 2, and increased fourth-quarter sales by 6.3 per cent compared with the same period a year earlier.
The COVID-19 crisis has clouded the picture, however, and Dollarama says it will not issue financial guidance to markets for the coming year. In a conference call with analysts earlier this month, Mr. Rossy and finance chief Michael Ross disclosed more detail about the current crisis – confirming that sales momentum carried over into February, surged as people stocked up on supplies, but then started to level off. They said they expect same-store sales for April to decline, but provided no expectations for the full first quarter.
It’s all-new territory for Mr. Rossy, who succeeded his father, Larry, as CEO in 2016, and has largely kept Dollarama growing while many other traditional retailers have been clobbered by online competition. The company is often lauded for its prowess in sourcing, which the CEO does himself with a small team.
But the truth is that Dollarama gets its goods from many of the same suppliers as its rivals. The chain just seems to be able to do more with the things it buys than many competitors – knowing how to pick, shape and display its carefully culled array of items so that they’re appealing to consumers without being perfect.
“Whatever we do, whether it’s a process or a product or whatever, we’re doing it as well as it needs to be done to get the most out of it where we’re all satisfied with it,” Mr. Rossy said. “But to take it that extra 10 or 20 per cent, there’s a huge cost to that. So being able to let go when it’s really at the right point – and not before, otherwise everyone will be disappointed – is an art. And that’s not so easy, that art. And I think we’re always trying to find that sweet spot.”
The company also works hard at keeping out operational fat. It owns its warehouses, for example, and relentlessly pursues cost savings by designing some of its own products.
“We’ve tried to beat that [fat] out of every piece of the business so that we have what we need,” Mr. Rossy said. “Until COVID-19, it was like a train going down the track. And now it’s more challenging because there is constant iterating. So it’s been fascinating, exhausting and very challenging. This is the first really big change for the world [in a long time] I’m sure, but for us too.”
Dollarama has come under criticism from some employees who’ve told reporters the company took too long to introduce safety measures. There were reports of Dollarama staff creating checkout barriers out of cellophane wrap as they waited for the company to send plexiglass shields.
Mr. Rossy said the company acted promptly to prepare protective equipment and put in place new processes, but admits it fell short in one key area: It used its own truck distribution system to get 6,000 specially designed plexiglass shields for its checkout counters to stores, which takes anywhere from one hour to more than two weeks to reach various destinations from Montreal.
“The evolution of the sensitivity [toward what was then an emerging pandemic] in Canada went crazy within several days, and that time frame from leaving here with the perfect product that we put a lot of time and effort into was too long,” he said. “My bad.”
Employees who don’t feel safe aren’t required to come to work and will still have jobs when they feel ready, Mr. Rossy insists. In the meantime, the company is hiring to plug its staffing holes, adding about 2,200 workers over the past two months. Fewer than 10 employees have fallen ill with the coronavirus, a number the CEO attributes both to luck and the company’s actions.
The supply chain is another area of focus. Dollarama didn’t cancel its orders for Halloween and Christmas merchandise (it typically places such orders four to six months out), even though it knows those celebrations won’t be the same this year. “The goods won’t go bad, they’ll be fine. But there will be inefficiencies that come from this," Mr. Rossy said.
More immediately, the company is seeing shifts in its North American supply chain. Some U.S. vendors are redirecting their stocks to U.S.-based buyers, Mr. Rossy said. He gave the example of one unnamed food vendor that told him it is getting a higher price by selling in-country.
“I don’t fault anybody for making the decisions they’re making right now. It’s really complex what’s happening out there,” Mr. Rossy said. “It bothers me if it’s being made for financial gain. But if it’s being made because Americans want to support Americans first, I respect that.”
Dollarama has been able to source from different vendors to replace those it has lost, the CEO added. But it has had to accept new product formats and packaging.
“Where I was buying a gallon of 70 per cent alcohol for $9.60 for sanitization purposes, a week and a half later the going rate was $65 for the same thing. And so it’s not simple to rectify that problem,” Mr. Rossy said. “All those things that are happening by the hour are part of why we’ve made all the decisions that we’ve made to date.”
As shoppers queue up in widely spaced lines to enter stores across Canada, it’s hard to imagine a return to normal.
Dollar stores showed resiliency during the previous financial crisis in 2008, and they’re poised to do so again, Veritas Investment Research analyst Kathleen Wong said in a recent note. Dollarama, in particular, has a strong balance sheet, she said. With about $490-million cash on hand and $135-million in available credit, Ms. Wong estimated the company’s debt to be about 3.3 times its operating earnings (EBITDA), a ratio well within the range of an investment-grade credit rating.
Mr. Rossy expresses confidence that customers will keep coming as circumstances evolve.
“There will be a lot of people who will suffer financially during this crisis and that’s not to be taken lightly as a society,” he said. “Our role has always been to serve those who are on a budget or want a great value from zero to $4. And I think, more than ever, that will be important."
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