Million-dollar question: Are $5 stores up next?

Thursday, September 18, 2008

Special to The Globe and Mail

MONTREAL -- First, five-and-dimes gave way to dollar stores. Now, inflation pressures are threatening to make the dollar store a thing of the past, too.

Dollarama Group LP, Canada's largest dollar store operator, is set to abandon its "all at $1" pricing strategy at its 536 stores in the new year, the company said yesterday.

After Feb. 1, Dollarama will introduce three new price levels - $1.25, $1.50 and $2 - though it says the majority of items will still sell for $1.

"After 16 years at a dollar, we've found in the last few years sourcing dollar products has become a little more difficult," Dollarama chief executive officer Larry Rossy said in a rare interview. "Meanwhile, during our recent buying trips [to Asia] we were consistently offered 'wow' items at the $1.50 to $2 price point."

Dollarama follows U.S. operator 99 Cents Only Stores, which said this month it would raise its highest price to 99.99 cents (U.S.), and other "extreme value" retailers in North America that already charge up to $10 for items.

Meanwhile, some operators of pure dollar stores acknowledge that rising costs have hurt the bottom line.

That includes Vancouver-based Dollar Giant Store B.C. Ltd., which operates 67 dollar-only stores primarily in Western Canada. It opened its first FiveBucks store in Abbotsford, B.C., in July, with two more planned for 2009. Close to 40 per cent of the 16,000 items for sale there cost more than $1 (Canadian).

"There's a very good possibility true dollar stores might end up not existing in the same format as today," said Joseph Calvano, CEO of Dollar Giant.

At Dollarama's Montreal head office this week, Mr. Rossy, 66, the third generation of his family to operate "value retail" stores since his grandfather immigrated to Canada from Lebanon a century ago, focused on the positive aspects of the changes.

For example, the company can now source merchandise from manufacturers' closeout sales that it couldn't afford in the past, such as the 40,000 boxes of heavy-duty aluminum foil it recently bought.

The foil usually retails for up to $7.99; Dollarama will charge $2.

Chief merchandising officer Neil Rossy, the CEO's son, produced a white porcelain serving dish he called "amazing value for $2."

"If I took you to a boutique kitchenware store you'd be paying $17.99 - and it would also say 'Made in China' on the bottom," he said.

Ken Wong, a professor of marketing and strategy at Queen's University in Kingston, Ont., said Dollarama "is absolutely right moving up to $2."

But it shouldn't stop there, he added.

"Once they move away from $1 pricing, a lot will change in their operations. You might want to even open up the possibility of $3, if that opens up a range of merchandise. You may be seeing the genesis of a new type of Dollarama, and maybe calling it 'Dollarama is not the way to go,' " he said.

The key will be to continue selling items that rank as "the cheapest one I'll find" in their category, he said.

Adding price points will indeed require changes to the business. For example, Dollarama will use price stickers for the first time. Some will have to be applied at the store level, so it must buy hundreds of pricing guns and install buttons on cash registers. The company will introduce signage and new banners that feature its yellow-on-green loonie logo - and now read "$1-plus." Labour costs will also rise slightly, chief operating officer Stéphane Gonthier said.

But are customers willing to pay more than $1 for items?

"That's the million-dollar question," said Jack Klaiman, president of Oberfeld Snowcap, Dollarama's retail real estate consultant. "If you ask the people at Dollarama, including Larry, they're nervous. I think it will turn out great but, no question, it's not a slam dunk."

Mr. Rossy acknowledged some trepidation but said surveys found the company's customers are willing to pay more, "as long as the value was as good as at a dollar. ... Five and dimes evolved, and this will evolve. Sixteen years of giving tremendous value at $1 ... was quite an accomplishment. Why not another 16 years at between $1 and $2?"

Privately owned Dollarama - Mr. Rossy sold 80 per cent to U.S. private equity firm Bain Capital Partners in 2004 for $1-billion - also reported yesterday that second-quarter profit increased 16.8 per cent year over year to $26-million as sales rose 13.3 per cent to $264.3-million. Sales at stores open at least one year rose 3.7 per cent.

Dollarama reports in the United States as it issued public debt there following its leveraged buyout.