Four reasons why Dollarama is making big bucks

Dollarama, the largest operator of dollar stores in Canada, expects to open its 1,000th store this year, riding on a year of growth and jumps in quarterly profits that are defying the expectations of market watchers.

Retail analyst Doug Stephens says there are several reasons why Dollarama has done so well in recent years, and many of them have to do with seismic changes in Canada’s retail sector.

1. Capitalizing on changing retail landscape

Canadian middle incomes have been stagnating for decades, and after the big recession of 2008-09, shoppers became much more conscious with their dollars, Stephen says. They are less focused on brands and more interested in finding good deals.

"So we have consumers going up market, who are shopping luxury, and we have consumers going down market and they're shopping at places like Dollarama. So they've really capitalized on that growth," he told CTV's Canada AM.

The worst place to be right now, Stephens says, is the middle-of-the-road retail space that department stores dominated for so long. Those are the chains that are struggling the most, as Future Shop and Sears can attest.

Consumers are saying that when they want something special, they'll go to a luxury retailer for a great brand and a great shopping experience. But for just about everything else, they're content to shop at discount stores.

2. Creating a trusted brand

The dollar store is hardly a new retail concept. Decades ago, we called them "five and dimes" and there was always one to be found, no matter how small the town. Even Dollarama itself has been around since 1992.

But a key to Dollarama’s success in recent years is in its creating a consistent brand that shoppers have come to recognize and trust.

"They've done a good job of putting in our heads that Dollarama logo and creating a brand within the dollar store category that gives consumers a sense of trust about going there," says Stephens.

That sense of trust has even encouraged shoppers who never shopped at discount stores to start visiting, and buying an ever-growing list of items.

3. Quietly expanding product lines and prices

While Dollarama once sold only trinkets, they've been expanding into other categories in recent years, offering more toys, party supplies, and dry good food products, says Stephens.

At the same time, they've also been able to quietly moved price points up.

"It's really not a dollar store anymore – about 72 per cent of what they sell is above $1," he notes.

Dollarama is now becoming a bit of a “mini department store,” selling more and more items in the $2 and $3 range, which may be why the average checkout bill for a Dollarama customer rose 5.9 per cent in the first quarter this year compared with last.

4. Growing in big cities

With its expanded product line, Dollarama has been moving closer to directly competing with Walmart and Canadian Tire -- a potentially dangerous rivalry. But Stephens says Dollarama's advantage is that is not based on a big box model, so it can open smaller stores in more areas around town.

"What Dollarama has going for it that other discount retailers like Walmart don't is the growth in Canada is taking place in major metro markets and these stores are small enough that they can get real estate in those markets, whereas a Walmart has trouble fitting itself into that," he said.

Dollarama added 17 stores in the first quarter, bringing its store total to 972 locations. The company expects to open its 1,000th store this fall and plans to hit a maximum of about 1,400 over the next few years.