Bain and Dollarama

Introduction

1. Dollarama, established in 1992, is a chain of ‘company owned and company operated’ fixed price point value retail stores. It carries wide variety of products, all sold for a standard price point of 1 dollar, at conveniently located stores. Over the years the chain has rapidly expanded - from 44 in 1992 to 349 in 2004. The rapid expansion strategy has led to brand recognition. Widespread network of stores and direct procurement from overseas suppliers has helped Dollarama establish itself as the market leader in the segment. The successful growth of business is reflected in the financial statements. The main competitors of Dollarama are ‘A buck or Two’, ‘Dollar Store with More’, ‘Great Canadian Dollar Store’, ‘Dollar Giant’ and ‘Everything for a Dollar’. Bain, a leading consulting strategy firm with expertise in operations is considering the viability of investing in Dollarama, through leverage buy out, to support expansion. The succeeding paragraphs assess the suitability of Dollarama for investment.

Analysis

2. Business Environment. Value retail stores have a distinct segment in any economy. Canada is no different. The environment of Canadian business strongly supports Dollarama’s business model (Appendix 1). Over 60% of the population is middle class or below (2004). This group forms the customer base of Dollarama. Canadian economy has been steadily growing (2004), which has supported Dollarama’s growth as customer continue to seek maximum value for their money. The ongoing changes in the social structure would not align with Dollarama’s strategy of selling non-branded $1 products. Dollarama would need to include branded products in the portfolio even if that would require increasing the price point. The technological factors would help Dollarama in optimizing supply chains, and improving operations and inventory management. This would create value for customers. Dollarama excises considerable power over its suppliers as well as customers (Appendix 2). The key stakeholders, apart from the customers and suppliers, are the competitors. Dollarama is the market leader in this category. Though there is competition in the business, it neither is concentrated geographically nor has substantially different product category to pose any serious threat to Dollarama. The direct-from-manufacturers procurement chains give Dollarama an edge over its competitors. Further, the high barriers to entry make Dollarama an attractive business for investment. Generally, value retail stores experience increased sales during economic slowdown. In Canada, however, the customers are price conscious and even during economic booms, look for value for money. This makes Dollarama the preferred destination for its customers in all economic scenarios.

3. Capabilities and Limitations. Dollarama’s strengths lie in its widespread network of stores (which makes it a recognizable brand), niche image, efficient procurement chains, and a business model that supports economies of scale (Appendix 3). It has experienced management, which knows the business well. However, the range of products it carries is restricted because of the business’s pricing model. Policies, such as, cash only or one price point, severely restrict the options. There is an opportunity to substantially increase revenues by increasing product range (beyond $1) and by accepting other modes of payment. Any changes in such policies, however, may impact its brand image. Another limitation is absence of products that generate repeat customers, viz., grocery. The business is heavily dependent of rate of foreign exchange. As the profit margins are thin, minor unfavorable changes in rate of exchange will impact profit margins.

4. Analysis of Competitors. Dollarama has competition from stores with similar business models. IN the retail value segment, Dollarama is the segment leader. It also faces competition from big box retailers, which often offer deep discounts. This form of competition is limited in duration (sale days of big box retailers) and is restricted to a few products. Dollarama overall maintains an upper hand over the big box retailers in the products that it offers.

5. Sensitivity to Changes. Dollarama’s business model is susceptible directly to change in currency fluctuation. An economic slow down or negative growth would impact the valuation of currency, which could disrupt the business model. In long term, Dollarama business is sensitive to increase in the standard of living. Though, Canadians lay emphasis on getting value for their money, substantial increase in standard of living would invariably take away the customers from Dollarama to big box retailers.

Strategic Recommendation

6. Attractiveness of Investment. The aforesaid analysis indicates that Dollarama is an attractive opportunity to invest for Bain. The business environment in Canada supports the business model. The segment is attractive but not easy to enter and Dollarama is the segment leader. It is financially in a strong position (Appendix 4). The stores are owned by Dollarama and hence there are no rental payouts. No major capital expenditure is on the cards and there are no loans. This means that there would be sufficient cash available for interest and principle payout, in case of LBO. The widespread network of stores and procurement chains would ensure Dollarama’s status as the segment leader. For continued growth, Dollarama, apart from expansion, would need to make some changes, viz., increase product range,