Booming consumer demand for discounts drives Dollarama profits up 27%

Inflation has helped fuel booming business at Dollarama as sales at the discount retailer have increased by almost 17 per cent in the past year.

The Montreal-based retailer released earnings results on Wednesday, numbers that show just how strong the demand for bargains is from cash-conscious consumers.

Sales at the chain grew by 16.7 per cent to $5.05 billion in its last fiscal year, which ended on Jan. 29. Net earnings per share grew from $2.18 last year to $2.76 in 2022. Same-store sales, a key metric for retailers, increased by 12 per cent.

Stronger profits have compelled the company to hike its quarterly dividend to shareholders by 28 per cent, with the payout rising from $0.0553 to $0.0708 starting next month.

The chain announced plans this time last year to raise its prices on some items to up to $5, but Dollarama's financial performance doesn't seem to be due to customers spending more money on every visit.

The average transaction size only grew by 1.6 per cent during the fourth quarter, but the number of transactions mushroomed by more than 14 per cent. That's a sign the chain had more people coming through its doors, either loyal customers or first timers. 

To Ken Wong, an associate professor in marketing at the Smith School of Business at Queen's University in Kingston, Ont., the reason the company has more customer visits coming through its doors is obvious.

"In these inflationary times, with interest rates being so high, a lot of Canadians are feeling the economic pinch, and so Dollarama is looking very much like their salvation," he said in an interview. "Customers believe that Dollarama is going to have lower prices."

While all retailers are laser-focused on costs, Wong says Dollarama has been successful by thinking differently. "Everybody else prices their products based on their cost, but Dollarama starts with a price point and then works backwards to figure out what's the most they could afford to buy that product for," he said.

Given the scrutiny on rapidly rising food costs, Dollarama has even started to expand its food offerings. But even there, Wong notes the company proceeds cautiously, only offering items where it can ensure it will maintain its margin, and minimizes losses or unexpected expenses.

"There's no perishables, there's no dairy, nothing requiring refrigeration or freezing — those are very expensive items," he said. "These are all shelf-stable products."

The chain has opened 65 locations in the past year, and now has 1,486 across the country. More are expected, too. It expects to open another 60-to-70 stores this year and by 2030, the chain says it is on track to have 2,000 locations.

The chain doesn't just have growth ambitions in Canada, either. In 2019, the company purchased a 50 per cent stake in Latin American-focused discount chain Dollarcity. That chain is growing, too, with 440 locations across South and Central America, and up from 350 in 2021.

While Dollarama's business model has been a success of late, that ambitious growth plan could be their undoing if they make too many missteps, said retail consultant Bruce Winder.

"With any expansion plan you have to walk a fine line," he told CBC News in an interview. "There is a risk when [you] have too many stores and saturate."

As it grows, Dollarama will face stiff competition from foreign chains like the U.S. Dollar Tree, which has 227 locations in Canada and more than 4,000 overall — and Chinese based Miniso, which has expanded into the U.S. and Europe.

"It's not a landscape that Dollarama will  have a monopoly on," Winder said. "As this sector grows, more people will enter this sector and more retailers will go for it as well."