Retail: The genius of Dollarama

How a small, Quebec-based chain became a billion-dollar retail empire — one buck at a time.

At 8:30 on a December morning, after a damp snowfall had turned the streets of Montreal slushy and unpleasant, Larry Rossy arrived at the downtown location of his next Dollarama to consider toilet placement. The founder and chief executive of Canada’s largest dollar-store chain, Rossy, who is 67, still worries about banal details.

He visits each store before it opens and develops each floor plan himself. Following his visit to the Montreal store, he fielded a call from his lawyer about the site’s garbage disposal. He also serves as one of the company’s chief buyers and can speak with authority about polyester tablecloths and decorative vases. (He saw a real “wow-y” vase on his last buying trip to China, he says.)

Thanks in part to his careful management, Dollarama has gotten very big by selling very small things. It is the largest dollar-store chain in Canada and, with 594 stores across the country, it now has more outlets than Canadian Tire. Dollarama intends to add 30 to 40 stores a year for the foreseeable future. In its warehouse this December, inventory was already being stockpiled for not just the next couple of store openings, but the next 28.

With a company that operates in a state of constant expansion, Rossy usually claims he is too busy to speak with the media. Dollarama went public this October. Rossy granted his first interview, an exclusive with Canadian Business, nearly two months later. He brought an impressive posse: his chief financial officer, his chief operating officer and his senior vice-president of merchandising, who also happens to be his son, Neil. These mandarins did not stay long. One at a time, they slipped out, citing prior appointments or pressing issues that had popped up on their BlackBerrys. These were no doubt legitimate excuses; they are busy men. But they weren’t needed anyway. As Neil noted as he left, his father had all the answers. Larry Rossy built the billion-dollar business a single buck at a time, and he did it by worrying about seeming trivialities like toilet placement.

“It’s just what I love to do. I am a merchant,” Rossy says. “I’m not an IT guy. I’m not an accounting guy. I open stores, and I buy products, and that’s my passion and my love.”

He tends to keep things simple like that. He told investors in a conference call last month that Dollarama was “a simple business with simple drivers.” He echoes that sentiment in our interview, defending the company’s primitive inventory system and decision to, until recently, accept only cash by saying: “Philosophically, we like to keep things simple.”

Dollarama’s uncomplicated approach to its business involves operating clean stores, maintaining a consistent inventory of name brands and dealing directly with suppliers. Under this no-frills strategy, sales increased 12% in the past year alone to $1.2 billion-and the company has seen similar growth every year since it opened in 1992. On its first day of trading in October, Dollarama’s stock, which represents 20% of the company, leapt in value by 11.4%. It has remained on an upward trend for the past four months.

But growth has created complications. The IPO brings new-found scrutiny to a company that prefers a low profile. The stores are accepting debit cards for the first time and toying with credit cards. Adding further wrinkles is the recent introduction of multiple price points. Dollarama now sells $1.25, $1.50 and $2 alongside its traditional 65cents candy bars and $1 everything else.

These changes could mean even more growth, but they also represent a series of gambles for a company that has done very well by keeping things so simple for so long.

The Rossy family’s first store in Canada opened in 1910. Salim, the grandfather of Larry and great-grandfather of Neil, emigrated from Lebanon and opened a five-and-dime store in Montreal. Over the ensuing decades, the chain was subdivided among Salim’s descendents. Larry took control of his portion of the family business in 1973. By 1992, he owned 40 stores, but the five-and-dime business was dying, squashed by the advent of big-box retailers such as Wal-Mart. So Rossy went looking for a new concept, finding inspiration in a small Quebec chain called Un seul prix, or One Price Only. Not thinking they would ever expand beyond Quebec’s borders, Rossy played with calling the nascent chain Une Piastre, or One Dollar, but the name lacked the typographical flare needed for signage. During a big family dinner, a new name was found.

“There was Loonie-rama and This-rama and That-rama,” recalls Neil Rossy of the various options considered.

The Rossys opened their first Dollarama in Matane, Que., in 1992. On the day of our interview, both Neil and his father wore purple shirts, although the son’s was trendier and hidden beneath a mustard tweed blazer. (The effect was more haute couture than dollar store.) His father, seated in a small conference room just off the lobby of Dollarama’s headquarters, wore grey slacks and black loafers. He has the patrician good looks of Leonard Cohen. While the Rossy family had been successful retailers for three generations, Larry says they found their calling with the first Dollarama. “We did the [dollar store] concept very well. We did it a lot better than we did 60 or 70 years of general merchandising,” he says.

They did it so well that in November 2004, with 331 stores in Quebec and beyond, Rossy sold 80% of his company to Bain Capital Partners for a reported $1 billion. He says he decided to work with the Boston-based equity firm because they were “nice people.” In addition, bringing Bain onboard allowed him to compensate for his own “managerial weaknesses,” like an inability to fire or demote people. As proof of his own deficiencies, Rossy notes Dollarama’s first comptroller was an accountant who drove to work every day until died at the age of 96. “The guy who was waiting for 25 years to take his place is still with us today,” says Rossy. “He’s 85. So we have a hard time transitioning people.”

Dollarama’s owners inspire similar fealty in their employees. Toni Fadel worked for the Rossys in the pre-Dollarama days and helped establish the chain’s first stores in Toronto. He now oversees 14 stores in the Montreal area. The company has always done well, but lately? “It’s going,” he says, punching his fist in the air – bam, bam, bam.

Fadel, dressed in a green velvet blazer, jeans and a black T-shirt, stands in the candy aisle of the Dollarama in the Place Vertu mall in the Montreal suburbs. The store bustles with lunchtime shoppers and, like most of Dollarama’s locations, is brightly lit, clean and entirely lacking the dank scent of stale spices, candles and lemon cleaner common to lesser dollar stores. As one analyst who follows the chain said: “If you took the sign off the front door, you could forget you were in a Dollarama.”

Fadel points with both hands as he explains the logic behind the store’s layout. Food and chocolate sits near the watchful cashiers to prevent shoplifting. Gift bags and toys are close to one another to facilitate the easy purchase of last-minute birthday gifts. Each store is planned around its greeting card racks, since they require a wider aisle than other products. The other sections unfold from there, with party supplies after the cards, then food, cosmetics, school supplies, crafts and kitchen goods. “If you have the cards at one end, the kitchen supplies go at the other. You can’t have the kitchen stuff and party supplies together,” Fadel says, as though doing so would violate natural law, not just corporate policy.

With 10 days until Christmas, the shelves at the end of each aisle are stuffed with giant red bows, penguins in Santa hats and party hats declaring ” Bonne annee!” Valentine’s Day merchandise appears in the store on Dec. 15 and the first shipments of summer stock come on Jan. 14. It seems like an awfully early summer, until Guy Champagne, the vice-president of distribution, notes that spring breaks begin in February.

Out of the roughly 4,400 items that line Dollarama’s shelves at any given time, 700 are seasonal products. (Not all are as superfluous as stuffed snowmen; the end of one aisle is dominated by road salt.) This ability to capitalize on seasonal demand is widely admired. “They run it like the U.S. marines,” says John Williams, a retail consultant. “When Christmas is out, they go into Valentine’s Day, and when that’s out, they go into Easter.”

When measured by their total retail value, these seasonal goods represent 16% of Dollarama’s total stock. Meanwhile, food, drinks and other so-called consumables, which currently represent 37% of a store’s stock, occupy more and more shelf space. Two years ago, you only needed a few dozen shelves for food, according to Fadel. The Place Vertu store has 54 shelving units of cookies, soup, candy and condiments. And these are not obscure, low-quality brands being sold cheaply. Perrier, Werther’s candies and Lays chips are all prominently displayed. The increased food business relates to people discovering what Dollarama has to offer and not the economy, Fadel claims. “It’s not the recession. It’s the good items,” he says. He points at a big bag of maple cookies. “Where else could you get that for $1?”

Sometimes, rather than seeking out brand name merchandise, Dollarama creates its own. Kids now seek out Studio notebooks, made for Dollarama, the same way they once sought out Hilroy for back-to-school, Fadel claims.

If the contention strains credulity, it is worth noting Dollarama employees have an earnest, almost evangelical belief in the value of the goods that they sell. Walking through the company’s mammoth distribution centre, which unloads 100 trucks a day at its peak, Champagne stoops to point out the best-before date on a crate of Turtles chocolates is a year away. “We do not sell expired product,” he says, jabbing the box.

This commitment to quality manifests in other areas as well. By eschewing importers, Dollarama has considerable sway over product design, packaging and labelling.

“We look at a dollar item and dissect it with the same degree of analysis as if it was a $20 or $30 item,” says Rossy. “We treat it really well, that $1 item. I don’t think anybody else in the world takes it as seriously as we do.”

Having doubled its maximum price from $1 to $2 last February, Dollarama must now master a whole new price point. “This is a work in progress,” Rossy said during a recent conference call. “It took us 10 to 15 years to perfect a dollar, so in eight months to a year, we still have a lot to do in educating ourselves what’s best to buy [at two dollars].”

Rossy says the higher prices have opened new possibilities, noting he did a strong business selling $2 vinyl clogs (He studiously avoids saying the word “Crocs”). Roughly 27% of sales now come from higher priced items, a percentage that surprises even Rossy.

Furthermore, the average transaction has increased 6.2% since the introduction of the new prices. But the move was not without risk. The more expensive their goods, the greater the risk that Dollarama may draw the attention of value store Goliaths like Wal-Mart. “The further up the price spectrum they move, the closer they get to some very, very sophisticated realtors,” says Kenric Tyghe, a retail analyst with Raymond James. “You risk opening yourself up to competitors that you’re not equipped to deal with.”

Rossy agrees, noting his company’s simple pricing was part of what made it a success. “We have no intention of going past two dollars. Because once you start going to fives, then people don’t perceive you as a dollar store and it becomes a big mush in their minds,” he says.

Nonetheless, the comparison highlights how Dollarama is a whale in a fish tank. There is no denying Dollarama dominates the Canadian dollar-store sector. There are thousands of “mom and pop” dollar stores, but only one other national dollar-store chain, Dollar Giant. It has just 75 stores. There are also four large franchise operations-Dollar Store with More, Great Canadian, Buck or Two and Everything for a Dollar-but combined they operate less than 400 stores. Without significant competition, Dollarama has managed to treat things like state-of-the-art inventory management systems as unnecessary luxuries, according to Tyghe. “They’ve managed to get by with what, by U.S. value retailer standards, are fairly base and basic inventory management and inventory control systems,” he says.

Basic may actually be hyperbole in describing how Dollarama currently manages its inventory. Each morning, managers receive a list of 200 to 300 stock items. Their staff counts the specified items by hand, and the results are e-mailed to head office. Two weeks later, the store receives its next shipment of stock. Chief operating officer Stephane Gothier says the system is rudimentary but foolproof, having been perfected over the company’s lifetime. “It’s amazing, but it’s also very efficient because we’ve been doing that for 16 years,” he says.

Dollarama is now updating its inventory systems, but the process is slow; it will be another year before all of its products even have bar codes. Only then will scanning devices be integrated into its cash registers. Elsewhere, the modernization’s benefits are already evident. For example, purchases made with debit cards are 2? times larger than cash transactions, a fact Dollar Giant knows very well, having accepted both debit and credit since its inception in 2001.

“The world has changed,” says Joseph Calvano, the company’s president. “It doesn’t matter if you’re rich or poor-everybody uses a debit card.”

What percentage of Dollarama’s customers fall into each of those two camps-rich and poor-is not entirely clear. In the United States, dollar stores undeniably rely on the lower class for business. Most American dollar stores sell bread, milk, eggs and other perishable goods, a requirement for any business that wants to accept food stamps. Analysis by the Neilsen Co. suggests consumers making less than $30,000 annually accounted for 45% of U.S. dollar store sales. But Canadian dollar stores seem to draw from a wider demographic. “There’s a type of consumer who may drive a Mercedes but get their stationery from a dollar store,” says retail consultant Wendy Evans. “You’ll see them buying a no-name brand and driving luxury cars and wearing designer clothing. They care about brands for some things and not others.”

The differences between the two countries could make an American expansion difficult for Dollarama, and Rossy says it’s “not part of our intention at the moment.” But Dollarama will also likely continue to expand when the recession ends, whereas U.S. dollar stores will likely see an end to their boom years when the economic crisis subsides. Consider Dollar General, whichoperates 8,700 stores in the United States and announced its third-quarter results on the same day last month that Dollarama made its first quarterly report since going public. Dollar General saw a 9.2% hike in sales at existing stores, while Dollarama’s increase was just 7.3%. However, Dollar General’s success came with far more caveats attached. “It will be difficult for Dollar General to maintain current levels of productivity and profitability as some consumers will probably return to other retail channels once economic conditions improve,” wrote Zoe Tan, an analyst with Morningstar, at the time of the announcement.

“Americans, during a recession, will trade down from a Target to a Wal-Mart to a dollar store. That’s not going to happen in Canada,” says Rossy.

The figures back Rossy’s claims. No matter what the economy has thrown at it-downturns, booms, recessions-Dollarama has continued to thrive over the past 17 years, with an annual growth rate of 16%. The question now is whether it can sustain that level of growth as it expands across the country.

Retail analyst John Williams argues the dollar-store industry is now in a “mature phase.” Others contend there is still plenty of room for growth. In Canada, there is a dollar store for every 32,000 people, far less than theone per 15,500 people in the United States. Dollarama’s current plans call for 900 stores across the country, although Rossy refuses to speculate exactly when Canada will reach its saturation point. He says he was convinced that he would never be able to open more than 100 stores in Quebec. He now has more than double that number. “From the experience I have, we’re far from saturated,” he says. “Every time I think we’re saturated in an area, I open 10 more stores there. So obviously, I’m wrong.”

Rossy’s company now employs more than 12,000 retail staff, operates 1.4 million square feet of warehouse and is housed in an eco-friendly headquarters that boasts a heated outdoor patio, a fanciful life-size sculpture of penguins at play and multi-storey atrium complete with an orange tree. Rossy is now one of Canada’s richest men with a personal fortune estimated at $933 million. And his position comes with other fringe benefits. He recently participated in the Olympic torch relay, a moment that was particularly meaningful because his seven grandchildren came to watch. Before running, he was given a little pep talk by one of the organizers. “The kid was actually a really good salesman,” he says. It was high praise from a man who made his fortune selling items far less lofty than the Olympic spirit.