Dollarama Inc. Is About to Have More Competition

Dollarama Inc. (TSX:DOL) remains a great investment for retail sector investors, but foreign competition is heating up.

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The Motley Fool

Few critics would argue with the fact that Dollarama Inc. (TSX:DOL) is one of the better investment opportunities in the retail sector at the moment, if not the best.

Dollarama has seen phenomenal growth over the years, and the stock up nearly 40% over the past year and over 86% in the past two years. Impressively, the company has also developed a knack for shattering expectations come results time. Most recently, Dollarama reported double-digit sales growth and diluted earnings-per-share growth.

Part of the reason for that growth can be attributed to the wide variety of products Dollarama sells, which, for a dollar store, are notably a notch or two above the competition.

That competition is set to heat up as two existing foreign-owned dollar store players that already have a small presence in Canada are set to expand in big ways.

Dollar Tree ready to move into Quebec?

Dollar Tree Inc. (NASDAQ:DLTR) is the largest dollar store operator in the U.S. with locations in the 48 contiguous states; it also has locations in five provinces in Canada. In all, Dollar Tree has 226 locations in Canada and over 13,500 in the U.S.

While Dollar Tree’s operations in Canada still pale in comparison to Dollarama’s, the U.S. behemoth is looking at expanding into Quebec, one province the company does not yet operate in and Dollarama’s home province.

Vice President of investor relations Randy Guiler recently commented that the potential for Dollar Tree in Canada could include up to 1,000 locations with both Montreal and Quebec City cited as expansion points.

Expansion into Quebec is the next logical expansion route for Dollar Tree, as the company has locations in British Columbia through Ontario.

Chinese retailer Miniso expanding further into Canadian market

Miniso, a Chinese retailer of value-based goods similar to Dollarama, is another recent entrant to the Canadian market that is looking to expand further into Dollarama’s home turf. It has up to 500 new locations targeted for the Canadian market at a rate of 35-50 over the next year.

Miniso carries predominately cosmetics, stationary, and toys and already has one location open in Vancouver with a several more set to open within the next few months.

What does this mean for Dollarama?

Critics often point to the possibility that the market for dollar stores in Canada is becoming too saturated, too fast. Dollarama has, after all, expanded to nearly 1,100 locations in a fairly short period of time, far surpassing the competition.

The reality, however, is that the market is nowhere near saturation, and could, as per industry experts, handle significantly more stores before reaching anywhere near the saturation that exists in the U.S. market.

Additionally, Dollarama’s unique mix of price ranges allows the company to offer a greater variety of goods over the competition. That price range also allows Dollarama to carry products that typically wouldn’t be found in other dollar stores. Dollar Tree can’t match Dollarama on those price points, particularly the higher-priced items that Dollarama carries.

While Miniso and Dollar Tree could provide limited competition for Dollarama in selective markets, it will be several years before either of these entrants could challenge Dollarama’s current spread across the market, at which point, Dollarama would be significantly larger.

Dollarama remains the dollar store leader in Canada for the foreseeable future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Demetris Afxentiou has no position in any stocks mentioned.

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