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Will Changes at This Retailer Return the Stock to its Former Glory?

After an amazing run since its IPO in 2009, Dollarama (TSX:DOL) would like to forget the year 2018. It was a brutal year for Canada’s leading dollar store operator with over 1,100 stores located throughout the country. Dollarama has some changes planned in the coming year. After a nearly 40% drop in the stock, will these changes help it bounce back in 2019?

Dollarama launches e-commerce site

In December, Dollarama launched a pilot program of its first-ever e-commerce site. The site was two years in the making and currently offers over 1,000 products. Designed to target small businesses, items are not sold individually. Rather, items are only available for purchase in bulk quantities. The site caters to customers shopping for events or activities in which bulk purchases are necessary, such as party and wedding planning, restaurants, hospitals, schools, and the workplace. The site groups products by specific function, helping customers shop by offering suggestions based on the type of activity.

During the pilot program, the service is only available to customers for shipments within Quebec. The company plans to conduct scores of data testing during the pilot program and use the feedback to improve the site before its eventual rollout to other provinces in Canada.

Expansion into Latin America

In 2013, Dollarama entered an agreement with Dollar City, a retailer with a similar pricing strategy looking to grow its footprint from its base in El Salvador. As part of this arrangement, Dollarama would share its business expertise with Dollar City. This allowed the company to begin testing its business model in new markets in Latin America. The agreement also gives Dollarama the option to buy a majority stake in Dollar City in 2020.

Dollarama could increase prices in its multi-price-point strategy

Although Dollarama was founded on the principle of offering its merchandise for $1, it now boasts seven more expensive price points. While the retailer still maintains some items at $1, over 65% of the products sold are at a higher price.

The first time the retailer offered products for more than $1 was 2009, when it had just over 500 retail outlets. Dollarama deviated from its single-price point strategy by adding three more price tiers for its merchandise, with items selling for a maximum of $2. By 2012, Dollarama had grown to 700 stores and further expanded its product offerings with two additional price points, increasing the maximum sales price of its merchandise to $3.

Dollarama’s executive team was confident that the higher price points and the additional product offerings were well received by its customers. In 2015, the retailer improved its merchandise selections and raised prices once again, adding products priced at $3.50 and $4 to its lineup.

The idea of selling higher-priced merchandise has not gone unnoticed in similar stores in the United States. Activist investor Starboard LLC has taken a minority stake in Dollar Tree, a retailer based on a similar concept of selling products for $1. One of the demands from Starboard is that Dollar Tree adopt a multi-price-point strategy like Dollarama.

Before increasing prices again, Dollarama must weigh the balance of alienating loyal customers with the potential of attracting new customers with higher-price offerings. Given that it has been four years since the company raised prices, I believe an additional price tier, perhaps taking the maximum price of items to $5, will be forthcoming. Sales of higher-priced merchandise should add to Dollarama’s bottom line.

Another change in the past two years is that Dollarama began accepting credit cards at all locations. Although this move raised the cost of individual transaction fees, the sales growth from customers who shop only with credit cards offsets the higher fees.

These changes can improve stock performance

With the company’s expansion into Latin America and the launch of a successful e-commerce site, the company should be well poised to return to its former position as a leader on the TSX.

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Fool contributor Cindy Dye has no position in the companies mentioned.

 

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