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Why Dollarama’s (TSX:DOL) Brilliant Push Into E-Commerce Matters to Your Portfolio

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Canadian value retailer Dollarama (TSX:DOL) quietly moved into e-commerce in January 2019 without catching the eye of its consumers. How did the well-known company manage to launch it so quietly? Because its newest business strategy is focused on business-to-business sales rather than its staple business-to-consumer model.

Dollarama’s online e-commerce site presents shoppers with an $18 flat-rate shipping fee added onto every individual order. From there, consumers can purchase bulk quantities of Dollarama’s regular in-store products at a wholesale discount. For example, a pack of chewing gum will not be sold individually but rather in a “case” of 216 units.

This introduction into bulk online sales creates a credible and well-established competitive threat to leading wholesaler Costco. It also diversifies Dollarama’s sole focus on brick-and-mortar sales to a more powerful e-commerce platform.

Positive impact on the stock

Since officially launching its e-commerce platform on January 21, Dollarama’s stock is up from $35.50 to today’s open of $40.01. This represents strong growth of 12%, which can be attributed to the announcement of its e-commerce site and a strong Q4 earnings report. Its latest quarterly report stated a sales increase of 13% and comparable store sales growth of 2.5%—a strong showing offering shareholders convincing metrics to double down on its investment.

With the publication of the online sales figures expected in the Q1 2019 earnings report, investors should expect an increase in overall gross sales with a boost coming from that channel. The online sales figures should contribute to a strong rise in the stock price as long as the launch is deemed successful.

Defying the brick-and-mortar stock trend

It is no secret that brick-and-mortar store sales have been declining since the popularity of e-commerce. All one has to do is compare the size of Amazon to their hometown shopping centre to find evidence of this. It is an obvious solution for businesses to sell their products directly from their warehouse to their consumers to avoid costs associated with operating a physical store. This has not been a problem for Dollarama as it profitably operates 1,225 stores as of February 2, 2019.

However, Dollarama faces a tall obstacle when it comes to transitioning into online sales: its products are too inexpensive to profitably ship to consumers and can only realize a profit by being sold in physical stores. We know this from Amazon’s “Cut the CRaP” campaign of removing items that “Can’t Realize a Profit.”

For Dollarama, every single one of its products falls in the “CRaP” category unless sold online in bulk.

What we should expect

With Dollarama’s consumer base being mostly comprised of value-driven individual shoppers, it remains to be seen how Dollarama will convince businesses to leave Costco’s established online business for Dollarama’s. Both companies possess a strong brand for value; however, Dollarama’s advantage in brand accessibility can be the key distinguisher Dollarama’s fight for market share in the online wholesale retailer space.

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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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon. Fool contributor Chris Fabian has no position in the companies mentioned.

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