Consolidation in the dollar store sector is providing opportunity for local entrepreneurs and proving that small product price-points can generate big profits.
A private equity consortium bid US$1.36 billion on March 12 to buy the 275-outlet, California-based 99 Cents Only Stores Inc. (NYSE:NDN).
But unimpressed analysts expect a new suitor to emerge with a richer offer.
Dollar Tree, Inc. (Nasdaq:DLTR), which projects that its more than 4,000 stores will generate around US$6.5 billion in 2011, is one potential candidate. So is Dollar General Corp. (NYSE:DG), which has more than 9,200 stores and generates almost twice as much annual revenue. Family Dollar Stores Inc. (NYSE:FDO), with more than 6,600 stores, rounds out the three large, potentially acquisitive American dollar store chains.
Dollar Tree spent $62 million last October to buy Vancouver’s Dollar Giant, which then had 86 stores and has since opened two more locations.
Dollar Giant Canada president Joseph Calvano told Business in Vancouver March 15 that he expects his Dollar Tree subsidiary to open another 15 stores across Canada in 2011 and “after that we will get aggressive with expansion.”
He said stepped-up annual store growth will mean a minimum of 30 stores per year from 2012 onward.
“Our strength is in our size, our buying power and our consistency. We can really deliver.”
Calvano is also appealing to an ever-broader audience.
Pollsters at the Nielson Co. have estimated that almost 77% of Canadian households have members who have shopped at a dollar store in the past year.
Calvano founded Dollar Giant in 2001 when he, a brother and a friend each invested $40,000. Calvano was the only one of the three to collect a salary and be active in the business.
But, post-sale, each of the three split $52 million in proceeds after first paying off $10 million in debt.
Calvano’s major selling point was that his operation was corporately owned.
The three major U.S. dollar store operators also own all of their locations. So does the largest dollar store chain in Canada, Quebec’s Dollarama Inc. (DOL:TSX), which may be seeking smaller acquisitions.
Calvano said being franchised diminishes a dollar store chain’s resale value.
“In franchised operations, your buying power changes because every franchisee might want to carry different products in their stores. There’s less co-ordination,” Calvano said. “Franchisors could deal with people who have the financial resources but don’t have the retail background or the expertise.”
Retail analyst and DIG360 Consulting Ltd. principal David Gray agreed.
“There’s more complexity taking over a franchised operation than a corporate one. When stores are corporately owned you can run it how you want and close underperforming locations. If you’re buying franchise agreements, then that’s a different equation.”
None of that fazes Great Canadian Dollar Store CEO Kevin Walker. He’s not pressuring his children to get involved in the franchising company that his parents co-founded in 1993. Nor is he tempted to sell the family business.
All of Great Canadian’s 112 locations are franchised, and Walker expects to add up to 12 more franchised locations within the next 18 months.
“We just had our best year of gross sales so far,” he said. “We’re not driven by shareholders, and we’re not in huge growth mode. We just go strong and steady.”
Eight of Walker’s 15 staff are based in Victoria. The rest are scattered predominantly across Western Canada and the Maritimes, where most of the company’s stores are.
B.C.’s other large dollar store chain – the 140-location Your Dollar Store With More Inc. – similarly is entirely franchised. Jeff Simla, its director of marketing, said the chain will add eight new stores in the next year.
Both Great Canadian and Your Dollar Store charge roughly $20,000 as a one-time franchise fee in addition to a 4% royalty on annual gross sales.
One difference between the two is that Your Dollar Store charges a 0.5% national marketing fee while Great Canadian charges nothing but encourages franchisees to do local marketing. Great Canadian also has no City of Vancouver locations.
Your Dollar Store has three Vancouver stores and plans to open a fourth near the corner of West Broadway and Yukon streets in the next few months.