Dollarama: How adding additional price points impacted operations
Dollarama is a deep discount/value retailer operating in Canada. The company offers a wide range of general merchandise, seasonal products, and consumer packaged goods. Until 2009, Dollarama was a pure dollar store, selling items at only one price point: one dollar. In this stage, the Company had an operating model that was very well aligned to selling merchandise for $1 as cost-effectively as possible. This model resulted in challenges, however, for achieving the true business model of the company, which is to deliver maximum convenience and value to consumers at very low price points. As a result, the Company transitioned to a multi-price point strategy, which required some changes to the operations.
Sourcing Model:
Dollarama’s business model of offering goods at limited low price points requires innovative low-cost sourcing strategies. Dollarama is able to offer low prices and maintain margins by working with directly with manufacturers on innovative SKUs including smaller packaging, engaging in opportunistic sourcing, and avoiding long term contracts. Direct relationships with suppliers allows Dollarama to capture some of the value traditionally captured by distributors/importers and also allows Dollarama to collaborate with CPG companies on dollar-format sizes and packaging to keep sticker prices low for end consumers. Dollarama also carries a mix of merchandise between items that are consistently stocked and items that are sourced opportunistically in a close-out or promotional purchase. Willingness to take on this inventory can also help improve relationships with suppliers. 25% to 30% of SKUs at Dollarama turn over every year, and the Company maintains flexibility to make opportunistic merchandising decisions by avoiding any long term supply contracts. In addition, Dollarama sells a range of private label products, sourced directly from manufacturers abroad, which are cheaper to procure relative to recognized national brands.
In-Store Operations
Prior to the introduction of multiple price points in 2009, the stores contained no price labels, either on shelves or individual merchandise. To aid in check-out, the cash registers had one button that was pressed for each item purchased by the customer. Cashiers needed only to count the number of items at check out and press the button the requisite number of times to complete the transaction, speeding up checkout. Inventory, too, was tracked through a manual counting process, which was aided by the single price point merchandising model.
Challenge of the Single Price Point Strategy
Keeping prices fixed over a long time horizon (in this case, 16 years) without allowing for inflationary increases guarantees that over time either margins will begin to deteriorate or the value offered to the customer will diminish. In order to add increased flexibility to the operating model moving forward and allow for the introduction of new, higher value product offerings, additional price points were introduced. Today, the Company offers products at seven price points ranging from $0.77 to $3.00, and is considering introducing prices up to $4.00.
Operational Impact
The shift to multiple price points allowed Dollarama to even better leverage their existing sourcing capabilities. Additional price points gave buyers flexibility to introduce new product offerings and additional size and packaging options. They were also able to take better advantage of opportunistic sourcing, as they were able to buy inventory to sell for more than one dollar.
On the other hand, the shift required significant changes to in-store operations. Store layouts were redesigned to have one dollar and “dollar plus” sections, and in some cases individual items had to be labeled with prices. The cash registers were replaced with registers with four buttons, one for each of the four prices offered in 2009 instead of the single button models used previously. Since 2009, the Company has rolled out a comprehensive RFID point of sale and new inventory/warehouse management systems.
While this shift required significant investment, it has also improved the company’s operations. An unprecedented level of sales data is now available, allowing the merchandising and sourcing departments to better optimize product mix. Data availability has also improved the replenishment process, minimizing in-store physical inventory counts and reducing inventory costs and labor expenses. These savings translate into opportunities to deliver better value to the customer, supporting the value-driven business model.
Sources:
- “Dollarama, Inc.” HBS Case by Andre F. Perold
- Dollarama SEC Filings
- “Dollarama Inc may have to raise prices up to $4 to deal with lower loonie”, Financial Post http://business.financialpost.com/news/retail-marketing/dollarama-inc-may-have-to-raise-prices-up-to-4-to-deal-with-lower-loonie
- “Four reasons why Dollarama is making big bucks” CTV News http://www.ctvnews.ca/business/four-reasons-why-dollarama-is-making-big-bucks-1.2434206
I like that your explanation of Dollerama’s business and operating models spans both the company’s single price and multi-price point periods and shows how it was able to maintain alignment throughout. I wonder if you would classify this as an example of a company that had a particular business model in mind (in this case, shifting from single to multi-price to restore margins and/or value to the customer) and then figured out how to shift its operating model to match. I certainly thought so at first blush, but I liked what you said about how moving to multiple prices actually allowed it to “better leverage its existing sourcing capabilities” and to gather more relevant data that improved product mix and customer satisfaction. It made me wonder if this could actually serve as an example of a company that saw value to changing its operating model and then shifted its business model to match. Or (probably most likely), perhaps this is just an instance of a company realizing that BOTH models could benefit from the same change, which would make it unique (at least among the cases we have discussed in our last TOM module, where one model seems to drive decisions about the other).
Quick question: when you say, “Dollarama also carries a mix of merchandise between items that are consistently stocked and items that are sourced opportunistically in a close-out or promotional purchase,” I know you mean that these items are purchased by Dollerama buyers from suppliers on sale (right?), but just out of curiosity, how are these items displayed in the Dollerama store itself? Is the promotional sale advertising carried through to the customer or are these presented as normal items? (Hard to imagine a real “sale” at a dollar store but I’d be curious to know if they happened).
No, these items wouldn’t be sold on sale to the end consumer, they are just purchased cheaply by the Dollarama buyers. On the shelf, before the addition of multiple price points, these items would have been sold at $1. Today, they would be sold at one of the seven existing price points in an every-day-low-prices model.
My impression, although this is open to interpretation, is that the company made a decision to shift their business model (due to margin pressures with inflation) and this decision necessitated a number of the changes to the operating model. While many of these changes would have been helpful anyway (POS and inventory management systems, specifically), it was really the shift to multiple price points that added urgency to implement these systems long after the rest of the retail industry had done so.