Dollarama partners with Latin American operator, could lead to ownership stake

MONTREAL – Discount retailer Dollarama is looking beyond Canada to potentially fuel its long-term growth by entering into an eight-year agreement to help Latin American chain Dollar City to expand its network of stores.

Under the deal announced Tuesday, the Montreal-based company will share its business expertise and provide sourcing services to Dollar City.

Dollarama (TSX:DOL) won’t take on operational responsibilities or make a capital commitment, but could acquire a majority interest in the chain beginning in year seven.

The fledgling dollar store chain operates 15 locations in El Salvador and Guatemala but wants to expand in Central America, along with Colombia, Peru and Ecuador.

Dollarama CEO Larry Rossy said the Canadian company is as much an importer as it is a retailer. In addition to growing its network of stores in Canada, Dollarama is continually looking to develop its low-cost direct sourcing.

“Our objective is to test the potential of the Latin American market in a way that minimizes risk, capital and time investment and we believe that we have found the right strategic approach and the right partners to achieve this,” he said in a news release.

Dollarama said it doesn’t expect the agreement will have a material operational or financial impact on the company in the medium-term, but that the Latin American market holds long-term potential.

Latin America is the world’s second-largest emerging market, with a gross domestic product of US$5.6 trillion, 589 million people and stronger growth rates than Canada and the U.S.

Despite the presence of many global retailers and spending patterns similar to North America, the dollar store market is underdeveloped and under served, providing for significant growth potential, Dollarama said.

“As we continue to explore opportunities to extend the reach of our concept, Latin America stands out as an increasingly attractive market,” Rossy added.

“This collaboration with Dollar City will provide us with a timely window and a strategic entry point to participate in the long-term potential of this dynamic emerging market. Furthermore, we believe that our product offering can be easily adapted to appeal to local tastes as well as offer consumers tremendous value.”

The Canadian retailer, which sells products for $3 or less, has been one of the country’s big success stories in recent years. It said Canada still has “significant growth potential” and will add 80 new locations this year to strengthen its leading market position.

Dollarama operates 761 stores across Canada.

Analysts welcomed the agreement as way to potentially grow the chain.

“Dollarama dips its toe into foreign waters in a low-risk way,” said Irene Nattel of RBC Capital Markets.

“Investors should take comfort that this decision appears to have been structured to minimize risk, as Dollarama seeks to establish a longer-term growth opportunity outside of their core Canadian market,” she wrote in a report.

Nattel notes that Dollarama’s North American peers have not yet exploited the potential in Latin America.

Keith Howlett of Desjardins Capital Markets said Dollarama is ultimately exploring if and how to bring its retail concept to the growing consumer markets in Latin America.

“This opens up potential new avenues of long-term growth,” he wrote.

On the Toronto Stock Exchange, Dollarama’s shares gained 12 cents at $60.25 in morning trading.