Foreign retail giant Dollarama has big plans for the nation’s discount retail space
Canadian giant Dollarama’s takeover of The Reject Shop signals a new era for bargain hunters, heralding bold expansion plans and private-label expertise.
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When Canadian discount powerhouse Dollarama swooped in to buy The Reject Shop, it wasn’t just another takeover – it signalled a new era of fierce competition in Australia’s retail market.
With a reputation for turning dollar deals into booming profits, Dollarama is gearing up to nearly double the iconic Australian discount store’s network and bring its savvy private-label expertise down under.
As Aussie shoppers face rising costs, the move is set to transform bargain aisles and challenge the nation’s reigning discount retail heavyweight Kmart.
So how will this largely-unknown Canadian challenger shake up the Australian retail landscape, and what can shoppers expect?
The Canadian business behind the buyout
While most retail chains struggle with slim margins, Dollarama has bucked the trend – despite offering many items for just a dollar.
Founded in 1992, Dollarama is Canada’s largest discount retail chain, famous for offering a wide range of low-cost household goods, snacks, party supplies and seasonal items.
The Montreal-headquartered business owns more than 1600 shops in Canada and also controls a chain of 588 discount stores in Colombia, Guatemala, El Salvador and Peru.
The chain has a market capitalisation of about $58bn and posts an operating margin — a key measure of profitability — of a sector leading 30 per cent.
It’s estimated Dollarama earns a higher profit margin than any other large department store or discount chain in North America, including Target and Costco.
The company is especially skilled at private-label merchandise – goods manufactured by a third-parties but sold under a retailer’s own brand name – that closely resemble pricier brands.
Since 1993, the company has built strong relationships with suppliers in countries like China, Turkey and Vietnam.
These direct connections have allowed Dollarama to create better-quality imitations, or “dupes”, by closely matching what makes the original products appealing to customers.
Knock offs include lipsticks, eyeshadow palettes and nail polish designed to replicate popular brands Maybelline and NYX, bath bombs with scents and fizz identical to well-known brand Lush and glass food storage containers, considered a dupe for Pyrex.
What we know about the deal
The $259m takeover of the ASX-listed The Reject Shop, founded in Melbourne more than 40 years ago, was announced earlier this year.
Dollarama has offered to pay The Reject Shop shareholders $6.68 in cash per share, more than twice the stock’s $3.15 closing price at the time the takeover was pitched.
Following the disclosure of the bid, The Reject Shop’s shares more than doubled to close at $6.60.
The Reject Shop’s board has unanimously recommended Dollarama’s offer.
Billionaire businessman Raphael Geminder, whose company Kin Group is The Reject Shop’s largest shareholder with a 20 per cent stake, also backs the deal.
Shareholders are set to green light the deal when they vote on in on Monday afternoon, paving the way for it to be completed in the second half of this year.
Why the Aussie icon was ripe for takeover
The Reject Shop was facing a combination of ongoing business challenges, strategic gaps, and market conditions that made it vulnerable – and attractive – to a buyer like Dollarama.
The retail chain, which opened its doors in South Yarra in Melbourne’s inner city in 1981, has become a household name with 390 locations nationwide selling everything from food and drinks to beauty products and cleaning supplies at affordable prices.
Sales grew 2.6 per cent to $852.7m on a comparable store basis — a measure which strips out the impacts of store opening and closing — in the 12 months to June 30 last year.
But earnings plummeted more than 40 per cent to $5.4m, while net profit decreased 36 per cent to $4.7m — well off the $16.6m to posted in 2016.
Chief executive Clinton Cahn previously said the sale was “really exciting for Australian retail” at a time when the national market was “really tough”.
“(The discounter) is a business that we think has so much opportunity to grow,” he said.
“Our approach has been somewhat incremental. It’s been step by step because we have constraints the way that we’re currently set up. Dollarama will be less constrained.”
Retail expert Roger Simpson said The Reject Shop’s growth had been “hampered” in recent years, with the business relying on natural growth.
“It seems they were in a bit of trouble a few years ago,” The Retail Solution chief executive said.
“I think for a large extension, it would be impossible for them to do it without obviously a huge cash injection, which obviously Dollarama’s going to do.”
Dollarama’s vision for The Reject Shop
Dollarama is planning to expand The Reject Shop’s store network in Australia to approximately 700 stores by 2034.
This would nearly double the current store count, which is around 390 stores.
It’s not yet clear whether Dollarama will keep the iconic Reject Shop branding.
Mr Simpson said the Canadian giant’s expansion plans were a “huge ask”.
“There is a challenge around expanding in the city because there’s not a lot of great real estate properties available, because going into shopping centres is expensive,” he said.
“And it’s a challenge when you’ve got that sort of market, where your average sale is probably quite low because your products you’re selling are generally around the $5, $10, $20 range.
“(The Reject Shop) is in some smaller towns as well, which I think is obviously good for the local community, so hopefully that will continue.
“The regionals are really great. But again, you’ve got much less volume than you have in inner city stores.”
Queensland University of Technology marketing and consumer behaviour professor Gary Mortimer said The Reject Shop could expand into the Northern Territory, where it currently has no stores, and into Tasmania where it has a handful.
“The Reject Shop had a good opportunity to fill a gap left unfilled by ALDI,” he said.
“ALDI indicates it has no plans for a Tasmanian expansion, if a revitalised Dollarama-funded Reject Shop increases their dry grocery offer, this would be well received in those states.”
In a presentation to investors, Dollarama said the Australian discount retail market contained “big box retailers” that had “higher price points”.
They also said The Reject Shop will have access to their merchandise – meaning they will sell their stock which is assumed to include private-label items – and that the store will be converted to a “Dollarama shopping experience”.
While The Reject Shop has historically operated as a third-party reseller of discounted branded goods, Dollarama’s model is far more vertically integrated, with a heavy emphasis on private-label, tight supply chain control and global sourcing efficiencies, experts say.
Retail Doctor Group founder Brian Walker said if executed well, this shift in model could see The Reject Shop move from being a “passive discounter” to a curated value-driven destination with much stronger margin control and product consistency.
“The use of Dollarama’s global buying scale and proprietary product mix may create a more compelling customer proposition than The Reject Shop has been able to offer in recent years,” he said.
“It also signals a likely reformatting of the store experience – potentially cleaner, more consistent, and more aligned to the successful North American dollar store formats.
“This could better meet value-conscious shoppers who are now more discerning and price-sensitive than ever.”
Mr Simpson said the stocking of private label items was a “really good strategy”.
“The challenge (for Dollarama), of course, is getting it known,” he said.
“If it’s a Canadian brand, that’s not in Canada … some things take a while to get across to the market here (for consumers to see) what the quality is like.”
Kmart faces new retail rival
Dollarama’s Australian debut is expected to shake up the discount retail sector, introducing more competition to giants like Kmart.
Kmart also has a strong private-label including Anko which covers homewares, kitchen goods, toys, apparel and electronics.
Professor Mortimer said the expansion is expected to pose a threat to Kmart in areas including office supplies and pantry items.
“I imagine a stronger Reject Shop, with greater market penetration, will have a material impact on Kmart in some categories,” he said.
“Kmart’s strength lies in apparel, home furnishing and decorator. The Reject Shop won’t have the floor space to dominate in those categories, but in other areas like storage, stationery and dry groceries, it will pose a threat.”
Professor Mortimer said Dollarama’s plans may provide the biggest challenge to smaller discounters in the market, like Dollars and Sense, Silly Solly’s, Daiso, Red Dot and Dollar Tree.
“With Dollarama’s global buying power and operational expertise, these smaller, fragmented players have the most to lose,” he said.
Mr Walker said regional locations where Kmart’s footprint is less dominant will also provide challenges to the giant.
“However, Kmart’s strength lies in its broad offer across apparel, home, toys, and its growing Anko private label brand, which continues to resonate strongly,” he said.
“So the threat may not be direct, but rather complementary or disruptive in some overlap categories like homewares, consumables, and impulse household goods.”
The real test, however, will be in execution, Mr Walker warned.
“Localising the model, building brand awareness, and achieving consistent in-store value perception are critical,” he said.
“But with cost-of-living pressures top of mind for Australian households, the appetite for this value-led retail approach is growing – and that could play in Dollarama’s favour if done well.”
What does it all mean for shoppers?
The expansion could ensure wider access to lower-cost goods and greater competition leading to better pricing for Australian consumers.
Mr Walker said The Reject Shop is expected to maintain its focus on low prices as a core part of its brand.
“On pricing, it’s likely The Reject Shop will retain its core value proposition – low prices will stay central to its brand,” he said.
“However, with Dollarama’s sourcing power, there’s scope to improve product quality and consistency without necessarily raising prices.
“That would be a win for Aussie customers in the value segment.”
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