The Canadian retailer that may become the next Costco or Walmart

Note: This interview was taped on Wednesday 27 November 2024.

We've all heard of Costco (NASDAQ: COST) - the American big box retailer that makes even Australia's largest Coles and Woolworths stores look like a bar of Twinkies. But one of the reasons Costco is so well-known is that it's been around for a long time. Costco was founded in the US in 1983 and has been publicly listed since 1984. In that time, it has returned a lazy 20,000% for shareholders - proof that both quality operators coupled with long-term investing cannot be beaten.

But given Costco shares are going for nearly US$1,000/share, is there a cheaper alternative for investors who want access to a global, high-quality retailer but don't have the guts to cough up a 58x trailing P/E ratio? 

Well, it turns out, there may just be one such example. It's not exactly the same as Costco but its laser focus is on delivering fantastic value for customers, maximising operational efficiency, and its dominance in its homeland of Canada makes it quite the opportunity.

In this episode of The Pitch, Jack McManus of Canopy Investors introduces you to the company that could become the next Costco - Dollarama (TSE: DOL).

Neat, eh? (Sorry, I couldn't not throw in the Canadian-ism.)

EDITED TRANSCRIPT

Costco's share price has soared more than 20,000% since listing in 1984. Have you found another retailer that could track this same rise over the long run?

McManus: Costco is one of the all-time great retailers and one of the all-time great businesses. But we're excited about Dollarama. It's a large position in our fund, but it's important to know that they're following a different path to success. 

So as you said, Costco is a destination shop. They have these huge warehouses. You need a membership card just to get in the door, and then when you get there, you're going to go and you're going to stock up. You're going to get 48 rolls of toilet paper, you're going to get a flat-screen TV and a slice of pizza all at a bargain price. 

But Dollarama is more of a convenience shop. These are smaller stores and are more accessible. 85% of the Canadian population lives within 10 kilometres of a Dollarama store. And when you go there, you might buy two rolls of toilet paper and a bunch of household essentials, all priced at $5 or less. They are different business models but there are some core key strengths that we think make them both pretty special. 

Firstly, they're both obsessed with delivering value to the customers. Costco does this by leveraging a huge buying power across a limited selection of items and it passes their savings onto the customers. Dollarama does it by sourcing most of its products directly from suppliers, and it leans very heavily into home brands or private labels. Private label represents about 70% of their sales versus the 30% they might see at Woolworths or Coles. That allows them to offer prices well below their competitors and even Walmart. 

Secondly, they're both exceptional operators, so Costco is famous for relentlessly optimising every part of its operations and Dollarama, they're also very lean and very disciplined. They've delivered very consistently over the last decade. 

And thirdly, they both have really strong brands. So you might not have heard of Dollarama, but they're actually the highest-rated retail brand in Canada. And their value proposition is really about a mix of convenience and value. 

Dollarama approached The Reject Shop (ASX: TRS) in 2023. What happened there?

Do you mind that management is so hush-hush about some of their future plans? We hear a lot from investors who say they want more communication from management teams.

Do you think there are other M&A opportunities on the horizon for Dollarama?

Are there any risks?