November 26, 2017

On Friday, the S&P 500 and the Toronto stock index were each up 0.2%.

The Boston Pizza Royalties Income Fund units were up 1.6% to $22.48. These units should be a good investment for the 6.5% yield. The price does fluctuate and the units have been a very good investment when bought on larger dips. There is some danger that the price could fall as interest rates rise. But growth in distributions per unit will likely cause the units to maintain or increase in value over the years. But that does not mean the price can’t fall temporarily.

Constellation Software was up 1.9%.

The Competitive landscape for Liquor Stores versus Dollar Stores:

Liquor Stores N.A. which is no longer on our list but which I continue to follow to some extent was up 1.1% to $10.06. I lost faith in this company some time ago and the fact that it is under new management does not change my view. I think they simply face a very tough competitive landscape.

Consider the competitive landscape that this liquor store chain faces. It’s the largest chain in Alberta but still only owns about 13% of the total stores (at my last check). Imagine if you wanted to get into business and compete against them. As a small one-location store you would have no trouble getting wholesale supply at exactly the same prices as this big chain. And it is no secret where to find that wholesale supply. I believe every liquor store in Alberta buys essentially everything (there may a few exceptions for certain specialty wine stores) from the provincial liquor wholesaler and I don’t believe there are any volume discounts at all. If you opened a store in a good location there would be no real issue with trying to establish a brand name or following. It would be obvious what you were selling and a convenient location would attract a certain amount of local traffic. You would be at a disadvantage in terms of scale for advertising. But you might choose not to advertise. Despite its larger scale, Liquor Stores N.A. has not been able to build up any big reputation for low prices – probably because they don’t have costs that are much lower than even a one-location store. The point is that you would not be at any insurmountable disadvantage. This is is proven by the fact that there are many one-location liquor stores operating in Alberta. Given competition, it may not be a very lucrative business, but the mom-and-pop stores do seem to survive.

Contrast that with what would happen if you thought about opening a one-location dollar store in competition with Dollarama. I don’t know where you would go to purchase your goods at wholesale. But I guarantee that you would not have access to the same low prices and the same store-brand proprietary merchandise that Dollarama sources (which is mostly in China). Even if you had a great location, it would not be obvious to customers exactly what you might be stocking. I suspect you would have  a hard time drawing in customers. Even the smaller dollar store chains, which include the Great Canadian Dollar store and Buck or Two Plus!, I suspect cannot access the same low-cost products as Dollarama. Certainly, unlike in the case of liquor, there is no requirement for Dollarama’s suppliers to sell to other dollar stores. The names of Dollarama’s specific Chinese suppliers are basically valuable trade secrets. Dollarama has built up a huge amount of brand awareness which is very difficult to compete against. The point is that Dollarama has established itself in a manner that is extremely difficult to compete against. I don’t think a one-location dollar store could easily survive. Only large chains would have much chance of competing successfully against Dollarama. Dollarama gets a huge advantage from being by far the largest of the dollar store chains and from the proprietary sourcing knowledge and relations that it has built up. In the liquor store business the fact that everyone must purchase from the same provincial wholesaler at the same price eliminates much of the advantage of scale.