December 17, 2000

THE BARGAIN! SHOP AIMS TO KEEP IT SIMPLE
by Zena Olijnyk - Financial Post

As The Bargain! Shop sets out on a course apart from its previous owner - the legendary retailer once known as Woolworth Corp. - the discount chain's new head has no illusions about its future.

"We're a modest operation," says Mike Roellinghoff, cheif executive of the 85-store chain, which was recently sold by Venator Group Inc. to a group of investors that includes the chain's management. (Venator changed its name from Woolworth in 1997 in a bid to lose its five-and-dime image.)

"Our mission is to keep things simple, not try to compete with the much larger discount chains." Part of this new mission, says Mr. Roellinghoff, is to give Bargain! Shop a frest start by concentrating on small-town Canada and creating a more focused assortment for customers, making it the convenient alternative to travelling to a larger discounter.

"We have to understand who our customer is, and serve them better," he says.

Bargain! Shop is one of a number of discount chains that has suffered by being sandwiched between large discounters, such as Wal-Mart and Zellers, and the dollar stores, such as A Buck or Two. The BiWay chain is in a financial mess that has hurt its parent, Dylex Ltd. Recently, after a $25-million writedown as a result of inventory and distribution problems at BiWay, Dylex announced it was selling the discount chain (with sales of about $600-million) and its other banners.

Saan Stores, owned by Winnipeg-based Gendis Inc. and with annual sales of about $400-million, was also up on the auction block until late last year. With no takers, management decided to close more stores and continue trying to fix problems at the remaining 240 stores.

Bargain! Shop, with its hodge-podge of store locations in urban, suburban and rural areas, also felt the impact of the larger discounters, prompting Venator to put the chain up for sale.

Similar chains, such as Family Dollar and Dollar General, are doing brisk business in the United States. So Mr. Roellinghoff believes "at least one of us up here can get our act together and retain in this market the way it needs to be done. We have to be ready to change and adapt to the reality of the market place."

Under the management and investor buyout completed in December, the Bargain! Shop, with annual sales of about $100-million, will be reduced to an 85-store chain from 128. Mr. Roellinghoff said the stores that remain are "cash-flow positive" and are concentrated in smaller markets.

Retain waters suggest that while there probably is a market for a discount shopping tier below the Wal-Mart of Zellers level, the three main players, Bargain! Shop, BiWay and Saan, have yet to find a way of exploiting it.

There has been speculation that a merger of two, if not all three, chains would create a national discount chain with annual sales of about $1.1-billion.

David Brodie, an analyst at CIBC World Markets, wonders whether this would be simple "taking two or three problem chains and making one bigger problem chain," while others suggest it could make sense to join their buying power, distribution and national scope. This could also attract a U.S. player.

"There may be room for one national discount chain if they can do it right," says Richard Talbot, a retail consultant.

For his part, Mr. Roellinghoff acknowledges only that there's "a lot of flux" in the discount sector, and "wouldn't necessarily disagree" with the observations being made. "But whether there is a role for us in this, I can't say."

George Hartman with Dundee Securities Corp. also suggests there is room for discounters at the level of Bargain! Shop. "But basically what you have to do is create the market for yourself, make yourself necessary to shoppers," he says. "There's no use competing with the likes of Wal-Mart or Zellers if you don't have the resources fo the plan."

Mr. Roellinghoff agrees, saying the strategy is to concentrate on small-town Canada, where a store such as Bargain! Shop will be the only game in town. "Right now, there are at least 600 communities with a population of less than 10,000," he says. "Our focus is on that market, and trying to make ourselves important and convenient."

However, observers note that those trying to concentrate on small-town Canada will have to keep an eye on Wal-Mart, which is looking at developing a prototype for a store serving small towns. It's already testing the concept in Kapuskasing, Ont., a northern town with a population of 10,000.