Dollar Tree Should Enter Mexico Through a Joint Venture with Calimax

A Vision of Value: Planting roots in Mexico

Evan Benkert, Kristen Busby, Isa Eugenio Hunter Gray, & Joey Padgett Dollar Tree should enter Mexico through a joint venture with Calimax

Approach Partner Position Prosper

Partner with Calimax Rollout multi-price point Profitably increase market stores in the Baja region share over 3 year period

Bottom Line

Dollar Tree could realize profits of approximately $190K and capture 18% of Baja’s discount store market in 3 years, setting up a possible buyout of Calimax 2 Partner Position Prosper

Partner with Calimax Rollout multi-price point Profitably increase market stores in the Baja region share over 3 year period

Partner Position Prosper Dollar Tree has experienced successful growth and expansion

Number of Stores Open 5000 190 Deals stores 2012 year end

4000 140 Dollar Tree Canada stores 3000 2012 year end

2000

Expand into 1000 Mexico

0 4 2008 2009 2010 2011 2012 Source: Dollar Tree Partner Position Prosper Low labor costs & fast retail industry growth makes Mexico attractive for expansion

Hourly Compensation Wages, 2012 Retail Industry Growth, ‘09-’16 $160 Norway Switzerland $140 Germany Canada $120 United States United Kingdom $100 Singapore Argentina $80 Portugal Slovakia Billions of USD of Billions $60 Brazil Estonia $40 Taiwan Hungary $20 Mexico Philippines $0 0 10 20 30 40 50 60 70 2009 2010 2011 2012 2013 2014 2015 2016 5 Source: U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013 Source: USDA Foreign Agricultural Service, 2010

Partner Position Prosper Joint venture presents optimal entry into Mexican market Acquisition JV Greenfield

Total Control

DT can gain from Gains Local Knowledge market knowledge and risk mitigation in a new environment Share Risk

Gov. Restriction JVs can decrease capital requirement while creating Risks Share Profit better government relations

Initial Investment 6

Source: Deloitte Partner Position Prosper Dollar Tree should Partner with the small grocery store chain Calimax

Industry selection Grocery store selection

Retail

Small to medium size chain

Consumer products

1. Convenience stores 2. Department stores 3. Grocery stores Value division opportunity opportunity division Value

Small to medium ì Willingness to work with a US Company grocery store chain 7

Source: Team analysis, Company websites Partner Position Prosper Calimax de Valor adds value by combining strengths of each company Current Position Within Mexico

Established Brand

Real Estate Knowledge

Supplier Network Distribution Network de alor Access to Capital

Economies of Scale “Menos es mas con Valor”

“Dollar” Industry Experience

Infrastructure 8

Source: Dollar Tree; Calimax websites Partner Position Prosper Position Partner Prosper

Partner with Calimax Rollout multi-price Profitably increase market share over 3 year period point stores in the Baja region

Partner Position Prosper Calimax de Valor should adopt a multi-price point strategy

Price products differently to Use precision to reduce Value based costing to satisfy different preferences perceived cost reach 3 price points

Calimax % Offer multiple price Eight Case Studies Testing: Waldo’s “Charm” Prices vs. Rounded de Valor Undercut points $9.99 vs. $10.00 9.95 13.60 27% More product Result: “Charm” Prices 50% diversification 14.95 29.60

Sales 39.95 59.00 34% Satisfy more 24% customer preferences

Source: Waldo’s website & Facebook page, Book: Priceless by William Poundstone, Cornell, Bain

Partner Position Prosper Baja California’s maquiladora economy offers a large, low income target market

% of Baja Population Supported by Maquiladoras

4000000 40%

35.5% % Supported by Maquiladoras 3500000 35%

3000000 700+ maquiladoras 29.2% 30% are Baja’s primary

2500000 employers 24.9% 25%

Baja California Population Population Baja California 2000000 20.76% 20.6% 20.5% 20% 1500000

1000000 15% 11 2006 2008 2010 2012 2014 2016

Source:Journal of Borderland Studies, INEGI, CBRE Partner Position Prosper Dollar Tree should concentrate store rollout in Baja California 5 1 5 2 Tecate Mexicali 1 Tijuana San Luis Rio Rosarito Colorado

5 Store allocation to each city determined by Ensenada GDP, population, and poverty level

San Felipe 12 Sources: “International Market Expansion…”, Baja.gov, BajaCalifornia.gov

Partner Position Prosper Dollar Tree should utilize high growth with fewer initial stores to test markets

Calimax de Valor Store Rollout 70 16 Dollar Tree 14 60 Growth: Canada is 12 50 Openings ~30% on average 10 and we assume 40 similar rate 8 30 Stores 6 20 Payless Case 4 Study: 10-20 initial 10 2 stores allows scalable potential 0 0 2014 2015 2016 2017 2018 to be investigated 13 # of Stores Openings per year

Sources: Dollar Tree, Payless Shoesource, Wright.edu Partner Position Prosper Prosper Partner Position

Partner with Calimax Rollout multi-price point Profitably increase stores in the Baja region market share over 3 year period

Partner Position Prosper Dollar Tree should focus on three key location pools in the first five years 2014 2015 2016 2017 2018

Construction &

Hiring Promotion & Training

TIjuana Opening

Construction & Hiring Promotion & Training

Ensenada Ensenada Mexicali & Opening

, Construction & Hiring Promotion & Training Rosarito Opening , San Felipe Felipe San ,

Key:

San Luis Rio Rio Luis San Colorado, Tecate Setup Re-Evaluate Current Promotion Operations Concentrate on Growing Execution Markets & Consider Begin to expand 15 Calimax buyout beyond Baja Sources: Reuters; Forbes Partner Position Prosper

Timing risk of being early adopter: - More risks and uncertainty - Potentially higher cost - source: american Marketing association Calimax de Valor would hold approximately 30% of the Baja discount market by 2018

100%

90%

80% CAGR: -33.4% 70%

60%

50%

40%

%Market Share CAGR: 30.0% 30%

20%

10% CAGR: 3.4% 0% 2013 2014 2015 2016 2017 2018

Waldo's Calimax de Valor Other 16

Source: McKinsey, Waldos, and USDA Foreign Agricultural Service Partner Position Prosper Buying out Calimax after three years could provide long-term benefits at short-term costs

Dollar Tree Net Income w/o Dollar Tree Net Income w/ Buyout Buyout $4,000 $8,000

$3,000 $6,000

$2,000 $4,000

$1,000 $2,000

$- $- 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Net($1000s)Income $(2,000) Net($1000s)Income $(1,000)

$(2,000) $(4,000)

$(6,000) $(3,000) Worst Expected Exceptional Worst Expected Exceptional

Expected potential NPV in Expected potential NPV in perpetuity of $16M perpetuity of $31M 17

Source: Dollar Tree, CBRE, Bloomberg, CMO Survey Partner Position Prosper Appendix

Partner PositionPosition Prosper Framework

Grocery Low Income Market Entry Dollar Tree 5 Forces: Dollar Options Shoppers Failure Growth Tree

Past JV Success in Product Population Financial SWOT: Dollar Alignment Concentration Assumptions Tree Mexico

Don’t Acquire Walmart Price- Need for Value Waldo’s Based Costing Stores Projected Sales SWOT: Calimax

Post-Entry Multinational Expansion Convenience Projected Net Suppliers Shopping Income STEEP: Mexico Speed

McDonald’s Payless Expansion Transportation Market Share Partnership Infrastructure Analysis Speed

50/50 JV has Price Point best chance Validation

JV’s make use of Synergies 18 JV & Collaboration Grocery stores considered for partnership

-More than 606 stores -183 stores -Holding company -57 branches with 200 stores in -Grocery and -Publicly traded Mexico department retail Mexican grocery -One stop shop chain store and department -Owns 50% of Costco store chain de Mexico through JV

Emphasizes that it Aprecio focuses on is Mexican-owned providing the best Presence of Food and operated, Family run prices for low Club and Top Care business, already Mercado Soriana purchasing power lines target lower has four store offers low pricing consumers through income spenders formats scheme a narrower range of products    19

Source: Company websites Joint ventures in Mexico have proven successful

- Joint venture with Grupo Axo - Greenfield venture in Canada - Expect to open 41 stores in - Joint venture in Mexico with Mexico within first 3 years Home & More - 300 stores long-run - 50% equity holder - Past success with - Kept Home & More name for partnerships in 10 other Latin over 2 years then rebranded American countries stores to Bed Bath & Beyond

Source: Payless Source: Bed Bath & Beyond

Dollar Tree should not acquire Waldo’s to enter Mexico

Potential for local resistance to Dollar Tree’s takeover Large capital Acquisition of all stores investment (~150M, would not allow for which is 3X the cost of gradual entry Canada acquisition)

Dollar Tree should not acquire Waldo’s

Waldo’s pricing strategy Would miss out on is set at multiple price cultural knowledge from points insiders Government intervention and regulations 21 Dollar store shoppers have lower incomes than non-dollar store shoppers

Shopper’s Household Annual Income

Non-Dollar 20 28 21 11 7 5 8 store shoppers

Dollar store 30 34 17 8 5 3 3 shoppers

0 10 20 30 40 50 60 70 80 90 100 Percentage

Under $25,000 $25,000 to $49,999 $50,000 to $74,999 $75,000 to $99,999

$100,000 to $124,999 $125,000 to $149,999 $150,000 and above 22

Source: Deloitte 2011 American Pantry Study, n = 4,086 size, survey conducted in November 2011 Calimax de Valor would utilize Dollar Tree’s relationships with multinational suppliers

Source: Dollar Tree and company websites Strong retail segments in Mexico align with popular dollar store products

Categories with Top selling Products available strong growth in products in US at Waldo’s Mexico Dollar stores

Office/school supplies

Home and garden

Consumer products

Books/magazines

Flowers

Gifts

Greeting cards 24 Food and drinks

Sources: US Media Consulting, Waldos, Statista Analysis reveals high barriers to entry and importance of economies of scale

Barriers to Entry • Capital requirements: must make a large capital investment in order to compete • Unequal access to distribution channels • Restrictive government policies • Switching costs: products/signs in Spanish

Buyer Power Supplier Power Intensity of Rivalries • Industry products are rather • Competition coming from Waldo’s/Wal- • Suppliers size, package and standard/undifferentiated Mart but aren’t many other value stores price offerings to make margins • Face switching costs in changing • US Industry growth rate is high and • Need vendors that have large vendors/product differentiation if likely to rise in Mexico affecting enough economies of scale industry margins decide to use Mexican vendors • Supplier groups don’t rely heavily • Loyal customers to Mom & Pop shops • Have strong contracts and on Dollar Tree as they have relations with large US suppliers many other customers

Threat of New Entrants • High growth and opportunity in Mexico Key increases threat of new entrants High 25 • International companies looking to enter Medium must have capital requirements • Buyers’ propensity to switch is high due to undifferentiated products at Dollar Stores Sources: Dollar Tree, Team analysis Factors affecting Dollar Tree internally and externally

Strengths Weaknesses

- Access to capital resources - Highly seasonal demand; inconsistent - Established supplier relationships - Strong dependence on domestic and - Large scale and flexibility foreign suppliers drives financial - Solid and scalable infrastructure and performance distribution centers - Profitability is vulnerable to cost - Expanding business model and high increases, thus decreasing margins growth rates and effecting profit

Opportunities Threats

- International expansion - Barriers to entry in certain international - Increase square footage and capacity of markets (resistance and legal/ current stores government regulations) - Room to increase number of Dollar Tree - Fluctuating economies of suppliers and Deals stores in US and Dollar Tree - Other stores are entering the dollar Canada market (Target, Wal-Mart, etc. have - Broaden customer base & market dollar sections now) penetration in the Northeast and West 26 Factors affecting Calimax internally and externally

Strengths Weaknesses

- Access to capital resources - Constrained to Baja Region - Established supplier relationships - Unable to reach “value-centric” - Well known, middle-tier brand customers - Solid and scalable infrastructure and - Limited network with single distribution distribution centers center - High growth rates within the Baja region

Opportunities Threats - Tapping into “value-centric” market by - Government stability is a concern in the creating low cost standalone store future - Expand geographically to further - Corruption exists in Mexico as a whole, penetrate current region impeding growth and innovation - Partner with experienced, international - Being beat by lower prices of firms to raise growth rate competition; who have the scale to offer value 27 SDlskd

Key issues determine optimal entry strategy for Mexico

Social Technological • High context culture • Mobile telephone use 13th in Factors suggest world • Family es important in greenfield entry into

business • Strong broadcast media • Increasing technological Mexico is not ideal • Neposm desirable standards

Economic Environmental Key Issues •GDP: $1.7 trillion • Extreme populaon levels Government regulaons •Highly unequal income distribuon produce polluted urban areas Mexican naonalism

•More than 90% of trade under FTAs • Contaminated water Distribuon channels •GDP • Improved infrastructure • Natural disasters

Social: High Polical Technological: Med • Intensiﬁed security at US border • Major drug-producing and transit Economic: High naon; related crime Environmental: Med • Free trade agreements with over 50 countries Political: High 28

Source: http://countrystudies.us/mexico/ Statista, http://www.heritage.org/index/country/mexico Walmart’s Pricing Model does not reflect consumer’s ability to pay

1300.00%

1100.00%

Percent Change in 900.00% Hours of Walmart is failing Work 700.00% Needed to to capture its Purchase maximum value by Product 500.00% setting prices too high Percent Increase in 300.00% Price

100.00%

-100.00%

Source: University of Massachusetts- Lowell, 2004 1. Table with all the country specific info

Several factors affect the speed of post-entry expansion

1. Country-specific or general international experience

2. Number of prior entrants and competition level

3. Where a company lies relative to “status quo” 30

Source: “Strategies of Post Entry Expansion: Speed-up or Slow-down” (2012)

Case study: McDonald’s and speed of post entry expansion

+ Number of stores is highly correlated with market potential

+ High competition increases the target; suggests that McDonalds’s sees the presence of its competitors as a sign of high market potential

+ GDP and and population are other important factors _ Negatively correlated to corporate tax rate

Source: “Beyond Entry: Examining McDonald’s Expansion in International Markets” (2004) Payless Case Study: Start small by partnering to test market and potential

- In Colombia with very similar corruption level; says government has completely supported this initiative (due to it being partnership) - 10 stores in first year to test market

Source: transparency.org Prnewswire.com

Leading factors of market entry failure support joint venture as a winning strategy

Low spacial- Failure to Lack of coverage or gain store “relative foothold in density entropy” first 7 years

Market Entry Failure

Partnerships offer “Way to limit risks in high uncertainty markets and an opportunity to quickly reach a suitable relative entropy level and 33 brand penetration in a host country”

Source: International Market Expansion of Retail Networks: Determinants of Market Entry Failures” (2013) The vast majority of Baja California’s population reside in three cities

15% Tijuana 49% Mexicali Ensenada Other 30%

* Data as of 2010

Source:bajacalifornia.gov.mx Target market demographics highlight need for value

Tijuana is a Demographic Statistics of Target Markets “ magnet for ” low-income Populaon GDP population Tijuana 1,559,714 $17.4 billion Mexicali 936,145 1.6 billion Ensenada 466,727 1.1 billion San Luis 159,089 n/a Tecate 100,968 n/a Rosarito 90,620 n/a San Felipe 16,702 n/a

Source: baja.gob Dollar Tree is experiencing increased sales per square foot and steady growth overall

Dollar Tree Net Sales (million Dollar Tree Sales per sq. ft USD) $200

$8,000 $180

$7,000 $160

$6,000 $140

$120 $5,000

$100 $4,000

$80 $3,000 $60 $2,000 $40

$1,000 $20

$- $- 36 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 JV’s are risky, but a 50/50 JV is the most likely to succeed

“Probability of JV success is “Overall, there is a general 60% 80% in more developed areas” chance of failure”

“Equal ownership JVs are the “78% of JVs end in an most likely to succeed” acquisition”

Source: M&A Coursepack Synergies are what make joint ventures successful

Source: KaufmanHall Collaboration and cooperation is important in forming a joint venture with Calimax

Source: KaufmanHall Baja has highest rate of convenience shopping because weekday shopping requires convenience

Source: Nielsen Transportation infrastructure in Baja would help reduce overall costs

Source: CBRE Financial Assumptions

• SG&A = 60% of Sales • Marketing = 10% of Sales • All items under Income from Continuing Operations maintain the same percentages as Dollar Tree’s Income Statement • Sales in any given store could related to a certain percentage of average US stores sales based upon number of years in operation: • 1st year: 10% • 2nd year: 15% • 3rd year : 25% • 4th year: 40% • 5th year: 50%

Financial Sources: Dollar Tree, CBRE, CMO Survey Expected sales calculation

Store Size (sq. ft) 11,000 Price per sq. ft $9.30 Real Estate cost/store $102,300 Average DT Sales per sq. ft $190 Distribution 9.95 $0.77 50% 14.95 $1.15 25% 39.95 $3.07 25% CMV sales per sq. ft $273.60 Ideal CMV sales per store $3,009,600

DT sales per sq. ft CMV sales per sq. ft Ideal CMV per store 2013 197 $283.68 $3,120,480 2014 203 $292.32 $3,215,520 2015 210 $302.40 $3,326,400 2016 218 $313.92 $3,453,120 2017 225 $324.00 $3,564,000 2018 233 $335.52 $3,690,720

Year # Stores New Openings Total Predicted Sales In Thousands 2014 20 $6,431 2015 26 6 $11,975 2016 34 8 $23,136 2017 45 11 $42,055 43 2018 59 14 $64,403

Source: Dollar Tree, Statista, Team analysis Expected net income calculation

2014 2015 2016 2017 2018 Revenues $6,431 $11,975 $23,136 $42,055 $64,403 Cost of Revenue $4,132 $7,695 $14,866 $27,023 $41,383 Gross Profit $2,299 $4,280 $8,270 $15,032 $23,020 Operating Expenses SG&A $1,286 $2,395 $4,627 $8,411 $12,881 Marketing $643 $1,198 $2,314 $4,206 $6,440 Buildings $2,046 $614 $818 $1,125 $1,432 Total Operating Expenses $3,975 $4,206 $7,759 $13,742 $20,753 Operating Income $(1,677) $74 $511 $1,290 $2,267

Income from Continuing Operations Total Other Income/Expenses Net $19.96 $37.17 $71.80 $130.52 $199.88 Earnings Before Interest and Taxes $(1,657) $111 $582 $1,421 $2,467 Interest Expense $(1) $(3) $(5) $(9) $(14) Income Before Tax $(1,658) $109 $577 $1,412 $2,453 Income Tax Expense $57 $105 $204 $370 $567 Net Income from Continuing Ops $(1,715) $3 $374 $1,042 $1,886 44 Market Share Analysis

Mexico Number of New Discount Stores 2009-2011 825 Waldo's Calimax de Valor Other CAGR of General Retail Market 2009-2011 8% 2013 5% 0% 95%

Number of Discount Stores in 2009 4,894 2014 5% 0% 95%

Number of Discount Stores in 2011 5,291 2015 6% 0% 94%

Number of Discount Stores in 2012 5,719 2016 6% 1% 93%

Number of Discount Stores in 2013 6,183 2017 6% 1% 93% Number of Discount Stores in 2013 in Baja California 193 2018 7% 1% 92% Baja California Number of Waldo's Stores in 2013 297 Waldo's Calimax de Valor Other Number of Waldo's Stores in 2013 in Baja California 29 2013 15% 0% 85% 2014 16% 10% 74% Number of Calimax de Valor Stores 2013 0 2015 17% 13% 70% Number of Calimax de Valor Stores 2014 20 2016 17% 18% 66% Number of Calimax de Valor Stores 2015 26 2017 17% 23% 60% Number of Calimax de Valor Stores 2016 34 2018 17% 31% 52% Number of Calimax de Valor Stores 2017 45 Number of Calimax de Valor Stores 2018 59

CAGR Waldo's 0.034 45 CAGR Calimax de Valor 0.3 CAGR Others -0.334

Source: McKinsey, Waldos, USDA Calimax de Valor undercuts Waldo’s pricing and offers more quality import products

Waldo’s Pricing Calimax de Valor’s pricing • Undercut 13.60 pesos price point by setting at 9.95 (27% savings for customer) • Undercut 29 peso price point by 50% à set at 14.95 for Calimax de Valor • Undercut 59 peso price point by 34% à set at 39.95 for Calimax de Valor 46