US: Dollar General Adding Tobacco Products to Its Stores

Source from:  The Tennessean  12/12/2012

Dollar General will add cigarettes and other tobacco products to the majority of its 10,000 U.S. stores by the middle of 2013, citing "competitive pressures" and a perceived customer demand.

Family Dollar Stores, a key competitor to Dollar General (NASDAQ: DG), began adding cigarettes to its stores last year, even amid opposition from anti-smoking advocates.

"As the competitive environment changes, offering tobacco and cigarette products in our stores will drive additional traffic," according to a Dollar General statement. The company said it will take until the middle of 2013 before the tobacco products will be available in all stores.

As part of its decision, Family Dollar (NYSE: FDO) said that about a third of its customers are smokers, compared with less than 20 percent of the adult U.S. population overall. The company also noted that its core customers are more likely to smoke than the national average.

Dollar General has the same demographics, and the move will help the company generate more sales and profits, said analyst Mark Montagna with Avondale Partners in Nashville, who follows the company's stock.

"I think it's a smart idea; it's what the customer wants," he said. "Dollar General customers over-index toward smoking."

The company began testing tobacco products in Nevada last year and added them earlier this year in Florida to see how they would impact sales, Montagna said. The company found that the average purchase per customer was $14 in stores where tobacco was sold, versus an average of $11 otherwise.

Some reports suggested that adding cigarettes to the Family Dollar stores would raise average store sales by $1,000 a week, although the company has not released data yet to verify the impacts of tobacco sales. The company does not break down sales by product category.

Family Dollar reported that its same-store sales in the recent quarter rose by 5.6 percent from the same period last year, compared with just 4 percent for Dollar General in the third quarter. Some of that difference could have been a result of tobacco sales, Montagna said. Analysts had expected Dollar General's same-store sales gains to be higher.

Dollar General's third-quarter profit of 63 cents per share beat analyst estimates of 60 cents, he said.

The company reported profits of $207.7 million for the quarter, up from $171.2 million a year ago, and said sales were up 10.3 percent to $3.96 billion, about what analysts had expected.

The Dollar General move to sell tobacco isn't without its critics.

"That's disappointing news," said Patrick Reynolds, founder and executive director of the California-based Foundation for a Smoke-Free America. "Dollar General has chosen to sell tobacco in its stores and profit from the only product that when used as intended by the manufacturer causes lung cancer and heart disease, even in non-smokers who are inhaling second-hand smoke involuntarily.

"Smoking in the United States is declining, and stores that choose not to sell tobacco will benefit by publicizing that," said Reynolds, who is a grandson of the founder of the R.J. Reynolds Tobacco Co. "People like to shop where they feel the management has integrity, and not where they feel management just wants to make a profit without regard to the health of their customers."

Montagna, though, doesn't believe that Dollar General's reputation will be hurt by the addition of tobacco products.

"Customers will still want to go there because of the low prices and convenience," he said. "Dollar General has price parity with Walmart, but customers are in and out so quickly."

But there is one challenge the company will face with tobacco products, Montagna said: shoplifting.

"Adding tobacco is really wise if they do it correctly, but they have had to have a large focus on how to prevent shrinkage (theft)," he said. "It's definitely the No. 1 shrink category."

Family Dollar has tried to limit shoplifting by placing the tobacco products behind the cashier at the registers, and having the cigarettes counted at the end of each cashier's shift, Montagna said. Enditem