Dollar Stores Break Into Cigarettes

Why tobacco category is attracting new channel of retailers

Samantha Oller, Senior Editor/Fuels, CSP

TACOMA, Wash. -- The drive by dollar stores to increase trip frequency and grow basket size has them pushing into categories that introduce a considerable degree of complexity--and competition with convenience stores.

Family Dollar is rolling out a four-foot tobacco set to 6,000 sites by end of 2012. In a second-quarter 2012 earnings call, CEO Howard Levine said the company chose tobacco as a major business for several reasons.

"First, it only takes 4 feet of space behind the checkout, so it was relatively easy to find space," he said. He also cited Family Dollar's new distribution deal with McLane Co. and the shorter and less expensive licensing process for tobacco, which enables the chain to add it to more sites compared to beer or wine. "And lastly, we believe tobacco is a larger opportunity because it is more frequently purchased and drives substantially more trips than beer and wine--in fact, 16 trips vs. 10 trips," he said. (Meanwhile, Dollar General has not announced sales of tobacco, but it has been testing the category in Nevada since late 2011.)

According to Family Dollar's own research, its shoppers overindex with tobacco products--more than one-third of heavy Family Dollar customers smoke, compared to the national average of less than 20%--and these smokers make more trips. Also, 60% of baskets that include cigarettes have additional items in the basket, which averages $17 compared to $13 without cigarettes.

"When you back tobacco out of that basket, the remaining basket is 8% higher than our original basket," Levine said, pointing out that the chain does not look at category sales individually, but rather at total basket size.

Lou Maiellano, partner in TAZ Marketing & Consulting Group, a tobacco retail consultancy based in Sevierville, Tenn., said Family Dollar's entry into the category is a "no-brainer." "It's always been a part of the business that they were just missing," he told CSP Daily News. "This is all pure plus sell, just an add-on."

He described the offer as "basic," with a mix of premium brands such as Marlboro, Newport and Camel, and value brands such as Pyramid and Maverick. The OTP selection is limited to a few shelves of cigars.

Maiellano considers Family Dollar's tobacco offer a "hodgepodge," with a surprisingly low number of OTP SKUs, and no moist smokeless tobacco. Prices are competitive but not necessarily the lowest. The stores also do not sell cartons of cigarettes. In the short term, he believes drug stores will see the more immediate sales hit, saying that "the person going to Family Dollar buys cigarettes there but typically bought them at Walgreens on the corner, or at the tobacco shop. The pie is just being re-sorted."

He does urge c-store retailers to make sure they stay on top of their tobacco categories and pursue opportunities to drive customers to their store; this will become more important as dollar stores learn and perfect the offer. "Their stores in the future when this category begins to grow will end up growing into that business," Maiellano said.

For more on dollar store channel blurring, see the October issue of CSP magazine.