GOODLETTSVILLE, Tenn. -- Dollar General Corp. has announced plans to roll out tobacco at the majority of its 10,000 discount stores by the end of second-quarter 2013.
In its third-quarter 2012 financial earnings call, Dollar General chairman and CEO Rick Dreiling noted an initial test--beginning in Nevada in 2011 and Florida in 2012--proved the product's potential.
"As we've used our test-and-learn approach to this launch, we have given this initiative time to develop," said Dreiling. "While the category is in structural decline and is low margin, we know that our core customer over-indexes with tobacco and cigarettes, and we expect the category to drive traffic."
With this move, Dollar General has caught up with its arch-rival, Family Dollar Stores Inc., which had planned to roll out tobacco sets to 6,000 of its more than 7,000 sites by the end of 2012.
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Dollar General has secured an exclusive distribution agreement with wholesaler Nash Finch Co., Edina, Minn., "that does not require us to sacrifice margin from other categories such as candy and HBA to subsidize the distribution of tobacco and cigarettes," said Dreiling. "The competitive environment has changed, and I view this as a response that will allow us to get our fair share of this traffic."
According to preliminary results, Dollar General has seen basket increases from $10 to almost $14 when tobacco is included in the purchase. "That's a little bit less than the price of cigarettes, so that tells you they leave an item behind," said Dreiling. "We've seen increase in traffic and a nice bump in the comp that goes with it."
When asked what was motivating Dollar General to introduce tobacco--Family Dollar had suffered a backlash from anti-tobacco groups after it jumped into the category--Dreiling said it was a matter of customer demand, which he observed first-hand after visiting Dollar General stores about five weeks ago. "Between the customers and store managers, they were asking us when we were going to put cigarettes in," he said. "I view this as a response to the needs of our customer, and our store managers are communicating they need it."
The company believes the sales comp lift from tobacco will be greater than what it has seen from beer and wine, although it expects most of the growth to be on the front end, considering the category is in decline. It has also had to adjust its gross-margin projections for 2013 to accommodate the lower expected profits. "My theory is you're going to get a nice bump for a year, and that bump's going to moderate over time," said Dreiling.
Dollar General is still figuring out its investment in inventory, executives said, noting it depends on how quickly the program is rolled out.
"It is a category that's going to feel really good for about a year," he said. "We've done a really good job of controlling the supply chain, of managing the flow of cigarettes into the store and getting them out the door."
The news came on top of an announcement that Dollar General grew operating profit by 16.1% in the third quarter, to reach a record-breaking 9.1% of sales. Same-store sales rose 4.0%. Consumables--most significantly candy, snacks and perishables--drove the increases.
The Goodlettsville, Tenn.-based company also shared updates on other initiatives in its stores, including:
- The continued rollout of beer to more than 4,100 stores, including 3,300 stores that now sell wine. Dollar General plans to have beer or beer and wine at 50% to 60% of its 10,000 locations. Execs noted that adding beer or wine to a store typically adds a lift of 100 basis points in comp sales to that store. Dollar General's private-label wine, Spring Creek--produced by E&J Gallo--sells more than 1,400 cases per week.
- The continuation of its cooler expansion, with new stores featuring 16 cooler doors, and plans to add additional cooler doors to 2,200 existing locations. Execs noted the room for growth, with 4,300 sites having eight or fewer cooler doors. "Fresh and refrigerated foods help us drive customer traffic and improve basket size by serving a greater share of our customers' needs," said Dreiling, who added that where the retailer expands the number of cooler doors, it typically sees a lift in the average basket from $11 to more than $17 because of perishables.
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