Cigarette Sales Are Soaring at Dollar General, Showing Why Retailers Are Addicted to Tobacco

The anti-tobacco movement can hoot and holler all day long about the well-known negative impact of cigarettes, but the reality is that the tobacco business is too lucrative to disappear anytime soon. Few companies demonstrate this better than Dollar General (NYSE: DG  ) , where sales have shot higher since the chain began stocking cigarettes in the middle of last year.

According to Dollar General CEO Richard Dreiling, cigarettes have increased the size of the retailer's average transaction by 28%. A basket without tobacco products typically adds up to $10.77. A basket with them comes to an average of $13.75.

When Dollar General first introduced tobacco products in the second quarter of 2013, roughly one-third of cigarette sales involved no other product, one-third included a single other item (a "smoke and Coke"), and the final third was part of a larger basket.

Fast-forward to today, and only 26% of cigarette sales don't include at least one other item. More important, 44% now fall into the third and most lucrative category.

Dollar General is also seeing traffic count increase as customers discover that it's in the tobacco business. Dreiling addressed this on the company's latest conference call:

If you look at the fourth quarter, we're one of very few retailers who called out the fact that we still had transaction growth. So I feel, as we move through the back half of the year, that tobacco is going to continue to do what it's been doing, deliver -- it's going to deliver transactions and then, more importantly, the attachment rate is continuing to grow.

Finally, there's reason to believe that tobacco products inherently fuel future same-store sales growth. This is because their prices are in a near-constant ascent. "The manufacturer increases the cost, which we turn around and then ... pass on to the consumer," explained Dreiling. "So there is a built-in comp there."

My point here is not to make excuses for the tobacco industry or companies that sell its products. If anything, I can't help but wonder about the morality of doing so given that cigarettes are responsible for the deaths of an estimated half-million Americans each year and cost the country upward of $300 billion annually in health care expenses and lost productivity.

Yet it's impossible to deny that companies such as Dollar General -- and any other publicly traded retailer that sells tobacco products -- are stuck between a rock and a hard place. On one side, they have the health of their customers. And on the other, they're obligated to maximize profits to shareholders.

3 stocks that will help you retire rich
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2014, at 8:38 PM, helenaalaina wrote:

    The 'Defacing' of rural America.

    It is an astonishing drive across Rural Nebraska to see how DOLLAR GENERAL has positioned a store in every town. Their screaming DOLLAR GENERAL yellow & Black signs & their uninspiring warehouse looking buildings are an eyesore in town after town after town ...with their Cigarette banners and posters. Communities have lost all their individuality to this behemoth of a company. Our community of 1,100 has just been 'cursed' with a store...of course there is one 10 miles to the west....two that are 15 miles to the north...and another two,25 miles to the west. Seriously is there no saturation point? Of course, they strategically placed themselves at the 'gateway' of our community, adjacent to the High School athletic field and school....ready to pounce on every student, parent, visitor ...inundating them with their discount temptations. Of all the discount stores that have been invading small town America this one is especially repulsive

Add your comment.

DocumentId: 2879814, ~/Articles/ArticleHandler.aspx, 7/22/2014 8:01:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement