Feb 5 2014, 1:00pm CST | by Forbes
CVS is giving investors at Dollar General something to smile about today.
The nation’s largest pharmacy chain is making waves after announcing it will no longer sell tobacco products. The move will cost it $2 billion in annual sales, but CVS’s revenue loss may be a big win for Dollar General which recently introduced tobacco products into its stores.
CVS’s 7,000 US stores will stop selling the product come October 1. The decision is being heralded as a smart move for the company which says the decision is about long-term growth. “I see my role as insuring that the company is positioned for growth,” Larry Merlo, the chief executive of CVS Caremark, told Forbes’ Matt Herper. “And that is what this decision is about.”
Dollar General, meanwhile, is betting on tobacco products to be a big sales generator for its 11,000 stores. The Goodlettsville, TN discount chain started selling cigarettes for the first time in 2013 and says the move has boosted overall sales.
Dollar General’s fiscal third-quarter profit rose 14% as foot traffic improved and shoppers spent more per visit. Comparable same-store sales were up 4.4%.
The reason? Executives say consumers who now come in to buy cigarettes are often picking up a few more items while they’re visiting.
Rick Dreiling, CEO and chairman of Dollar General explained the strategy on a earnings call last quarter, “When we started the tobacco journey, one-third of our cigarette sales were by themselves,one-third were what we would call a smoke and a coke, where they would grab a cigarette and maybe a soda or a chip. And then one-third is where the cigarettes were actually going into a basket that was beginning to grow,” he said.
In the third quarter the number of people buying more than just cigarettes grew to 44% as cigarette-only purchases are declined to 26%. “So we’re beginning to convert the cigarette customer into a shopper,” Dreiling said.
Overall, consumables (tobacco, snacks, candy) are a big part of Dollar General’s sales accounting for about 76% of total net sales.
Shares of CVS are down half a percent, while Dollar General share are edging up about 1% this afternoon.
Source: Forbes Business
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