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[46 comments]

CVS to walk away from $2 billion in cigarette sales

February 5, 2014

CVS may not be the first to stop selling tobacco products, but the drugstore chain's announcement is big for no other reason than the sheer size of the company's tobacco business. CVS estimates it will lose roughly $2 billion in revenues from tobacco users on an annual basis. The chain anticipates the decision will impact 2014 earnings somewhere between six and nine cents per share.

Ending sales of tobacco, according to Larry Merlo, president and CEO, CVS Caremark, was the right move for the chain. "Put simply, the sale of tobacco products is inconsistent with our purpose," he said in a statement.

CVS received praise from President Obama for its decision. "As one of the largest retailers and pharmacies in America, CVS Caremark sets a powerful example, and today's decision will help advance my Administration's efforts to reduce tobacco-related deaths, cancer, and heart disease, as well as bring down health care costs — ultimately saving lives and protecting untold numbers of families from pain and heartbreak for years to come."

In addition to ending the sales of tobacco in its stores, CVS has pledged to step up its smoking cessation program. According to the company, the program, which will be launched in the spring, will include information and treatment on smoking cessation at the chain's pharmacy and MinuteClinic locations as well as online. Members of the CVS Caremark pharmacy benefit management plan will also have programs in place to help them quit the tobacco habit.

CVS told RetailWire it does not currently sell e-cigarettes. At the time this story was published, there was no response as to whether it would add e-cigarettes as a component of the company's smoking cessation program going forward.

FINANCIALS:     [NYSE:CVS] [ ]

Discussion Questions:

What is your reaction to the decision by CVS to stop selling tobacco products? What effect will this have on its competitive positioning versus others that continue to sell tobacco?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Will CVS's decision to stop selling tobacco be a net positive or negative for the company's business when we look back in five years?

Comments:

CVS not only sold cigarettes, they were one of the lowest priced sellers in the market, even taking sales away from convenience stores. It is likely the total loss in sales will be greater than just the cigarette lost sales. As the low price leader, consumers select CVS for their smoking needs and while in the store purchase other items as well.

Unless Walgreens takes the same position, they will have a sales gain. Consumers are addicted to cigarettes and will purchase them wherever they can, at the lowest price. This will not have any effect on overall cigarette sales.

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W. Frank Dell II, CMC, President, Dellmart & Company

Gutsy move, I'd say. They are positioning themselves as a health and wellness leader, to the detriment of their own finances. They will probably take some flack from shareholders, but it says they stand for something other than just trying to make a profit.

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Al McClain, CEO, Founder, RetailWire.com

 
10

There is no reason for anyone to smoke. Smoking will hurt or kill every user. I salute CVS for this bold move which will allow it to claim the moral high ground in a very competitive marketplace. That said, I wonder whether this move will cause more consumers to shop at CVS and how much business the chain will lose from smokers taking their business elsewhere.

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Max Goldberg, President, Max Goldberg & Associates

Obviously, this was not an easy decision. Tobacco sales generate visits, sales, impulse purchases, margin; not to mention the significant support (Advertising and Promotion dollars) from tobacco companies.

However, if CVS is going to position itself as "your health and wellness provider" then the decision, despite its potential short term negative effects, should eventually provide a significant differential advantage.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

Positive or negative for results, it's the right thing to do. I have never understood how chain drug stores could rationalize the sales of tobacco (and alcohol too, really). I mean, you'd never find either at a vitamin shop. I don't expect the company to go completely overboard and stop selling sugar, etc....but cigarettes were sort of a no brainer.

So all things considered, it's a very good move.

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Paula Rosenblum, Managing Partner, RSR Research

While others talk about the responsible citizenship, potential revenue loss and store image, I'll focus on the efficiency impact. Without cashiers having to find and grab tobacco products for shoppers at checkout, lines may move more quickly and result in more satisfied customers in general. That could be another competitive advantage for CVS.

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Joan Treistman, President, The Treistman Group LLC

This is a great position for a company that is focused on health and wellness. Whatever short-term financial impact it has, I think it will help them in the long run and they will be seen as a leader in the space.

It will be interesting to see what the competitive response is the likely winner is the mom and pop shops that will pick up these tobacco sales and footsteps

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

As a former smoker, I can say that there will be a secondary loss of revenue from other products purchased from shoppers who went to buy cigarettes. So it's more than the tobacco sales loss.

That said, good for them that they're taking a stand, and I'm selling my CVS stock.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

I'm glad in some ways that they did it, but it will obviously result in sales to smokers lost to competitors. And I don't see more non-smokers shopping at CVS, versus, say, Walgreens, as a result. Wishful thinking if you believe otherwise.

Most effective thing would be to double the tax on cigarettes and put the revenue into healthcare. Smokers are responsible for a disproportionate percentage of healthcare costs, so I'd be in favor of making them pay for it. Net-net, CVS will get some warm fuzzies out of this, and some nice PR points, but it will be a financial loser.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

Kudos to Larry Merlo and CVS! It's a great move and a gutsy one.

My thought is that it will hurt them measurably beyond the $2B for some time to come. Lots of people pick up secondary items along with their smokes or get their cigs while picking up prescriptions. Those people will likely leave for competitors and it will take a while for replacement sales to catch - possibly years.

Maybe Walgreens will drop foods containing sugar in a counter move?

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Ken Lonyai, Digital Innovation Strategist, co-founder, ScreenPlay InterActive

It has always struck me as strange that a pharmacy would be selling cigarettes.

I am sure CVS considered all the pros and cons quite seriously. The fact is cigarettes generate very little margin. The real value is the traffic and additional sales that traffic may generate.

I would not give them credit for making the "right" decision as far a health goes. They sell processed foods, sugared soda, candy, et. al. But, I will give them the benefit of the doubt that this is the right business decision. We will find out in a year or two. If it doesn't help the bottom line, somebody will be fired.

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Gene Detroyer, Professor, Independent

CVS is making a good long-term decision. With the way the world is changing and the way many people are focused on this "health" thing, more and more large retailers will stop selling smokes. Down the road we will have a weed store and a tobacco store and a sugar store....since yesterday we noted that the binge on sugar is not healthy!

Change like this becomes an opportunity for CVS.

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

I applaud the courage CVS has shown with this decision. As a provider of wellness products and services, this move will better align the company's mission and purpose to how it operates as a retailer. Our firm refers to this as brand authenticity, and I'll bet CVS customers will react favorably to this announcement.

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Jeff Hall, President, Second To None

As drug stores add more and more features like Minute Clinics, it's refreshing to see one to step out and make a decision like this. Interestingly, the first comment I saw on the topic was questioning whether they would likewise stop selling alcohol....

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Phil Rubin, CEO, rDialogue

Bravo to CVS! As Al already mentioned it is a "gutsy move" indeed. Any time you purposely take away a steady revenue stream representing nearly 2% of revenues, you are making a bold statement (or others might call you crazy). While in the short term it will have a detrimental effect on their revenue (they claim it won't impact 2014 earnings), over the long term it will enhance their competitive position overall.

CVS is in tune with what it takes to be a winning brand in today's world: clear, authentic and responsible vision driving consistent and transparent business (and product) strategies and execution in the store and engagement with partners, employees, and customers. According to their investor relations material, CVS touts itself as "a pharmacy innovation company" that is "reinventing pharmacy to offer innovative solutions that help people on their path to better health" and "improving health outcomes." In that context, the decision was maybe easier to make than expected.

They are making their assortment decisions in line with their aspirational vision and branding. It takes a board and c-suite with a long view to make these difficult but necessary business decisions. I expect CVS will expand on some existing lines and services or find new ones to replace (over time) the lost revenues.

Just yesterday we discussed the (de)merits of sugar on health and today we're having one on another addiction: smoking. Sign of the times?

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Mohamed Amer, Vice President, Global Integrated Retail Unit, SAP

Great for image if you support not smoking. Poor for image if you have made the decision that you want to smoke.

CVS has made a decision about who they want to serve. It is now up to those people who CHOOSE to smoke to make the choice of where they want to spend their money.

Is it right or wrong? That depends on what side of the fence you are on.

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Mel Kleiman, President, Humetrics

Good for them!

And now they can focus on the healthy lifestyle business. Cancer survivorship and prevention relies on smoking cession, a healthy diet and an appropriate body mass index, exercise, stress management (that includes figuring out the new reality, the hit on finances, work, family and self image), sleep hygiene, early detection, social support, and some more. Each has its own set of solutions - and there is probably an omnichannel model that can make these products available (even on a subscription basis).

There is much to learn and so much to do - a very tough job for someone in that moment - yet we have cancer and other chronic diseases where we basically tell the patient - good luck figuring it out.

America is so great at acute care but stumbles on chronic care. CVS hopefully will follow-up with solutions in these areas.

Why is it that cancer patients need to visit stores to pick up anything or figure out what to buy? CVS can have a Amazon/Google express equivalent. Do they know the problems chemo patients have with simple things like what to drink? There are solutions for this yet every patient basically reinvents the wheel.

Nice work CVS - step up, and guess what...make your shareholders happy. Oh, and enjoy your good night's sleep.

Vahe Katros, Consultant, Plan B

This is good news for the health of many, not to mention CVS's image. However, I think that there may be unintended consequences - namely, that this will help fuel the black market in untaxed cigarettes.

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Liz Crawford, VP, Strategy & Insights, Match Drive

Outstanding... hopefully others will follow.

'JackKurek'

Based on my own sentiment, I could easily join others here in applauding CVS's altruistic (or so it will be characterized) decision. But I'm withholding judgement for now.

Let's watch for a year. My prediction? Two consecutive negative quarters and tobacco goes back in. Four consecutive quarters of little to no financial/stock price impact and WAG boots cigarettes too.

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Ben Ball, Senior Vice President, Dechert-Hampe

Cigarette sales may have not been consistent with the health positioning of CVS, but cigarettes are a destination driver. The removal of this category will have an impact on sales both directly and indirectly for CVS.

If Walgreens does not follow suit, then they will have a competitive advantage over CVS for those customers who smoke. This is good news for c-stores and may help blunt the impact of the dollar store's entry into the cigarette market.

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Steve Montgomery, President, b2b Solutions, LLC

If a store is going to sell cigarettes they might as well sell pornography too. As a retailer, a company needs to decide just how low it wants to go to make a dollar. CVS will now appeal to a better class of shopper. If I were CVS, why not try to be the Trader Joe's of drug stores?

My rule is if it's not allowed in the corporate office, then don't sell it in the stores. This goes for tobacco, certain kinds of magazines, etc.

David Livingston, Principal, DJL Research

 
11

Good move health wise, and by the time you add in labor to buy, stock, and merchandise tobacco products, the extra profits gained are minimal, since the state and federal government make all the money. Liquor sellers in Ohio make 5% profit on what they sell. I'm sure they will create new layouts in the stores to create more business for the lost sales.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Editor's note: CVS does not currently sell e-cigarettes. In a reply to RetailWire, regarding their use as a smoking cessation option going forward, a CVS spokesperson e-mailed, "We are monitoring what the FDA decides in regard to these products."

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George Anderson, Editor-in-Chief/Associate Publisher, RetailWire LLC

Nervy, particularly as dollar stores double down on things deleterious! Smart in terms of delivering on brand promise. Walgreens could claim to have a bit of an out in that regard as it stretches beyond being a drug store and into fulfilling the multi-promise of "health and daily living store" "at the corner of happy and healthy." After all, tobacco is a part of daily living that makes some folks quite happy.

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Carol Spieckerman, President, newmarketbuilders

The thought on my ride to work: a grass roots campaign for folks to move their business to CVS to help make up that $2 billion!

Vahe Katros, Consultant, Plan B

What a great and gutsy business decision. I agree selling tobacco products is inconsistent with their core business which is keeping us healthy. Yes, it will have an effect on the bottom line for a few years. But it is a good move. Now let's see if any other large businesses will follow their lead.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

As a very small business, 30+ years ago I rejected lucrative work with the tobacco industry, probably for the same reasons that Caremark has. Admittedly, the tobacco business was and is a legal business. But when it became obvious that if they did not market to teens, their business would die, I concluded that legal or not, this was NOT a LEGITIMATE business.

Given the diversification of the tobacco conglomerates, it is obvious that I wasn't the only one recognizing the practical realities. Any business that depends on addicting/enslaving the young is NOT a legitimate moral business. I have no problem with them serving adults, and even appealing to them. And I don't find tobacco smoke personally offensive, in limited amounts. So I have no animus toward adult smokers.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

So why not candy, salt and soda too? And what about the periodicals that make a living by smearing the image of public figures with half truths and outright lies? Is two billion dollars enough of a sacrifice for them to swallow or is there in fact a true concern for public interest? Tobacco prices are making the commodity a passable shrink risk for any and all that wish to consider selling the products. Fines for sales to minors only add to the rapid depletion of profits. Fire risk from associated products increase insurance costs. Tobacco is simply a high risk with lowering returns for retailers and CVS wants out. But that's just what I think.

'gjarnoldjr'

CVS is making a strong statement not only to their customers but also to their employees. As we all know, our employees "watch our walk" and "listen to our talk" before they buy into the company's mission statement and slogan.

There is a lot to be learned from CVS setting a new expectation for the buying public as they look to other retail establishments where they spend their money.

It also sends a strong example to other companies who have been considering similar actions.

Tom Borg, Business Expert, Tom Borg Consulting, LLC

Bravo CVS! As they position themselves as a "health and wellness" center/store, this is the right move.

So be it; they decide to cater to 80% (and climbing) of the population who are non-smokers. In the neighborhoods where CVS is the chain of choice or the closest for convenience, smokers will still frequent there for pharmacy needs. For every smoker they may lose (really sad if you ponder this consumer who goes there for the primary purpose of inhaling carcinogens), CVS will gain others on the goodwill of its new mission.

Alan Cooper, Contract Trainer/Training Consultant, Independent/Freelance

The comments above give CVS good marks for stopping selling cigarettes -- and so do I. I never smoked in the past, when cigarette smoking was fashionable and government approved. Upon reflection I asked myself is this a sound business decision or a politically correct thing to do today?

Let's give CVS the benefit of any doubt, if any exists anywhere, as America, ironically, is trending towards legalizing the smoking of pot. Whatever ... it looks like tobacco cigarette sales at CVS have gone up in smoke.

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Gene Hoffman, President/CEO, Corporate Strategies International

CVS knows the real cost of selling cigarettes. They know the cost of employee training, dedicated space, compliance with tobacco regulations, fines when the rules are broken and checks of ID compliance in stores. All of this for a product in decline. The smoking rate has dropped in half over the last 40 years in the US and will likely continue to go down. I suspect CVS has already done the real math and is only mentioning half of their equation. This move will force others to re-consider the full benefits and costs of cigarette sales.

'tmlens'

I am a firm believer that store brands should decide who they are, stake out a market or niche to differentiate themselves, serve that market well and hope for the best. So what CVS is doing is fine by me. That said, I don't believe they'll gain new customers who wish to "reward" them, and I am quite sure they'll lose some customers who would have picked up their prescriptions, greeting cards, toothpaste, and cigs all in the same trip -- but will go elsewhere to do all that, now.

'Liatt'

While I admire the gutsiness of this choice, are they going to remove the candy aisle, beer/liquor, etc.? I don't see CVS in the "healthcare" business -- they are a place to get a fill-in trip for groceries and are a "prescription drug delivery location." One of many.

Stan Barrett, Director of Membership, IFDA

Stepping outside of my current knowledge base - is it possible that CVS would become a "preferred supplier" for prescriptions on various health insurance/prescription plans based on this move? Wouldn't it be a "natural fit" for those plans to try to steer the payments toward a retailer/pharmacy where temptation for cigarettes was not available? Could that be a way to diminish the lost revenue?

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David Zahn, Owner, ZAHN Consulting, LLC

Good move. Every retailer should constantly reevaluate if their products, services, and customer experience is aligned with who they say they are, and where they need to go. Hopefully they'll be able to stay with this decision.

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Doug Fleener, President and Managing Partner, Dynamic Experiences Group

To be true to their corporate message on the "About" page of their website, the first line being "Your health's important to us," they needed to stop selling tobacco products at their stores. Sales will take a hit, but this should (is) translating into good publicity and will help them build the integrity of their brand message.

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Larry Negrich, Vice President, Marketing, nGage Labs

Cigarettes are probably 95% of their tobacco sales. The gross profit margins on cigarettes are in the single digits - after allocating overhead they are probably a loss leader. Main reason to sell cigarettes is the hope that the customer will buy other things while in the store.

I was a pharmacist at a retail drug chain 45 years ago. Employee theft of cigarettes was common then when they were 25 cents a pack. I can only imagine what the theft rate is today at $6 a pack or more. When CVS refuses to sell those high profit margin unproven and often dangerous dietary supplement products, I will then believe they sincerely want to protect the health of their customers.

'schindler'

Until smoking becomes illegal, I am not sure it is a great move. Do they sell energy drinks, cup cakes and other items which are not health focused? I don't smoke, but I appreciate the freedom to choose that decision. It seems that they are making a decision based on political correctness.

'scottmharvey'

In an email to RetailWire, Walgreen's spokesperson Michael Polzin said the drugstore chain "will continue to evaluate the choice of products our customers want, while also helping to educate them and providing smoking cessation products and alternatives that help reduce the demand for tobacco products."

Walgreens also announced a partnership with GlaxoSmithKline Consumer Healthcare to launch a free, Internet-based smoking cessation program called Sponsorship to Quit.

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George Anderson, Editor-in-Chief/Associate Publisher, RetailWire LLC

I applaud this move to create a more positive face for CVS as a healthcare and wellness organization. But I can't believe they would just flatly give up $2B in sales for a PR move. I'm assuming/hoping they have a plan in place to ramp up sales in other areas or generate revenue some other way to replace this huge nosedive.

Sally Beckner, Owner, Sunflower Sally Used and Rare Books

It is a brave move that needs to be applauded. In a time of companies coming out in support or against social issues, it is a competitive point of difference. Social researchers will have a field day studying how the public reacts.

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Jerry Gelsomino, Principal, FutureBest

We might have expected CVS to have tested this idea in a relatively isolated set of stores to see what would happen if. Wonder if Walgreens will test....

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

Largely left out of the many discussions surrounding this story is the Affordable Care Act, which promises to bring millions of newly insured in search of convenient, healthcare options. CVS, particularly with its aggressive rollout of in-store clinics combined with a strong PBM business and 7,600 pharmacies, is ideally positioned to take advantage of this opportunity. I can't say if this is a $2 billion a year opportunity for CVS, but it's not going to be small change either.

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George Anderson, Editor-in-Chief/Associate Publisher, RetailWire LLC

Call me cynical. I think brand image was a secondary consideration. My hunch is the category is no longer as valuable as it was once and this is a financial move. After all, what else is the "purpose" of retail than to make money?

If CVS were so health conscious, then why does alcohol remain in the mix? Not to mention candy.

'IMRetail'

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