I resent the fact that I can’t walk down a street in New York City without breathing in a potentially lethal amount of second-hand smoke. So imagine my satisfaction when, on February 5, CVS announced it was going to cease selling tobacco products at its 7,600 stores by October 1.
CVS Loses a Loyal Customer
I became a CVS customer about 30 years ago. I found the stores conveniently located, bright, clean, and easy to shop. The product assortment was excellent and well-priced, and the ExtraCare loyalty program, of which I was a charter member, was terrific. I started shopping there for my prescription and over-the-counter medications, health and beauty aids, and vitamins, eventually expanding to cereal, juice, sundries, holiday candy, and school supplies. As the years went on, I did a greater portion of our family shopping there, and each quarter I would receive a generous coupon of “extra bucks” — free money to spend in the store.
However, it had become increasingly difficult for me to reconcile my disdain for smoking with shopping at CVS. The shelves of cigarettes behind the cash registers looked to me like a giant wall of tobacco marketing. Late last year, I’d had enough. I switched my prescriptions to a local independent pharmacy that doesn’t sell tobacco. I began writing to CVS/Caremark asking them to stop selling cigarettes. And I started ordering health and beauty aids on Amazon, whose refusal to sell cigarettes is well-known.
One Small Step for CVS, One Giant Leap for Public Health
CVS/Caremark made its announcement with little fanfare. It issued a press release and posted short notices on its retail and corporate websites. “Ending the sale of cigarettes and tobacco products at CVS pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health,” said CEO Larry J. Merlo. “Put simply, the sale of tobacco products is inconsistent with our purpose.” “We’ve got 26,000 pharmacists and nurse practitioners who are helping millions of patients each and every day,” continued Merlo. “They manage conditions like high blood pressure, high cholesterol, and diabetes — all conditions that are made worse by smoking.”
In short, dispensing healthcare advice right next to a rack of cigarettes for sale had become tantamount to holding a Weight Watcher’s meeting in a Dunkin’ Donuts: it just didn’t work anymore.
CVS’s purpose, of “helping people on their path toward better health” has driven its transformation from just another drug store chain selling magazines and gum to a central player in the US healthcare system. It has opened almost 800 in-store “Minute Clinics” where customers can get flu shots, diagnostic tests, and other medical treatments. It entered into a deal with medical products distributor Cardinal Health to form the largest generic drug sourcing operation in the US. It also acquired a specialty infusion business that would allow it to provide more pharmaceuticals through needles and catheters.
CVS Invests $2 Billion in You and Me?
So the company, after years of wrestling with the issue, finally decided to do the noble thing. It was so determined to enhance the health of Americans that it would take a $2 billion hit to sales, set an example for its competitors, and become the first US drugstore chain to kick the habit.
To which I said: yeah, right.
Don’t get me wrong. I’m supremely happy about the decision. And I’m sure health concerns were part of the retailer\’s motivation. But I’m not delusional enough to believe that the move wasn’t also driven by some serious long-term strategic and financial reasoning.
It’s true that smoking is the leading cause of preventable death in the US. The Surgeon General estimates it kills over 480,000 Americans each year (in other words, one in five deaths in the country), and takes an average of 10 years off a smoker’s life.
But US companies have a fiduciary duty to their shareholders, not to public health initiatives. Although some firms have become positioned around values (Chick Fil-A won’t open on Sundays; Chipotle only uses fresh, local, responsibly-grown ingredients; and Warby Parker donates a pair of glasses to a developing community for every pair it sells), those initiatives relate more to brand positioning than to public welfare.
To make a drastic move that sends a large chunk of customers out the door to the competition would be irresponsible. It might backfire, and ultimately do little to curb smoking. CVS must have felt the timing was right to make such a bold move.
Transforming From Drug Store to Healthcare Leader
To shed more light on the decision, it’s helpful to look at some numbers and trends. Last year, CVS/Caremark sales totaled $127 billion, of which less than $2 billion was tobacco. Tobacco represents less than 2% of its revenue, and CVS has a less than 2% share of the $100 billion tobacco market in the US. Prescription sales are becoming a larger and more profitable part of its business. In December, the company predicted that its pharmacy benefits management (PBM) business, the “Caremark” part of CVS/Caremark, would grow more than three times faster than its retail business in 2014.
Cigarette sales and smoking are both on the decline in the US. Despite the rise in their stock prices, which have been buoyed by overseas sales growth, a hefty dividend, US sales at Altria, Reynolds and other companies allowed to sell a lethal product and make tons of money in the process have been declining. Altria reported a 2.6% drop in net sales for the fourth quarter of last year as domestic cigarette shipments plunged by almost 6%.
Adult smoking rates have dropped from 43% of Americans in 1965 to 18% in 2014, according to the Centers for Disease Control. The American Lung Association and others predict that smoking will decline to under 10% of the adult population by 2024. Despite a temporary uptick during this Great Recession, smoking among young people has continued to drop, with fewer teens starting the habit.
The Cigarette Market
Like many commodities, cigarette sales are an increasingly competitive market. Selling cigarettes profitably has become increasingly difficult. The dollar stores have joined convenience stores as a top distribution channel and, along with warehouse club Costco, are putting tremendous downward pressure on prices. According to the Wall Street Journal, drug stores only account for 16% of tobacco sales. Many in the industry feel that CVS’s tobacco sales were slowing anyway, and would continue to be a drag on sales and earnings.
The healthcare market, on the other hand, is growing rapidly, and presenting huge upside potential. Aetna, the large healthcare insurer, predicted that total healthcare spending in the US would grow from $2.6 trillion in 2010 to $4.8 trillion in 2012. In an investor day presentation last December, CVS put the total pharmacy market potential at $340 billion, compared to $15 billion for front-end retail and over-the-counter products. The company expects the country’s shortage of primary care physicians to increase to 45,000 by 2020, resulting in skyrocketing demand for its Minute Clinic services.
Long term, then, it’s a whole lot more profitable to be in bed with Big Pharma than with Big Tobacco. CVS’s move to cease selling cigarettes is allowing the company to trade a small, underperforming part of its mix away for the potential to greatly grow sales and profits, and to get a lot of goodwill in the process.
The decision, which will inevitably be followed by others, will help intensify the decline in smoking, which will also help solidify CVS’s leadership position in the industry. It’s already been demonstrated that when cigarettes suddenly become more expensive, or when smoking or buying cigarettes becomes more inconvenient, smokers tend to quit.
I’ve moved my prescriptions back to CVS. My return to the store after three months away was accompanied by huzzahs, high-fives, and a $236.76 transaction.
What’s the next move in CVS’s transformation into the good-for-you store? Will it stop selling sugary sodas, infomercial “nutritional” supplements and dangerous diet pills?
One thing at a time.