CVS to Stop Selling Cigarettes - Doubles Down on Health Services

CVS/pharmacy announced it will voluntarily stop selling all tobacco products at 7,600 U.S. stores, as an effort to do the right thing and fulfill its purpose: "Helping people on the path to better health."

The decision will take effect on Oct. 1, 2014, following the launch of a smoking cessation program this spring, with the goal of helping millions of Americans quit smoking.

"Every day, we are helping millions of patients manage chronic conditions, like high blood pressure, high cholesterol, and diabetes, and all these conditions are made worse by smoking," says Larry Merlo, president and CEO of CVS Caremark. "Tobacco products have no place in a setting where health care is delivered. When we asked ourselves where we expect to be in the future as a health care company, it became clear that removing tobacco products from our stores is the right thing to do."

CVS/pharmacy Rebrands

This move will give CVS, currently the No. 2 drugstore chain the U.S., an opportunity to set its brand apart from Walgreens, the largest pharmacy chain, and Rite Aid, which ranks third. Consumers are increasingly looking to the Internet to buy many of the items currently sold at these chains, but pharmaceutical sales continue to rise. There is a growing health and wellness trend currently underway in the country and some people feel that the U.S. Affordable Care Act requires promoting public health.

CVS is the first national pharmacy to pull tobacco from the shelves, which might motivate other national pharmacies to do the same. Target stopped selling cigarettes in 1996, as did Wegmans Market, an East Coast supermarket chain, in 2008.

The recent announcement helps align CVS/pharmacy with these trends and sets it apart as a leader, and we are likely to see other companies follow a similar trend. CVS has increasingly transitioned to providing health care services, and not merely doling out pills. Smoking cessation is a good target for companies wishing to promote health, given that it accounts for 480,000 deaths each year in the U.S. and is the leading cause of preventable death.

Smoking rates have fallen significantly from 1965, from 43 percent of the American population to 18 percent today. Cigarette sales have even fallen 31.3 percent from 2003 to 2013, according to the Euromonitor International. It's worth mentioning that CVS/pharmacy will continue to sell other items that contribute to high blood pressure, high cholesterol and diabetes, such as liquor, soda and king-size candy bars.

Financial Impacts

Regardless, this decision will have a noticeable financial impact on the company, which expects to replace some lost cigarette revenue through smoking cessation programs.  The company currently has $2 billion in annual tobacco sales, and an expected 2014 revenue of $132.9 billion. This move will certainly look good in the eyes of doctors, insurers and the 82 percent of Americans that don't smoke. But will it strengthen the brand enough to forgo the revenue loss?

The good news for CVS is that the future looks bright for pharmacy revenue. Third quarter profits in 2013 were up a staggering 25 percent, largely due to generic drugs sales.  It has benefited from the expiration of patents covering top-selling drugs, thus enabling it to sell more generic drugs where it receives a higher margin. The U.S. is one of two countries that allows direct marketing to consumers, $2.4 billion was spent in 2011 on ads about pharmaceuticals, which fuels continued drug industry growth. Prescription drugs are the fastest growing sector in American healthcare, going from a $12 billion industry in 1980 to a $275.6 billion industry in 2010. The average American spent $898 on prescription drugs last year, far more than other developed countries. One in four children are on medication for chronic conditions, and this doesn't include prescriptions for acute conditions or over-the-counter medicines. This spending is likely to continue as these children enter adulthood.

Given this, it does seem to make good business sense to focus on drug sales, by refining the  brand and having well-trained pharmacists and nurse practitioners on-hand as a competitive advantage. It seems more like the decision is part of a broader rebranding effort than a publicity stunt, although they may as well get some attention for it.  The pharmacy market is crowded and competition is fierce, so it is smart for CVS/pharmacy to set itself apart, and kick the tobacco habit.