Decision could set trend for other retailers to follow
CVS Caremark’s decision to pull cigarettes and other tobacco products from its stores could ripple beyond the nation’s second-largest drugstore chain.
The move, which drew praise from President Barack Obama, doctors and anti-smoking groups when it was announced on Wednesday, puts pressure on other retailers to stop selling tobacco as well. But first they have to overcome their addiction to a product that attracts customers.
“They don’t make much money on tobacco, but it does draw people into the store,” said Craig R. Johnson, president of the retail consultancy Customer Growth Partners.
CVS Caremark Corp. said it will phase out tobacco by Oct. 1 in its 7,600 stores nationwide as it shifts toward being more of a health care provider. CVS and other drugstore chains have been adding in-store clinics and expanding their health care offerings. They’ve also been expanding the focus of some clinics to include helping people manage chronic illnesses like high blood pressure and diabetes.
CVS CEO Larry Merlo said the company concluded it could no longer sell cigarettes in a setting where health care also is being delivered. In fact, as CVS has been working to team up with hospital groups and doctor practices to help deliver and monitor patient care, CVS Chief Medical Officer Dr. Troyen A. Brennan said the presence of tobacco in its stores has made for some awkward conversations.
“One of the first questions they ask us is, ‘Well, if you’re going to be part of the health care system, how can you continue to sell tobacco products?’ ” he said. “There’s really no good answer to that at all.”
Health and Human Services Secretary Kathleen Sebelius called on others to follow the CVS example. “We need an all-hands-on-deck effort to take tobacco products out of the hands of America’s younger generation, and to help those who are addicted to quit,” she said in a statement.
Both Walgreen and Rite Aid representatives said Wednesday that they are always evaluating what they offer customers and whether that meets their needs.
The question of whether to sell tobacco is complex for retailers because it’s a revenue driver. Dollar stores such as Family Dollar have started selling it over the last couple of years, and they note that smokers make more frequent stops at retailers in order to buy tobacco. That’s an important factor because these customers also may pick up other items when they visit.
In fact, CVS said that while it has about $1.5 billion annually in tobacco sales, it expects to lose about $2 billion in annual revenue by removing tobacco because smokers also buy other products when they visit. Overall, the company brought in more than $123 billion in total revenue in 2012.
But CVS is in a unique position from some of its peers. While it trails only Walgreen in terms of number of drugstores, it draws most of its revenue from its pharmacy benefits management, or PBM, business. PBMs run prescription drug plans for employers, insurers and other customers.
Having the PBM business made it easier for CVS to disavow tobacco, according to Morningstar analyst Vishnu Lekraj. He noted that Walgreen, Rite Aid and other mass retailers depend more on convenience goods for their sales. Even so, he said he thinks Walgreen may eventually follow CVS and remove tobacco because it also has emphasized its role as a health care provider.
Gabelli Funds analyst Jeff Jonas agrees. “I think once one chain does it, the other one really has to follow,” he said. Gabelli noted, though, that Rite Aid may be less likely to do so because it hasn’t made the same in-store investment in clinics as the other chains.
Either way, the move by CVS highlights the pressure companies that sell tobacco are facing to kick that habit. Tobacco is responsible for about 480,000 deaths a year in the U.S., according to the Food and Drug Administration.
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