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CVS tobacco sales up in smoke

Earlier this week (Wednesday February 7th), the second largest drugstore chain in the US, CVS, announced that it is going to cease sales of cigarettes by October 1st. In doing so, it blazed a trail as it became the first US drugstore operator to announce such a move.

Why is a company that brands itself ‘America’s largest integrated pharmacy healthcare provider’ selling tobacco products in the first place? Surely this goes against the company’s stated aim of improving people’s quality of life? The answer is, unsurprisingly, it’s profitable. Shares in CVS Caremark Corporation fell by 1% on the day of the announcement as the company estimated the move would cost it around $2bn in annual sales and that it would consequently also impact its bottom line. By comparison, key rivals Walgreen Co and Rite Aid Corp, which will continue to offer cigarettes, saw their share prices rise by 3.9% and 2% respectively. This might have people drawing the conclusion that CVS has scored an own goal, but the positive image boost it has received should not be underestimated.

CVS Caremark Corporation’s CEO Larry Merlo said “We’ve come to the conclusion that cigarettes have no place in a setting where health care is being delivered.” He added in a written statement that discontinuing sales was “the right thing for us to do for our customers and our company to help people on their path to better health.” US Centers for Disease Control and Prevention Director Thomas Frieden echoed this sentiment stating “I think CVS recognized that it was just paradoxical to be both a seller of deadly products and a healthcare provider.’ Even President Obama praised the move saying in a statement the move will help wider efforts to “reduce tobacco-related deaths, cancer, and heart disease, as well as bring down healthcare costs.”

While the move will impact revenues and profitability in the short term, it could just give CVS first mover advantage. It can now focus on promoting itself as a provider of healthcare committed to improving quality of life. This is of particular relevance in the US where pharmacies are viewed as source health information rather than a simple dispenser. CVS embodies this more than any other chain, with more than 800 MinuteClinic (walk-in clinics) locations. The move may see other drugstores come under pressure to stop selling cigarettes too. By that point, CVS’ post-tobacco business model will be established, giving them a head start advantage.

Its tobacco sales are set to go up in smoke, but its business looks set to thrive.

For a detailed look at CVS Caremark Corporation and its position as America’s largest integrated pharmacy healthcare provider, see MarketLine’s Case Study ‘CVS Caremark Corporation: The opportunities and threats facing America’s largest integrated pharmacy healthcare provider – Click here for more information

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