Is CVS Stopping Cigarette Sales in the U.S. the End for Big Tobacco?

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CVS (NYSE: CVS  ) has decided to halt sales of tobacco in its more than 7,600 U.S. stores, a move that the company estimates will cost it approximately $2 billion in revenues on an annual basis from tobacco shoppers.

The change won't be immediate as CVS will continue selling tobacco products through October, which should allow the company to sell off much of its existing inventory.

"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 Larry J. Merlo, president and CEO of CVS Caremark. "Put simply, the sale of tobacco products is inconsistent with our purpose.

Why now?

"I think they see the hypocrisy of selling cigarettes, while promoting pharmacies nowadays as real partners in health care," said Tom McCaney, associate director of corporate social responsibility for the Sisters of St. Francis of Philadelphia to CNBC.

The Sisters of St. Francis have, according to CNBC, pushed Walgreen  (NASDAQ: WBA  ) , the top drugstore chain in the U.S., to drop tobacco sales, once pushing for a shareholder vote on the topic. Walgreen has acknowledged the issue, but has not pledged to follow CVS.

"They're afraid in a highly competitive industry that if they stopped selling cigarettes, their competitors will take up the slack," McCaney said. "Their justification is it gets people in the store."

In a statement released in response to CVS' announcement, Walgreen said, "We have been evaluating this product category for some time to balance the choices our customers expect from us, with their ongoing health needs. We 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 to reduce the demand for tobacco products."

Will it hurt CVS?

Though losing $2 billion in direct sales -- and whatever incremental sales are lost from tobacco smokers who don't come through the door -- will negatively affect CVS, it's also possible the goodwill created by the move will bring new customers in. That, however, is hard-to-predict and could be negated by other pharmacy chains following CVS and banning tobacco. So the move is a case where the chain is doing the right thing at the risk of losing money.

Will people smoke less?

"This decision, in and of itself, will not directly reduce smoking. Most smokers will simply purchase their cigarettes elsewhere," said Professor Michael Siegel, MD, MPH, Boston University School of Public Health Department of Community Health Sciences. "However, on a larger level, the decision adds to the negative social norms regarding smoking. It is a strong statement by a major, national company that wants to associate itself with health promotion, and so dropping cigarettes – even at a financial loss – makes a major national statement. Actions like this do affect societal norms. So in an indirect way, yes I do think this will contribute to changing social norms, which ultimately leads to a reduction in smoking."

Will it hurt tobacco companies?

The big three tobacco companies -- Altria (NYSE: MO  ) , Reynolds American (NYSE: RAI  ) , and Lorillard (NYSE: LO.DL  )  -- have already been losing market share in the U.S. as smoking has declined. According to a report released by the U.S. Surgeon General in celebration of 50 years of attempting to end smoking, in 1964, 42% of American adults smoked. That number has declined every year for 50 years and in 2014 only 18% of American males smoke. 

And while the U.S. represents a declining part of the tobacco business, the Centers for Disease Control estimates that in 2011 (the last year for which statistics have been released), 293 billion cigarettes were purchased in the United States – leaving it as a declining, but still roughly $80 billion industry. 

Still, the CVS move could create a ripple effect that spreads to other companies, which could hurt big tobacco.

"There is no question that this action by CVS sets an example and puts pressure on other pharmacies to follow its lead," Siegel said. "It is difficult to criticize a particular pharmacy chain for selling cigarettes when they are all doing it. But now that one major chain is not selling cigarettes, it opens the door to severe criticism of the other chains. So this action by CVS will put pressure on other pharmacies to follow its lead."

The bottom line

While it acknowledges that dropping tobacco sales will cause a $2 billion drop in sales, the company said in a press release that it does not expect the move to hurt its profitability.

"The company has identified incremental opportunities that are expected to offset the profitability impact," the release said. "This decision more closely aligns the company with its patients, clients, and health care providers to improve health outcomes while controlling costs and positions the company for continued growth."

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Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 05, 2014, at 4:07 PM, JWB429 wrote:

    This is absolutely the dumbest marketing move ever. For years I held Walgreens stock and when they goofed on Express Scripts, I sold it and took a position in CVS. I am thinking about switching back, because this is going to hurt CVS---badly! Maybe they shouldn't sell candy because it causes diabetes and obesity. How about wine which causes liver and other problems? If I am refilling a prescription at CVS and I am a smoker (which I am not), I certainly am not going to run across the street to Rite AId or Walgreens for my smokes. I will get it down all in one convenient place. What were you thinking CVS. Not smart!

  • Report this Comment On February 05, 2014, at 4:09 PM, JWB429 wrote:

    And to add to my other comment, my local hospital sells cigarettes in a vending machine!

  • Report this Comment On February 05, 2014, at 4:55 PM, anne wrote:

    If CVS is concerned about ethical behavior, why don't they rethink their policy of replacing human beings with automated check-out machines? I used to shop at CVS (here in Manhattan) almost daily. They moved my neighborhood store from a location where it was needed to one which is within a block of Staples (which has cheaper stationery, toilet paper, cleaning products) and Duane Reade, which has real people at the check-out..and (now) cigarettes. They've lost me!

  • Report this Comment On February 05, 2014, at 8:42 PM, ESJ wrote:

    They still sell Wine, Beer, and Hard Liquor so the CEO's comments about their concern for the health of their customers is pure B.S. They also do not control the accessibility of the liquor inventory so it is easy for minors to shoplift! Not impressed!

  • Report this Comment On February 05, 2014, at 8:44 PM, ESJ wrote:

    The real reason for discontinuing tobacco sales is they were not good at it and they were not making money. They are always out of stock of top selling brands and the disorganization of the category in their stores makes it difficult to shop.

  • Report this Comment On February 05, 2014, at 8:59 PM, LazyCapitalist wrote:

    I don't feel strongly one way or the other about this. And I'm not sure how much goodwill this will generate. How much goodwill does Target have today for stopping the sale on cigarettes in its stores back in the 90s? As a non-smoker, I wasn't even aware that Target didn't sell cigarettes until someone happened to mention it the other day.

    People have short memories. Those who smoke will simply go somewhere else. And those who didn't smoke (and have little reason to keep track of which stores sell and don't sell cigarettes) will forget about this by next week.

  • Report this Comment On February 05, 2014, at 10:08 PM, mansourg54 wrote:

    For me the issue is fairness and the tobacco industry is not being treated fairly. To be believable about its health concerns CVS must stop selling all types of alcohol, sugary soft-drinks, ice creams, fatty hot dogs, candies and chocolates. Another hypocrat is the president who smoke for forty years and never was sick and now applauds CVS decision. Instead he should come out and tell the world that he smokes for forty years and tobacco never made him sick. My family and I will stop shopping at CVS.

  • Report this Comment On February 05, 2014, at 11:59 PM, jbomb62 wrote:

    I'm not sure what's behind the CVS decision to stop selling cigarettes. This surely wasn't a rash decision and there has to be an economic benefit, otherwise, it wouldn't have been considered and ultimately carried out.

    Like other commenters have noted, there are still other food products (containing high fructose corn syrup for instance) that contribute to obesity, which is another significant health issue, so to focus on one habit that contributes to poor health seems disingenuous to me.

  • Report this Comment On February 06, 2014, at 12:22 AM, predfern wrote:

    My father was a dentist. He used to tell his patients to eat more candy and chew more gum because it is good for business.

  • Report this Comment On February 06, 2014, at 8:59 AM, lea745 wrote:

    CVS is not doing this on their own. They are getting pressure from the health sector because CVS has decided to get into the health care provider business. Now when your doctor decides he has too many patients thanks to Obamacare, you will be told to go to CVS for your minor ailments. They have already begun to run mini health clinics in their stores. You would never see cigarettes for sale in your doctors office, so you should not see them at CVS. I don't think this will hurt them monetarily because the cost of health care is more expensive and can provide a higher profit than cigarettes.

  • Report this Comment On February 10, 2014, at 2:52 PM, Crmzn wrote:

    They'll not only lose the cig sale, but also the cig customer. That customer may only use them for cigs and sodas in the front end, but they may be a pharmacy customer as well. I believe their stock price was going to take a hit anyway, and this was a way to justify the drop to their shareholders, all while catching some positive press.

  • Report this Comment On February 10, 2014, at 2:59 PM, Crmzn wrote:

    Lea, something else to consider.........those health services also come with very high operating costs and often take years to become profitable.

    And then there's payroll. Look for cvs to offset some of the losses by cutting their already skeleton thin labor budgets. Their hourly workers will lose hours, and their store managers will be even more prone to burnout. Unless the entire industry comes together and decides, as a whole, to get out of the tobacco business, one chain cutting the category is a HUGE gamble.

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Daniel B. Kline

Daniel B. Kline is an accomplished writer and editor who has worked for the Microsoft's Finance app and The Boston Globe, where he wrote for the paper and ran the business desk. His latest book "Worst Ideas Ever" (Skyhorse) can be purchased at bookstores everywhere.

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