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

CVS has decided to stop selling tobacco in its stores by October, a move that could have ripple effects throughout the drugstore industry and which could deal a blow to Big Tobacco.

Feb 5, 2014 at 1:53PM

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) -- 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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Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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