Cigarette Ban by CVS Caremark Lights a Match Under the Competition

The pharmacy chain's decision to stop selling cigarettes puts it at a competitive disadvantage.

Feb 6, 2014 at 9:37AM

Saying it's incongruous for a company dedicated to its customer's health and well-being to sell tobacco products, CVS Caremark (NYSE:CVS) declared the pharmacy chain will stop selling cigarettes at its more than 7,600 drugstores by Oct. 1. The noise you just heard was the roar of approval from the pharmacy's competitors, which will now reap the rewards, as customers abandon the chain for its rivals who still sell them.


CVS states that it sells some $2 billion worth of cigarettes every year, meaning it will willingly forgo only a small percentage of the $125 billion in revenues it generates annually; but it's going to be a kick to profits, as it estimates that it will wipe out $0.17 per share, or almost 5%, of its trailing earnings. For the 2014 fiscal year, the impact will only amount to $0.06 to $0.09 per share, because of the timing of the ban.

Although that's the direct cost of the decision, expect there to be significant collateral damage, as customers who buy their cigarettes at CVS while also picking up their prescriptions switch to Walgreen (NASDAQ:WBA) or Rite-Aid (NYSE:RAD) for their pharmacy benefits management so they don't have to make two trips.

Perhaps the chain believes it's doing right by its customers by looking out for their health, but investors might rightly wonder if CVS will also pull the soda, ice cream, chips, and candy from its shelves, too. Surely they contribute almost as much to ill health as cigarettes do.

According to a study just published in JAMA Internal Medicine, "A higher percentage of calories from added sugar is associated with significantly increased risk of [cardiovascular disease] mortality," with other studies showing 10% of U.S. adults consume 25% or more of their daily calories from sugar. The Centers for Disease Control recommends no more than 5% to 15% of one's calories should come from sugar; therefore, CVS shouldn't in good conscience allow these products to remain on its shelves. 

Of course, the pharmacy chain wouldn't be the first retailer to stop selling cigarettes. Target stopped selling them in 1996 after new regulations imposed on tobacco made it a hassle to continue doing so, and Wal-Mart stopped selling them at its Canadian stores in 1994 after the government banned cigarette sales at companies that also operate pharmacies.

Even so, the biggest beneficiaries of the move will likely be CVS' competitors. Walgreen has previously said it would be placed at a significant competitive disadvantage if it didn't sell cigarettes, and it publicly battled cities that sought to ban their sale. Dollar stores chains like Family Dollar have also begun selling them in recent years because they note that smokers frequent their stores more often, while warehouse club Costco reports more than a fifth of its revenues come from the sale of tobacco, alcohol, candy, and snack foods.

Of course, the move by CVS could also create a climate that will induce its rivals to join in. While Walgreen said it wasn't taking action now, it notes that it continues to evaluate the products that its customers want. But its shares were up following the announcement, as were Rite-Aid's and Wal-Mart's, while CVS' stock was down.

Admittedly, it is a little odd getting a nudge to improve my health at the pharmacy checkout while staring at a cigarette display case, but it's also a little hypocritical for CVS Caremark to risk generating returns for its shareholders by going on the offensive against tobacco while allowing soda, candy, and chips to continue to be sold. At least its competitors have a reason to cheer. 

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. 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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