Will Walgreen Follow CVS' Anti-Tobacco Move?

CVS plans to stop selling tobacco products and Walgreen is likely to follow. Will this contagion hurt Altria?

Feb 23, 2014 at 11:00AM

CVS' (NYSE:CVS) well-publicized decision to stop selling tobacco products in its stores was done for all the right reasons from a health perspective. The company reckons that the move will cost it around $2 billion in annual sales, which is under 2% of its 2013 revenue. However, now that CVS has made the first move, pressure has been increasing on Walgreen (NASDAQ:WBA) to also remove tobacco products from its stores.

A trio of organizations which included the National Consumers League, the Center for Science in the Public Interest, and the Change to Win Retail Initiatives sent a letter to Walgreen asking the company to remove tobacco products from its 8,700 stores. The letter highlighted survey results which showed support for the move from the American public as well as the American Pharmacists Association and the American Medical Association. So, all-in-all, there are quite a few people pushing for the removal of tobacco from stores. 

Unfortunately, it looks as if Walgreen might take the plunge. As of yet there is no evidence to support this view but it would be a perfect time for the company to do so, especially with so much pressure building. Indeed, the Walgreen mission statement is to help the consumer "get, stay and live well" so some could say that the company should never have stocked tobacco products in the first place. What's more, like CVS, Walgreen could find that now is the right time to cut tobacco from its stores, as whatever revenue it loses from the move it is bound to recover.

Why is this the case? Well, some analysts have brought up the issue of the Affordable Care Act, Obamacare in other words, which is going to bring insurance coverage to 50 million previously uninsured American's. The Act is also likely to push heath care prices up across the board, which is likely to drive patients to seek prescriptions over expensive health care facilities. So, analysts have speculated that this surge in prescriptions will more than offset the decline in revenue from tobacco sales for CVS and the same could be said for Walgreen. 

Is big tobacco worried?
It would appear that on the face of it, big tobacco does not need to be worried. In particular, according to the Financial Times, sales of cigarettes from drugstores only make up a tiny fraction of the $90-billion US tobacco market. This implies that cigarettes companies like Altria are unlikely to see a major impact from the decision. According to Nik Modi of RBC Capital Markets:

Over 75 per cent of tobacco sales come from convenience stores, so the drug channel is not that big, 

Further, it would appear that CVS as well as other drugstores will still stock smoking cessation aids, or as Philip Morris International and Altria (NYSE:MO) like to call them, 'reduced-risk products', and both Philip Morris and Altria have been working to increase their share of this market during the past year.

For example, Altria already has two 'reduced-risk' products for sale within the United States. These products are Verve, a chewable nicotine product, and Denmark, a type of gum that contains tobacco. Altria is also receiving several new reduced risk products as part of a technology-sharing deal agreed upon recently with Philip Morris. In exchange for the 'reduced-risk' products, Philip Morris is receiving exclusive rights to market Altria's e-cig products outside of the US. Now, I could mention electronic cigarettes here and say that Altria will benefit from sales of e-cigs in drug stores, but due to the regulatory environment surrounding e-cigs I'm not comfortable with making this claim.

Foolish takeaway
So in conclusion, there is pressure building on Walgreen to follow in CVS' footsteps and remove tobacco products from its stores and it would seem that right now would be the right time to do it. On the other hand, so far big tobacco does not seem to be worried by this move. If anything, Altria is likely to benefit from its ownership of reduced-risk products, which are likely to become more prominent in CVS' stores following the removal of tobacco. 

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Rupert Hargreaves owns shares of Altria Group. The Motley Fool recommends CVS Caremark. The Motley Fool owns shares of Philip Morris International. 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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