Will Walgreen and Wal-Mart Follow CVS’ Lead and Stop Selling Tobacco?

CVS has already dropped tobacco and attorneys general from across the nation are asking other chains to do the same.

Mar 20, 2014 at 8:39AM

First CVS Caremark (NYSE: CVS) voluntarily decided to end all tobacco sales in its stores and now a group of 26 state attorneys general have asked other retailers to do the same.

Letters were sent to Walgreen (NYSE: WAG), Rite-Aid (NYSE: RAD), Wal-Mart (NYSE: WMT), Kroger (NYSE: KR),  and Safeway (NYSE: SWY) from the prosecutors urging them to stop selling tobacco, CNN Money reported. 

"There is a contradiction in having these dangerous and devastating tobacco products on the shelves of a retail chain that services health care needs," the AGs wrote.

The letter, CNN Money reported, also said "that drug store sales make it easier for teens and young adults to take up smoking, and that selling tobacco products along with smoking cessation products are likely to increase impulse buys of tobacco by people trying to quit."

Following CVS' lead

CVS previously announced it will stop selling cigarettes in its stores Oct. 1. 

"The decision to stop selling tobacco products underscores our role in the evolving health care system," said CVS spokesman Danielle Marcus in an email interview with the Fool at the time it announced the end of cigarette sales. "Smoking is the leading cause of premature illness and death in the United States. Unlike those other products, which are OK in moderation, no amount of tobacco use is safe."

In an earlier article, Why CVS stopped selling cigarettes, I wrote that, "Dropping cigarette sales ... would cost the company $2 billion in 2014, but while health care spending is rising, health officials expect cigarette smoking to continue to fall -- perhaps even to zero. Acting U.S. Surgeon General Boris Lushniak last month released a 980-page report on smoking that pushed for stepped-up tobacco-control measures."

"I can't accept that we're just allowing these numbers to trickle down," he said in a recent interview with the AP, as reported by the Denver Post. "We believe we have the public health tools to get us to the zero level."

Smoking may not be where the dollars are

The biggest reason for other companies to follow CVS' lead may not be the altruistic idea that smoking is bad, but the profitable idea that it's going away anyway and more profit lies in selling increased health care services than in selling cigarettes. In the earlier article, I also noted that "Health insurance provider Aetna examined the rising cost of health care and found total health care spending in the United States is expected to reach $4.8 trillion in 2021, up from $2.6 trillion in 2010 and $75 billion in 1970."

Wal-Mart, Walgreen, Rite-Aid, Kroger, and Safeway may decide that by playing along with the attorneys general and ending tobacco sales they can profit from the good public relations such a move will generate. Of course that benefit diminishes from the first company to do it to the second and continues falling as it becomes less of a novelty.

Will stores not selling tobacco reduce smoking?

Limiting access to harmful products -- like tobacco and alcohol -- is a proven prevention tactic that does drive down use. 

"We expect that fewer points of purchase for tobacco products will result in less people smoking," William Gerrish, spokesman for the Connecticut Department of Public Health told the Fool. "Research has shown that policies that reduce access to tobacco products, such as creating smoke-free public and private environments and increasing the unit price of tobacco products, have significantly contributed to reductions in the rate of tobacco use." 

It's important to note that CVS alone not selling tobacco products won't have much impact because of the prevalence of stores that do sell tobacco. To put it simply, you're not really limiting access if CVS doesn't sell tobacco but a Walgreen across the street does. In pushing such a large volume of stores to drop tobacco sales, the attorneys general are looking at limiting access in a large enough way to actually make a difference. 

Is dropping cigarette sales good for business?

For the companies like Walgreen and Rite-Aid that are pharmacies first, selling cigarettes may simply be incongruous with their core business of selling good health. For Wal-Mart, Kroger, and Safeway it's a more complicated decision -- their brands are not built around health or promoting healthy lifestyles. 

CVS may have given up $2 billion in tobacco sales, but it's likely to make that up through selling more health services such as its walk-in clinics. The grocery chains face a more realistic prospect of actually losing revenue on the deal. The nature of grocery store shopping makes cigarettes an add-on purchase when someone is shopping anyway. It's hard to imagine that the customer who would have added a carton of cigarettes to their cart would spend that money on fresh fruit instead.

Pharmacies are also able to drop tobacco without risk of a backlash from smokers as the move just seems to make sense -- like banning open flames at gas stations. Grocery chains won't have the same protection and smokers may push back on the idea that their vice is being singled out while alcohol, fatty foods, and others are not.

Dropping tobacco for Wal-Mart, Kroger, and Safeway would be good for the health of their customers, but not necessarily the health of their bottom lines.

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Daniel Kline has no position in any stocks mentioned. He does not smoke. The Motley Fool recommends CVS Caremark. 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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