Pressure on Pharmacies to Break Up With Big Tobacco Increases

CVS recently announced that it will stop stocking tobacco products in stores, now Rite Aid and Walgreen are being pressured to follow.

Mar 26, 2014 at 11:30AM

CVS(NYSE:CVS) recent well-publicized decision to stop selling tobacco products in its stores was done for all the right reasons from a health perspective. The company believes that the move will cost it around $2 billion in annual sales, which is less than 2% of its 2013 total revenue. Following the bold decision by CVS, the first of which to make the move, U.S. officials are ratcheting up the pressure on retailers to quit selling cigarettes this year.

A group of attorneys-general from 28 states and territories has sent a letter to the chief executives of Wal-Mart, Walgreen (NYSE:WAL), Rite Aid (NYSE:RAD), Safeway, and Kroger asking them to remove tobacco products from their tobacco shelves. The letters all followed a common line, mainly the fact that:

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

This pressure follows a move by a trio of organizations, including the National Consumers League, the Center for Science in the Public Interest, and the Change to Win Retail Initiatives, which sent a letter to Walgreen earlier this year asking the company to remove tobacco products from its 8,700 stores. The letter highlighted survey results that 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, with so much pressure building on the pharmacy chains, Walgreen and Rite Aid, it looks as if they might be forced to take the plunge, or risk a barrage of negative media coverage. However, it could be a great time for these companies to make this move.

Why? Well, some analysts have brought up the issue of the Affordable Care Act (aka Obamacare), which is going to bring insurance coverage to 50 million previously uninsured Americans. The act is also likely to push health-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 and Rite Aid. The pharmacy chains will want to gain from this trend as much as possible, so plenty of positive public media coverage would be highly beneficial, implying that the companies will bend to the attorneys-general demands.

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 U.S. tobacco market. This implies that cigarettes companies like Altria are unlikely to see a major impact from the decision as pharmacies only make up about 3.5% of tobacco sales in the US, and CVS itself was responsible for only 2% of total US tobacco sales during in 2012.

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 U.S. Now, I could mention electronic cigarettes here and say that Altria will benefit from sales of e-cigs in drugstores, but due to the regulatory environment surrounding e-cigs, I'm not comfortable with making this claim.

Whatever the case, it would appear that big tobacco is well placed to ride out any lost sales from the removal of tobacco products from pharmacy shelves. Further, it would seem as if it is currently the right time for pharmacys to make this move as they benefit from the introduction of Obamacare.

 

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Rupert Hargreaves owns shares of Altria Group. 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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