CVS Health Corp.'s 5-Point Plan to Recoup Tobacco's Lost $2 Billion in Sales

Business hasn't been looking up since CVS Health gave up smoking, but the pharmacy chain has a plan to turn things around.

It's never easy letting go of $2 billion, as CVS Health (CVS -1.03%) did when it officially kicked the smoking habit and banned all tobacco products in its stores last year. While tobacco represented just a small percentage of CVS' $127 billion in total revenue, the move created a ripple effect that is hurting the chain's front-end sales.

Where CVS enjoyed higher revenue, higher profits, and an 11% increase in network claims in the first quarter as a result of its booming pharmacy business, same-store front-end sales tumbled 6.1%, with comps coming in 800 basis points lower than they would have had it not sworn off cigarettes.

Customers weren't just buying cigarettes when they visited CVS, they also bought snacks, beauty and personal care products, gifts, and more. So banning cigarettes is causing CVS to lose foot traffic and sales to rivals such as Walgreens Boots Alliance (WBA -0.27%) and the dollar store chains.

No good business manager would let that situation fester for long, and CVS Health revealed to Fortune last week a five-point plan to recover those lost sales.

1. Double down on the pharmacy business.
With a recent $1.9 billion purchase of Target's (TGT -0.37%) retail pharmacy business that will add nearly 1,700 new outlets to its network, CVS is giving the division a shot of adrenaline, bringing its primary business closer to more customers. Moreover, as Target builds out its small-footprint TargetExpress concept stores, CVS has committed to adding 10 CVS pharmacies to them over the next two years.

And in the wake of the Supreme Court ruling upholding the Affordable Care Act yet again last week, more individuals who might not have had insurance coverage provide CVS with a potential new source of clientele.

2. Vastly expand its clinic business.
In addition to Target's retail pharmacies, CVS is also taking over 80 of the big-box retailer's clinics, adding them to the existing 986 MinuteClinics it already operates, most of which operate within a CVS store.

CVS Health plans on growing the number of MinuteClinics by 50% of the next few years. Photo: MinuteClinic. 

CVS has promised to open an additional 20 MinuteClinics in Target stores over the next three years, which is part of its overall plan to increase by more than 50% the number of walk-in healthcare clinics it operates, to 1,500, by 2017.

3. Senior care will grow in importance.
Target's pharmacy business isn't CVS Health's only recent acquisition; last month it also bought specialty pharma Omnicare (OCR.DL) for $10.4 billion. That will significantly expand CVS' ability to dispense prescriptions in assisted living and long-term care facilities, a whole new channel of potential growth. Omnicare has about 160 locations in 47 states.

In its statement announcing the acquisition, CVS remarked: "Given the aging U.S. population, long term care is a growth segment of the healthcare system. More people are expected to use assisted living facilities and independent living communities in the coming decades, creating a substantial growth opportunity for those companies serving the healthcare needs of seniors."

4. More health food.
Making up the lost tobacco revenue isn't all about the pharmacy business, though it takes up the lion's share of it. Booting cigarettes was also about helping customers make healthier food decisions, and the company said it will introduce a bigger and better assortment of healthier food options, which it says is a $1 billion opportunity.

At 500 of its most-trafficked stores that are receiving the upgrade, CVS will more prominently display by the cash register an improved food section featuring nutrition bars and other healthier snacking choices, giving customers chances to make healthy impulse snack purchases. It will still sell chips, snacks, ice cream, and soda, something CVS has been accused of being hypocritical about given its stance on tobacco, but it plans to reduce their prominence.

5. Bulk up its beauty care business.
I see this last prong as one of the biggest opportunities to make up lost foot traffic, even if it is potentially the hardest one to pull off. The beauty care and supplies business already generates $3 billion in revenue for CVS, but the department will receive an extreme makeover at some 2,000 stores via greater prominence, a new look, and more products.

CVS Health hopes to build on the $3 billion it already realizes from beauty supplies. Photo: CVS Health.

The difficulty stems from Walgreens' own efforts at boosting beauty care following its acquisition of Boots Alliance last year, as well as from Sephora, which has its stand-alone stores and an exclusive presence inside J.C. Penney that has been credited with engineering the troubled department store chain's turnaround.

What it means for investors
It might have seemed foolhardy for CVS Health to ban tobacco products from its stores, even if they represented just a tiny portion of its overall revenue stream, but the latest initiatives show management isn't willing to cede those lost sales to its rivals. Instead, the company is striving to make them up in other ways that ultimately position it as a strong candidate for future growth.