Can corporations do good and still turn a profit? CVS Caremark (NYSE:CVS) is banking on it with their decision to pull cigarettes and other tobacco products from their pharmacies.
The move by CVS will be interesting and worth watching, particularly to see if their decision will have ripple effects throughout the highly competitive drugstore chain world. To be sure, it wasn't a decision embarked on lightly and without what was certainly a great deal of strategic discussion at the highest levels of the company. Analysts predict that CVS will lose an estimated $2 billion a year in revenue, which will negatively impact the company's 2014 profit by between $0.06 and $0.09 a share.
As the nation's largest "integrated pharmacy health-care provider" in the U.S., this move is seen as a way for the company to align with "its patients, clients and health care providers to improve health outcomes while controlling costs." It also potentially positions CVS for continued growth.
CVS president and CEO, Larry J. Merlo, had this to say. "Ending the sale of cigarettes and tobacco products at CVS/pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health," Merlo said. "Put simply, the sale of tobacco products is inconsistent with our purpose."
Clearly, CVS sees its role as much more than merely a drug store and/or convenience store. As pharmacy chains have continued to evolve in their relationship and role with consumers, CVS surely recognizes a way to get out in front on the changes in health care delivery, America's aging Boomer demographic, and taking a more active role in promoting healthy lifestyles.
With more than 7,300-plus drugstores and a pharmacy-benefit management unit with more than 60 million members, CVS has been moving in the direction of health-management for several years. In 2011, it introduced a Pharmacy Advisor program. That progam now represents 16 million patients.
Chief archrival Walgreen (NASDAQ:WBA), the country's biggest pharmacy chain, with over 8,500+ stores nationally, has been moving in a similar direction on the health care front. In its annual report, the company indicated that they see themselves as "becoming a key part of the community health care delivery team, supporting primary care physicians, health plans and health systems to address patient needs and gaps in care." This is especially important in rural parts of the country where primary care physicians and even medical clinics are in short supply, or not easily gotten to, particularly for seniors.
Both CVS and Walgreen have opened health care clinics in their stores as a way to capitalize on an anticipated influx of 30 million new patients due to the expansion of health insurance coverage through the Affordable Care Act. Consulting firm Accenture released a report in June predicting a significant growth in the number of these kinds of in-store clinics. According to Accenture's analysis, the number of patient visits at retail clinics is projected to account for 10% of non-primary care outpatient visits by the end of 2015.
Effect on big tobacco
Cigarette makers continue with their brave front and their reaction to the CVS decision was fairly standard by most tobacco manufacturers following the announcement, although tobacco shares dipped on Tuesday.
"It's up to retailers to decide if they're going to sell tobacco products," said Brian May, spokesman for Altria , maker of Marlboro and other popular brands.
RBC Capital Markets analyst Nik Modi said he expected little impact on tobacco companies. He noted that they rely on convenience stores for more than 75 %of sales.
U.S. cigarette sales have actually been falling steadily, dropping 31.3% from 2003 to 2013. Dating back to the early 1990s, when the tobacco industry in the U.S. was successfully sued by several U.S. states, companies have had to alter the way that they do business, which also includes how cigarettes are distributed.
Waiting on the FDA
Only time will tell whether or not the CVS decision is another nail in big tobacco's coffin.
While they are facing a shrinking market with traditional tobacco products, cigarette manufacturers are now looking to new products as a source of new revenues. One such product is electronic cigarettes, or e-cigarettes.
E-cigarette sales have exploded, from $500 million in 2012 to an estimated $1.5 billion in 2013. Recognizing this potential new market, big tobacco has created its own brands of e-cigarettes and is targeting considerable resources in marketing them as an alternative to smoking.
Big tobacco now awaits word from the Food and Drug Administration. The FDA is currently in the process of deciding on regulation for e-cigarettes and whether they are a safe and effective product for quitting smoking.
Regardless of the FDA's decision on e-cigarettes, CVS has clearly positioned itself as a company firmly on the side of the health of their customers, particularly on the tobacco question. This decision, along with getting out in front of their competitors recognizing the important role pharmacies play in helping consumers manage their health care are two reasons to keep an eye on CVS.
Jim Baumer has no position in any stocks mentioned. The Motley Fool recommends Accenture. 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.