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CVS Caremark Corporation Calls it Quits

By Leah Niu - Feb 13, 2014 at 10:01AM

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CVS has taken a bullish move against big tobacco. This may be good news for smokers trying to quit, but how will it affect shareholders?

A week ago, CVS Caremark (CVS 0.92%) announced  that it would stop selling all tobacco products by October of this year. This move may alienate smokers, but could be embraced by folks who are feeling a bit guilty about their habit. What does this mean for investors, and what type of fallout should the pharmacy chain expect?

A healthy move
Supporting consumer health through such a dramatic initiative falls in line with the company's goal of cultivating health and wellness. Taking on such a revolutionary endeavor allows CVS to become an industry leader, leaving Walgreen (WBA 1.13%) in the dust.

Walgreen has health initiatives in place as well, but nothing so overt as axing an entire product line. CVS has not only cut many, if not all ties to Big Tobacco (the pharmacy chain has yet to decide what stance it will take e-cigarette products)  but it has also opted to start personally engaging with customers who want to quit. Walgreen, on the other hand, has attempted to engage with its customer base by rolling out an app that tracks movement and awards discounts based on the collected data, which comes up short when faced with CVS' daring move.

While CVS' largest competitor is still evaluating how to proceed with their tobacco inventory, any effort Walgreen makes (short of removing all nicotine products) will pale in comparison to CVS' efforts.

What is there to lose?
Shareholders might be a bit hesitant to jump on the anti-tobacco bandwagon, for fear of losing revenue, but the company isn't too concerned. CVS believes it will miss out on $2 billion in revenue per year, which should hit the bottom line to the tune of $0.017 per share annually. However, it can easily offset the loss by embracing other incremental opportunities, such as stepping up its stakeholder engagement initiatives.

The $2 billion that CVS estimates it will lose is less than 2% of the company's annual revenue . Even if all of CVS' dejected tobacco customers went to Walgreen, that $2 billion would account for a negligible increase of 3% in revenue on an annual basis for the competitor. In light of all of this, investors seem to think Walgreen is on the right side of this issue, as the stock moved up 9% in the days following the announcement.

To engage or not to engage, that is a dying question.
Encouraging smokers to quit by choosing to no longer enable their addictions is a gutsy move. CVS has decided to not only take tobacco off its shelves, but will also tackle their smoking customers' addiction by supporting the 70% of smokers who want to quit each year . The pharmacy will implement a national smoking cessation program, much to the chagrin of big tobacco.

Even with this game changing announcement, Altria Group, Inc (MO 0.94%), doesn't seem too bothered by the announcement, saying, "it is up to retailers to decide if they are going to sell tobacco products ". Altria's lackadaisical response may have added to its shares dropping upon the pharmacy's announcement . CVS taking the tobacco out of their stores sends a damaging message about the entire nicotine industry. The pharmacy will no longer support the normalization of tobacco use, something that the nicotine giant Philip Morris has sued for in the past .

CVS isn't too worried about tobacco industry pushback. Instead, the company is looking forward and focusing on how to further support the health of its customers. Initiatives such as these are a progressive way to build trust and rapport among CVS's customer base.

CVS has your back... er, lungs.
Encouraging preventative measures, like smoking cessation, ensures greater loyalty among the consumers who might find success in kicking the habit through the support of CVS. Building rapport among such a potentially large market (about 22 million tobacco customers want to quit) pushes CVS to the forefront of embracing social sustainability.

Relying on loyalty cards and weekly ads to drive revenue is no longer enough. Actively engaging with its key stakeholders gives CVS a leg up on the competition. Listening to customers and keeping them healthy and happy is just good business.

Stub it out
Who do you trust more: the store that sells highly addictive substances while telling you to quit, or the store that encourages you to quit and chooses to remove the temptation? This endeavor not only speaks to the pharmacy's commitment to the health of its customers -- it also pushes its competitors to follow suit.

Embracing a corporate culture that focuses on health and engagement is a sure fire way to get buy-in from the growing market of conscious consumers. This gutsy move may be the first of its kind in the pharmacy sector, but it's a risk that investors should bet on.


Leah Niu has no position in any stocks mentioned. 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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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$45.16 (0.94%) $0.42
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$40.35 (1.13%) $0.45
CVS Health Corporation Stock Quote
CVS Health Corporation
$105.01 (0.92%) $0.96
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$99.32 (1.21%) $1.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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