No Butts About Cigarette Ban for CVS

Hilary Tuttle


May 1, 2014

ff_cvsIn February, CVS Caremark Chief Executive Larry Merlo said, "We've come to the decision that cigarettes have no place in an environment where health care is being delivered." The company, he announced, will remove all cigarette and tobacco products from its 7,600 pharmacies nationwide by Oct. 1, 2014. The move is expensive, with up to $2 billion in projected lost sales. But CVS is betting on long-term gains from fulfilling the promise of brand reputation and helping customers to live-and shop-far longer.

President Barack Obama personally took time to praise CVS, saying in a statement that the move will help broader efforts to "reduce tobacco-related deaths, cancer and heart disease, as well as bring down health care costs."

"CVS is now one of a small group of companies that have realized that their reputation is the most valuable asset they have and that building a stronger reputation by avoiding risks to that reputation can create a significant competitive advantage," Paul Argenti, professor of corporate communications at Dartmouth's Tuck School of Business, wrote in a column for the Harvard Business Review. "From the White House to the American Lung Association, CVS has received kudos for what seems to be a focus on shared value with society rather than the reckless pursuit of revenue at any cost."

Though CVS may lose in the short term, working to build and maintain a strong reputation boosts the bottom line. Studies from Argenti and a host of other researchers suggest that companies with a strong reputation enjoy price advantages because they can negotiate lower prices with suppliers and charge more to customers. They can also recruit better employees, have more stable revenues and, according to Argenti, "when something bad happens, they are given the benefit of the doubt by their stakeholders." Further, "highly reputed companies are more stable, which means they have higher market valuation and stock price over the long term and greater loyalty of their investors, which leads to less volatility."

While CVS stock initially dropped the day of the announcement, shares rose 10.7% during the following month. This success was further bolstered when the country's largest drugstore chain reported 2013 revenue of $126.8 billion-up 3% on notable growth for drug plans and in-store pharmacies, despite these gains being countered by weak growth in front-of-store sales.

"Its profit comes increasingly from health plans, which aren't keen on carcinogens," Jack Hough wrote in Barron's. "Consider: CVS' tobacco decision is expected to subtract six to nine cents from its yearly earnings per share. But a prescription deal with the Federal Employee Health Program, which expires at year's end, is worth 16 cents to 21 cents a share, investment bank Mizuho Securities estimates. For CVS, a good chance at renewal just became better, and there's plenty more business to be won."

In the weeks after the announcement, CVS actually raised its guidance for earnings in the first quarter of 2014-the first report that will reflect consumers' reaction to the tobacco sales ban. The company anticipates earnings per share to reach $1.06 instead of the previously projected $1.03. While not a massive increase, the positive forecast has allayed some fears of short-term losses, and concretely projects that losing cigarette sales may actually lead to significant gains.

But banning cigarettes is clearly not just about money. The decision represents an emboldened commitment to brand and lays out CVS Caremark's plans for the future. "CVS is putting its money where its brand is, betting that this first mover advantage will pay off. I say 'first mover' because no one truly owns health and wellness," brand consultant Scott Davis wrote on Forbes' CMO Shift blog. "Sixteen thousand health and wellness apps were downloaded last year. Over $1.4 billion was spent by people trying to learn more about the topic. The overall category is heading to $1 trillion in the next three to five years and the timing is right for someone to step in and lead the dialogue and become the Amazon of health and wellness. Why not CVS?"

Indeed, CVS Caremark has spent a considerable amount of time and money to establish and execute its corporate vision: extending the legacy of pharmacists as community health experts. To that end, CVS also added more than 800 MinuteClinic walk-in facilities, a move that made it the largest U.S. pharmacy healthcare provider.

The chain's competitors are also branching into anti-smoking efforts to expand their role in the wellness market. Walgreens, for example, recently unveiled a partnership with GlaxoSmithKline Consumer Healthcare to launch a free, internet-based smoking cessation program called Sponsorship to Quit.

On March 16, more than two dozen attorneys general sent letters asking the top five other major pharmacy chains to follow CVS' lead. Spearheaded by Eric T. Schneiderman of New York and Mike DeWine of Ohio, 28 states and territories, including Puerto Rico and Guam, urged Rite Aid, Walgreens, Kroger, Safeway and Walmart to stop selling cigarettes in retail stores that have pharmacies.

"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 letters said. As Schneiderman told the New York Times, "The fact that these stores profit from the sale of cigarettes and tobacco must take a back seat to the health of New Yorkers and customers across the country."

Overall U.S. cigarette sales fell 31.3% from 2003 to 2013, according to Euromonitor International. Many health officials hope that cigarette sales bans will help to decrease the number of smokers and smoking-related deaths in the United States. "I think CVS recognized that it was just paradoxical to be both a seller of deadly products and a healthcare provider," U.S. Centers for Disease Control and Prevention Director Thomas Frieden told Reuters.

Convenience stores account for 75% of cigarette sales nationwide, so the tobacco industry has yet to express concern about prospective losses from drugstore sales. But Dr. Richard Wender of the American Cancer Society said CVS's move would have an effect. "Every time we make it more difficult to purchase a pack of cigarettes, someone quits," he told Reuters. So far, CVS is betting on it-both for patients' health and its own.

Hilary Tuttle is managing editor of Risk Management.