CVS kicking tobacco habit, shifting toward health care

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by KHOU Staff and AP wire reports

khou.com

Posted on February 5, 2014 at 8:22 PM

Updated Wednesday, Feb 5 at 10:08 PM

HOUSTON—CVS, the nation’s second largest drugstore chain, announced it will pull cigarettes and other tobacco products from it shelves by next October, a move marketing experts said should solidify its stores’ growing identity as not only pharmacies, but also health care providers.

CVS Caremark made its announcement with a publicity campaign that began on television network morning news shows and was hastily greeted with a laudatory statement from President Barack Obama.

“You know, it’s a real contradiction to talk about all the things that we’re doing helping people on their path to better health and at the same time sell tobacco,” said Larry Merlo, CVS Caremark’s CEO, during a live interview on the CBS Morning News.

Smokers generally shrugged off the news, although some of them noted that CVS often sells cheaper cigarettes than other retailers.  Brannon Johnson, puffing on a cigarette outside a courthouse in downtown Houston, said the decision “sucks.”

“CVS is cheaper than the corner store sometimes,” Johnson said. “They give you a little discount.” 

The company plans to phase out tobacco products by October 1 in its 7,600 stores as it shifts toward providing a broader range of health care services.  CVS, like other drug store chains, has been adding in-store clinics and expanding its health care offerings. It’s also expanding the focus of some clinics to include helping people manage chronic illnesses like high blood pressure and diabetes.

Merlo said the company concluded it could no longer sell cigarettes in a setting where health care also is being delivered.  In fact, as CVS has been working to team up with hospital groups and doctor practices to help deliver and monitor patient care, CVS Chief Medical Officer Dr. Troyen A. Brennan said the presence of tobacco in its stores has made for some awkward conversations.

“One of the first questions they ask us is, ‘Well, if you’re going to be part of the health care system, how can you continue to sell tobacco products?’” he said. “There’s really no good answer to that at all.”

CVS stores, like Walgreens and Rite-Aid stores, have broadened into competition for convenience stores and supermarkets. Customers driving home now drop by the neighborhood drug store not only for prescriptions, but also for last-minute grocery supplies like milk, beer and cigarettes. The decision to drop tobacco from its shelves moves CVS a step away from one-stop shopping, but it also identifies it more closely with health care.

CVS, based in Woonsocket, R.I., follows a precedent set by other drugstores. Most independent pharmacies abstain from tobacco sales, according to the National Community Pharmacists Association. Pharmacies in Europe also don’t sell cigarettes, and neither does major U.S. retailer Target Corp., which operates some pharmacies in its stores.

But the world’s largest retailer, Wal-Mart Stores Inc., which also operates pharmacies, does sell tobacco. So do CVS competitors Walgreen Co. and Rite Aid Corp.

“If you’re trying to look like you care for people’s health – and why on Earth would you not want to look like that in the business they’re in – it’s hard to think of a downside,” said Betsy Gelb, a retail expert with the University of Houston’s Bauer College of Business.

Kicking the tobacco habit will cost CVS an estimated $1.5-billion a year in direct profits from tobacco sales, plus another half-billion dollars smokers would have spent on other products when they dropped by stores to buy cigarettes. The $2-billion loss will represent literally only a small fraction of CVS Caremark’s annual revenues, which totaled more than $123-billion in 2012.

But CVS is in a unique position from some of its peers. While CVS trails only Walgreen in terms of number of drugstores, it draws most of its revenue from its pharmacy benefits management, or PBM, business. PBMs run prescription drug plans for employers, insurers and other customers.

Having the PBM business made it easier for CVS to disavow tobacco, according to Morningstar analyst Vishnu Lekraj. He noted that Walgreen, Rite Aid and other mass retailers depend more on convenience goods for their sales.  Even so, he said he thinks Walgreen may follow CVS and remove tobacco because it also has emphasized its role as a health care provider.

Gabelli Funds analyst Jeff Jonas agrees. “I think once one chain does it, the other one really has to follow,” he said. Gabelli noted, though, that Rite Aid may be less likely to do so because it hasn’t made the same in-store investment in clinics as the other chains.

Either way, the move by CVS highlights the pressure companies that sell tobacco are facing to kick that habit. Tobacco is responsible for about 480,000 deaths a year in the U.S., according to the Food and Drug Administration, which gained the authority to regulate tobacco products in 2009.

The federal government has renewed efforts to reduce the death and disease caused by tobacco use on the heels of the 50th anniversary of the landmark 1964 surgeon general’s report that launched the anti-smoking movement. A new 980-page report issued last month by acting Surgeon General Boris Lushniak also urged new resolve to make the next generation smoke-free.

Several cities, including San Francisco, Boston and many smaller Massachusetts communities have considered or passed bans on tobacco sales in stores with pharmacies. Other places like New York City have sought to curb retail displays and promotions and raise the legal age at which someone can buy tobacco products.

The decision by a company such as CVS to stop selling tobacco products is a move of “great corporate social responsibility,” said Dr. Richard Hunt, director of the Mayo Clinic’s Nicotine Dependence Center.

But it didn’t faze Cody Petry, a smoker waiting for a bus in downtown Houston, who said he usually buys his cigarettes at convenience stores.

“It costs them $2-billion not to sell cigarettes?” Petry said. “Well, that’s $2-billion more that’ll go somewhere else.” 

 

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