CVS's $2 Billion Gamble Against Tobacco

| About: CVS Health (CVS)

"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."

- CVS President and CEO Larry J. Merlo

It was announced today that CVS (NYSE:CVS) is discontinuing its sale of tobacco.

This move comes, interestingly enough, while CVS continues to sell candy that makes people diabetic, alcohol that destroys people's livers, and the drugs that treat these conditions at the same time.

The strategy behind this move is to re-brand the company's image, while helping save lives and potentially effect the cost of prescriptions and healthcare moving forward. The idea is to be forward thinking and make the brand appealing to the coming generation of Americans that are going to need increasing amounts of prescriptions as the years progress. Additionally, it can be seen as a "safe" place to shop for those who are looking to quit the habit.

On the other hand, you're alienating 22 million potential customers - it just doesn't make sense to me at this time.

CNN reported:

Want to pick up a pack of cigarettes with your prescription refill? A major U.S. pharmacy chain is breaking that habit.

CVS Caremark announced Wednesday it will stop selling cigarettes and other tobacco products at its CVS/pharmacy stores by October 1.

The retailer said the move makes CVS/pharmacy the first chain of national pharmacies to take tobacco products off the shelves.

"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," Larry J. Merlo, president and CEO of CVS Caremark, said in a statement. "Put simply, the sale of tobacco products is inconsistent with our purpose."

CVS Caremark is the largest pharmacy in the United States based on total prescription revenue, according to the company. It operates more than 7,600 CVS/pharmacy stores nationwide in addition to more than 800 MinuteClinics, which are medical clinics within the pharmacy locations.

While ideologically a nice thing to do, it's only going to take Rite-Aid (NYSE:RAD) or Walgreens located on the same block to decide they are going to continue selling tobacco to help boost their sales. CVS just said to their competitors, "if you have the gusto to continue selling tobacco in the midst of our 'it's not healthy' campaign, you can reap the rewards of having those customers."

If I'm marketing for CVS's competitors, I'm working 24 hour days trying to get the message of "we still want to sell you cigarettes" out in a respectable and non-tacky fashion, while still placing importance on living a healthy lifestyle.

And, if I'm working in the tobacco industry, I'm starting to kick it into high gear as to how not to lose the rest of the pharmacy chains.

Again, I applaud the effort here - especially as someone who has quit smoking. But, in the land of the free, where smoking (like drinking) is a choice that millions of adults make on a daily basis, CVS is far from saving the world of this problem - all they're really going to wind up doing is hurting their revenues and, in turn, their EPS for shareholders.

If I was a CVS shareholder, I would not be happy about it.

This is a story that I can actually comment on, as a former smoker and someone who actually lived across the street from a CVS during my city-dwelling time, years ago.

There were four CVS stores within a couple miles of where I used to live in - one was right across the street from my apartment. It was closer than any bar, any food store, or any convenience shop. So, naturally, this became the place I went most often to get smokes, pop, and usually whatever else I needed at the time - limited groceries, medicine, etc. However, more often than not, it was the smokes that brought me through the door to begin with. Otherwise, if I needed food or snacks, I'd make the haul to the grocery store. There are customers like me all over every major city that have the same story.

This CVS became my go-to place when I needed prescriptions, bandages, or passport photos. I was roped in and shopping there consistently.

Additionally, there's pharmacies located near bars all over cities in the U.S. where bars aren't allowed to sell cigarettes. CVS will be losing out on this business as well. What's the point of operating 24 hour stores if you can't give people what they want at 3AM - namely snacks, booze, and smokes?

To me, it was never about being loyal to a pharmacy brand name, I always just picked whichever was closest - Rite-Aid, Walgreens, CVS, it didn't matter. It was about convenience for me - and, I suggest that many other people feel the same.

Granted, to the plus side, maybe this will be considered a move to set CVS apart if they are trying to re-brand and re-image themselves with a long-term focus. In the short-term, however, I can't see this as being a good idea.

Being the first to act on something like this comes with extreme risk. If no one else adopts it, CVS's bottom line could suffer. If other pharmacies follow the lead, CVS is seen as an innovator and gets even more good press than its currently getting.

Again, while I congratulate them for trying to be trendsetters and doing the right thing, I'd be wary, as a stockholder, of what this is going to do to CVS's bottom line.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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