Pharmacy giant CVS recently announced that it would no longer sell tobacco products.
CEO Larry Merlo explained the decision in a statement, noting “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. Put simply, the sale of tobacco products is inconsistent with our purpose.”
On the surface the decision makes a lot of sense. CVS wants to become a leader in healthcare and selling tobacco products doesn’t align with this goal.
The announcement also generated a lot of positive publicity for CVS.
As a business decision, however, I find it very puzzling.
One thing seems clear: this is an expensive move. CVS sells more than $1.5 billion of tobacco products a year. While this is a small portion of the company’s total revenue, perhaps 2%, it is still a sizable business. If CVS makes a 30% margin on tobacco products, a fairly standard retail margin, the move has a cost of $450 million annually. In 2013 CVS had pre-tax profits of $7.5 billion, so a $450 million hit is meaningful.
The financial cost is clear. What is less clear is how this decision will lead to incremental sales.
Will people rush to CVS now that the company doesn’t sell tobacco? I suspect not. Most people choose a pharmacy based on convenience, service, price and insurance coverage.
Will people buy more at CVS when they visit? No.
Can CVS raise prices? No.
Will the move reduce operating costs? No.
So how in the world is it a good business decision?
The argument that tobacco isn’t a healthy product so CVS is dropping the category as a matter of principle just doesn’t make sense. Soda isn’t good for people, either, or alcohol or lottery tickets or Twinkies. CVS sells many things that aren’t good for people.
Some people argue that hospitals don’t sell cigarettes so CVS shouldn’t sell them, either. This argument doesn’t work. CVS isn’t a hospital. It is a pharmacy and a retailer.
CVS provides patient case under its Minute Clinic brand. Minute Clinic clearly shouldn’t sell tobacco or soda or lottery tickets. It also shouldn’t sell carrots or lettuce. Minute Clinic provides healthcare services. CVS sells products.
There must be more to this than meets the eye. Perhaps margins on tobacco products are so small that there actually isn’t a financial hit. Perhaps public interest groups pressured CVS to make the announcement. Perhaps CVS needs to bolster its credentials in a negotiation with government payers.
Otherwise it is just a bad business decision.
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My book Defending Your Brand is now available in paperback. You can find it at all the usual spots. Here is the Amazon link: http://tinyurl.com/k346pjf
This week I head to Germany to teach in the Kellogg-WHU Executive MBA program. I always enjoy these classes; the students are from all over Europe and the Middle East. It should be an interesting session given everything that is going on now.