Retailers keeping an eye on CVSPublished: 4/13/14 @ 12:00
It has long been gospel among retailers that tobacco pulls so much business into stores, with smokers also picking up water, gum or a bag of chips, that dumping it would be a sales killer.
However, with pressure from anti-smoking forces growing, tobacco use waning and now a national drugstore chain jettisoning cigarettes for good, is this calculus starting to crack?
It’s probably too early to say, but major retailers will be paying close attention to the sales numbers after CVS Caremark pulls tobacco from its shelves by October. If the old retail rules governing tobacco have not changed outright, they are at least coming up for review.
Since the nation’s second-largest drugstore chain announced it would dump tobacco just over two months ago, its shares have hit new all-time highs 10 times.
That’s not to say that the CVS case is unique.
CVS Caremark Corp. is part of a booming industry. In that same stretch since early February, shares of rivals Walgreen Co. and Rite Aid Corp. have surged as well.
And most of last year’s $126 billion in revenue at CVS came from its pharmacy benefits management business. That sets it apart because it doesn’t depend so much, like other drugstores, on tobacco to draw customers through the door.
But when CVS Caremark Corp. announced it was going cold turkey, it caught almost everyone by surprise.
The retailer will be giving up $2 billion in annual revenue a year, it estimates. About a half billion of that would come from non-tobacco products, the additional items that smokers pick up when they come in to buy smokes.
The response from Wall Street? Something between a yawn and a shrug. CVS stock is up about 11 percent since the announcement. That’s quite a run for a company that just announced it was giving up $2 billion in revenue annually, and during a period in which all major U.S. indexes have been under pressure.
Yet while CVS is not the first major retailer to give up tobacco, most industry analysts do not see the flood gates opening.
Target Corp. gave up tobacco in 1996, citing a “commitment to the health and well-being of our communities,” and no one followed it through the anti-tobacco exit door.
Each retailer has to weigh the bottom line against the message, but that has been going on for some time now, said Craig R. Johnson, president of retail consultant Customer Growth Partners.
“This isn’t just a bolt out of the blue,” Johnson said. “They’ve done the plusses and minuses, and they haven’t decided to do it.”
Some have chosen the opposite path. Discounters such as Family Dollar have actually started selling tobacco in the past few years.
Just last month Walgreens CEO Greg Wasson, when asked by an industry analyst if tobacco had become a long-term liability given the CVS decision, signaled that the nation’s largest drugstore would not be following suit.
Instead, the CEO said that Walgreens, which still sells tobacco, will focus on helping people quit.
Yet there are at least two forces adding weight to the no-tobacco side of the scale: one internal, one external.
Internally, the cigarette business has become tougher in the face of tax hikes, smoking bans, health concerns and social stigma. Plus, the number of U.S. adults who smoke dropped below 20 percent between 2005 and 2012, according to the Centers for Disease Control and Prevention.
The drugstores and major retailers angling to grab a bigger slice of the health care spending pie as the American population ages are looking at margins as well.
Cigarettes probably generate a profit margin of 3 percent to 7 percent. Generic drugs, in contrast, can fetch margins of 20 percent or more, said Burt P. Flickinger III, managing director of the retail and consumer-brands consultant Strategic Resource Group.
The question of whether retailers and drugstores can sell both health and tobacco raises the issue of those external forces that have been building for some time.
The presence of tobacco behind checkout counters creates an image problem for an industry that says it puts a priority on helping provide healthier lifestyle options for customers.
There is a push to hold retailers to their word on that score.
In the wake of the CVS announcement, attorneys general from 28 states wrote to executives at the nation’s largest retailers, including Walgreens, Rite Aid, Wal-Mart, Kroger and Safeway, urging them to follow the CVS lead.
“Pharmacies and drug stores, which increasingly market themselves as a source for community health care, send a mixed message by continuing to sell deadly tobacco products,” said New York Attorney General Eric Schneiderman.
Which retailers can afford to kick the habit, if any, may play out over the next year as CVS posts sales numbers. Investors won’t get their first look at a full CVS quarter without tobacco revenue until February 2015.
“Retail is notorious for copycat marketing, meaning if somebody is successful at doing this, others will follow quickly,” said Marshal Cohen, chief industry analyst at market researcher NPD Group.