CVS Still Stands Alone in Quitting Tobacco

November 5, 2014
Convenience Store News
WOONSOCKET, R.I. — Two months after quitting the tobacco business, CVS Health Corp. stands alone in its decision.
Walgreen Co. and Rite Aid Corp. are instead sticking with the strategy of helping adult tobacco users quit. Neither drugstore chain plans to follow in CVS’ footsteps to pull tobacco products from its shelves, according to Bloomberg.
The decision to exit tobacco has not hurt CVS, however. Earlier this week, the Woonsocket-based company reported its third-quarter revenues grew 9.7 percent to $35 billion, led by a 16-percent gain in its pharmacy services unit that more than made up for the loss of cigarette sales, the news outlet added.
However, other drugstore chains that do not have pharmacy benefit management units still need tobacco, said Jeff Jonas, a portfolio manager at Gabelli Funds. That may eventually change as the drugstore chains bolster their balance sheets, he added.
While Rite Aid needs the cash flow, Walgreen could get out of tobacco retail, Ross Muken, an analyst with Evercore ISI, told Bloomberg.
CVS’ decision may have been made easier because of its Caremark unit, which manages drug benefits and makes up 54 percent of its revenue. While CVS has said that dropping tobacco will cost it about $2 billion in annual sales, a good year by Caremark means it can afford to give up some of those retail sales, according to the report.
“They’re having good enough earnings growth elsewhere that they can more than offset that,” Jonas said. “The Caremark pharmacy benefits manager unit is becoming more and more important to them. That’s what’s growing double-digits; that’s what’s driving their results.”
Walgreen and Rite Aid aren’t diversified in the same way. “Rite Aid and Walgreen want to be retail stores,” Muken said. “CVS wants to be an innovative healthcare delivery organization.”
In March, the attorneys general of 28 states and territories wrote to the CEOs of Wal-Mart Stores Inc., Walgreen Co., Rite Aid, Safeway Inc. and The Kroger Co., asking them to remove any and all tobacco products from their shelves, as CSNews Online previously reported. Walgreen also operates Duane Reade stores.
Rather than pulling out of the tobacco business, Walgreen and Rite Aid said it’s better to stop nicotine addiction at its source, rather than make it more difficult to satisfy cravings. Walgreen plans to offer customers access to an online smoking cessation program. Rite Aid’s pharmacists coach people on how to cut nicotine use.
“We believe that if the goal is to truly reduce tobacco use in America, then the most effective thing retail pharmacies can do is address the root causes and help smokers quit,” Walgreen said in an email to Bloomberg. The company also said because pharmacy chains only account for about 4 percent of U.S. tobacco sales, it’s unclear whether dropping tobacco would cut smoking rates very much.
Almost half of cigarettes in the United States are sold at gas stations and convenience stores, according to Euromonitor International, a research firm.
Rite Aid is always evaluating what it should be selling, said Ashley Flower, a spokeswoman for the Camp Hill, Pa.-based drugstore chain.
The biggest U.S. retailer, Wal-Mart Stores Inc., and the biggest U.S. grocery store chain, The Kroger Co., said they have no plans to stop selling cigarettes. “Our inventory is driven by customer preferences and at this time, we plan to continue to sell legal tobacco products in our stores,” Keith Dailey, a Kroger spokesman, told the news outlet.