On September 3rd, 2014, The Sustainable Investor examined CVS Health’s decision to cease tobacco sales.
Read here: A New Era: CVS Health at the Lead
“Will CVS lose sales to tobacco lovers now shopping at Walgreens? Maybe. The more likely scenario is that the company has evoked an incredible emotional response from its consumers, which will inevitably impact the sustainability of the brand.” – The Sustainable Investor, 09-03-2014
On September 3rd of this year, CVS Health removed tobacco from the shelves of its 7,800 stores across the nation. In fact, CVS underwent a complete rebranding, changing its name from CVS Caremark to CVS Health and asserting a heightened focus on America’s health.
“It positions us for future growth and the opportunity to play a bigger role in our evolving health care system. It’s my job to ensure that we’re positioning the company for not just short term success, but long term success.” – Larry Merlo, President & CEO, CVS Health
Long-term success. In other words, a sustainable company.
Importantly, at the time of the announcement, CEO Larry Merlo also proclaimed an anticipated $2 billion hit to annual revenues (about 3% of total) as a result of expunging tobacco. Despite this loss, Merlo stated that he felt tobacco elimination was the “right thing to do”.
Fast-forward three months to the present. What actually happened?
CVS Health recently reported third-quarter net revenue growth of 9.7% (approximately $3.1 billion) to $35 billion. Operating profits increased 4.3% to $2.2 billion. Importantly, the company was able to more than offset the estimated tobacco loss with a 16% gain in its pharmacy unit.
Let’s take a look at what the stock market thinks.
On February 4th, the day before CVS announced to America its plans to terminate tobacco, the company’s stock closed at $66.11. CVS closed at $90.11 yesterday.
The stock has experienced a 36.3% increase subsequent to the announcement.
This performance is not surprising. According to a Forbes article back in February when CVS first made the tobacco announcement, “…this week’s policy move by CVS did more for the brand than 10 years of promotion could ever do…an outcome like that is every marketer’s dream, and CVS achieved it not by ‘saying’ something to us, but by ‘doing’ something for the world”.
Competitors Can’t Afford to Halt Tobacco Sales
Rite Aid Corp. and Walgreen Co. have stated that they do not plan to follow CVS’s lead.
Both companies have separately indicated that although they will continue to sell tobacco, they are working to “try and help their users stop smoking”.
“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 Co. wrote in an email.
Somewhat equivalent to Dunkin’ Donuts trying to “stop obesity” by offering work out tips next to the donuts.
The real reason? Money.
CVS’s rivals cannot afford to lose tobacco. Walgreens and Rite Aid don’t have pharmacy benefit management units to offset the loss. Moreover, Rite Aid needs the cash flow because of the debt it has to service and Walgreens is still mitigating turmoil from the Alliance Boots acquisition.
And thus, we come back to another previously examined notion: are we only seeing sustainable actions from those who can afford to implement?
The answer, quite plainly, is yes.