One Year After CVS Quits Selling Cigarettes

Luke Willoughby  Follow

By October 1 of last year, CVS Pharmacies had boldly discontinued sales of all tobacco products in its 7,800 retail stores. Many people championed the company for its brand integrity supporting health and wellness. Others questioned the financial responsibility of the $2 billion loss of annual tobacco sales.

According to public financials, CVS's 2014 revenue of $139 billion means cigarettes accounted for approximately 1.4% of total cash flow. This summary from Motley Fool indicates there was an immediate impact on profits in Q4 of 2014, which was the first quarter on record after tobacco was removed. Retail profits slipped by 1.3% in Q4, whereas they would have grown by 1.7% with the revenue generated by tobacco.

But longer term, year-over-year trends indicate that CVS is overcoming the cost of this lost revenue. In Q1 of 2015, CVS saw net retail profit increase y-o-y by 1.3% vs. Q1 of 2014, when cigarettes were being sold. More broadly, the CVS stock price has seen 23% y-o-y growth as of September 25th. Competitive retail pharmacy Walgreens has seen 12% growth in y-o-y stock price.

Its gains in other non-retail businesses that might best tell the long-term strategy and vision of CVS. The same Motley Fool article describes the growth in CVS's Pharmacy Benefit Management (PBM) sector, which services employers and insurers with corporate healthcare plans. This B2B business plan generated $24 billion in revenue in Q1 of this year, which is an 18% increase from $20.2 billion in Q1 of 2014 when cigarettes were still sold.

These corporate strategies have a greater future earnings potential than the commoditized, low-margin sales of cigarettes. By surrendering the short-term profit, CVS has created a very unique position amongst competitors, including the retail pharmacy most actively fighting the healthcare costs associated with tobacco use ($133 billion annually according to the Center for Disease Control).

Whether it's a B2B or consumer strategy, the PR program is now a vessel that can keep on giving. CVS's PR agency of record is Edelman, which won PR Week's 2015 healthcare campaign of the year thanks to 129 million media impressions and 117K social media posts in the month surrounding the announcements. In addition, 20 U.S. congressmen made public comments insisting that other retailers follow in the footsteps of CVS.

To commemorate the one-year anniversary, CVS also released a report and an info-graphic with research of the nationwide impact of their tobacco removal. CVS claimed a 1% drop in cigarette sales nationwide (95 million fewer packs sold). While critics had questions about this correlation, the announcement was ubiquitous across top-tier outlets and continued positive sentiment in their battle to promote public health.

CVS flawlessly executed a risk over reward, long-term over short-term strategy that has left the competition pressured to respond. But more than this, CVS took ownership of a public challenge as a revenue-driving brand strategy. In today's world of unprecedented challenges, record corporate profits, and increasingly aggressive PR and marketing strategies, can we hope more brands will find public health a battleground for good?

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