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Why CVS is giving up smoking

CVS is getting rid of cigarettes, because they want to focus on healthcare instead.

If you’re used to getting your cigarettes from CVS, you should start coming up with a backup plan. The pharmacy convenience store chain says it’s no longer going to sell them after October 1.

IS THIS REALLY ABOUT CIGARETTES?

CVS is definitely going to lose money on this. $2 billion a year in sales, out of $123 billion total (in 2012).

"In the short run," says Columbia Graduate School of Business professor Rita McGrath, "it's clearly going to be something that their shareholders will have to swallow hard, because it will cost them cash flow."

NO.

Cigarettes sales in the U.S. are declining anyway. CVS’ decision is part of a modern business phenomenon of rapid redefinition in order to keep up, says McGrath, who is author of "The End of Competitive Advantage".

"They’re exiting a business that’s got flat growth, or is in modest decline, in order to pull resources out to fund things they see as brighter prospects of the future."

McGrath says it’s much like Verizon ceasing to print phone books, or Hilton Hotels quitting room service. 

"Not that they’re bad lines of business," says McGrath, "but they’re not the future."

SO WHAT IS IT ABOUT? MONEY.

"They’re trying to tap into this vast market for providing more comprehensive healthcare solutions," says McGrath.

If this pays off, CVS will make a lot more in the long run than it lost on cigarette sales. 

CVS wants to be somewhere between a pharmacy and a doctor’s office. It wants to become the place you go to get your shots, to get medical advice, to get prescriptions. And if that’s where CVS wants to go, then it really doesn’t look good to be selling cigarettes.

ALSO, RETAIL ISN’T HOT.

John Palizza is a retired lecturer from the Jones School of Business at Rice University, and worked at Walgreens for 23 years.

"The retail side, the general merchandise side of the pharmacy business is slow growth," he says. "If you look at same store sales on the general merchandise side, it’s a higher margin business, but a slower growth business."

On top of that, online sales have been a source of brutal competition for many retailers.

CVS has, for a number of years says Palizza, been pushing much harder to get more of their dollar revenues from the higher growth health care arena.

"This is another step in that direction."

WILL THIS BET PAY OFF?

Ceci Connolly, managing director of consulting firm PwC’s Health Research Institute, says for businesses ranging from pharmacies to communications, "we see enormous opportunity for nontraditional players to deliver more and more healthcare."

The drivers opening up this space for retail healthcare are the oldest in the book: convenience, cost, and technology. 

Already, "more than 10 million Americans get a flu shot today at pharmacies, many other millions get them at grocery stores or big box retail stores," says Connolly.

It’s cheaper and easier than scheduling a doctor’s appointment for something so simple.

"That’s a perfect example of people voting with their feet, and we believe much more of that is coming in the very near future."

Advances in technology – and advances in people’s comfort level with that technology -- allows more to be done outside of a hospital, says Columbia’s McGrath.

"As we get smarter with certain technology, it becomes possible for less skilled providers to do something," she says. "You don’t need a trained super-specialized doctor to say 'Yes you have the cold,' or 'Yes, you have pinkeye." 

What’s more, the industries currently occupying much of the healthcare industry space are damaged.

"We know from our research that insurers and pharmaceutical companies do not rate high on trust or popularity scales, so some of these new players may have an advantage with brand identity," says Connolly. CVS, capitalizing on its corner-store image – and now its anti-smoking cred – is adding capital to its branding bank.

IS THIS WHERE THE WHOLE PHARMACY INDUSTRY IS MOVING?

It’s more than a pharmacy industry thing, according to PwC’s Connolly.  

"Right now in our conversations with clients, we see a lot of interest in getting into the healthcare space," she says. "We’ve studied the top Fortune 50 companies, and 76 percent of them say that today they are in some way in the health care business."

This includes communications companies, retailers, sporting goods stores, and "folks you would not think of as being hospital or insurance companies."

These efforts range from offering healthcare services to healthcare gadgets, like those that count your steps or calories burned.

"These are the little initiatives that they can break into healthcare and get a foothold and see if they will expand."

It’s a reflection of the pressure and the opportunity that is facing the pharmacy industry as a whole, and CVS is trying to get out ahead.

LEADING THE WAY, OR TESTING THE WATERS?

"They’re trying to position themselves as a leader for the healthcare side of the retail business," says Palizza. "Whether others follow suit, or say 'we’re happy to pick up the dollar volume that CVS doesn’t want,' is an open question."

About the author

Sabri Ben-Achour is a reporter for Marketplace, based in the New York City bureau. He covers Wall Street, finance, and anything New York and money related.

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