Loss of tobacco revenue is unlikely to cost CVS

CLINICAL TRIAL: Nurse practitioner Corissa Pond enters patient data at a MinuteClinic in a Seekonk CVS/pharmacy. CVS Caremark applied in November to open seven MinuteClinics in Rhode Island, a move to expand its health care offerings. / PBN FILE PHOTO/MICHAEL PERSSON
CLINICAL TRIAL: Nurse practitioner Corissa Pond enters patient data at a MinuteClinic in a Seekonk CVS/pharmacy. CVS Caremark applied in November to open seven MinuteClinics in Rhode Island, a move to expand its health care offerings. / PBN FILE PHOTO/MICHAEL PERSSON

It’s a store layout as familiar to New Englanders as the bright, red CVS signs dotting retail strips across the region: medicine at the back of the store, cigarettes and candy at the checkout.
But as drugstores creep into clinical care, the contrast between the two sides of the store is causing some retailers to rethink pieces of that tried-and-true format, including the temptations behind the register.
Now Woonsocket-based CVS Caremark Corp. has taken a major step toward the growing health care side of its business, announcing this month it would stop selling tobacco products at its pharmacies by Oct. 1.
“Put simply, the sale of tobacco products is inconsistent with our purpose,” said CVS Caremark President and CEO Larry J. Merlo in a news release announcing the decision. “As the delivery of health care evolves with an emphasis on better health outcomes, reducing chronic disease and controlling costs, CVS Caremark is playing an expanded role in providing care through our pharmacists and nurse practitioners.”
Although the public identifies CVS with its drugstores, more than half of the company’s $127 billion in revenue last year was generated by the Caremark unit, which manages pharmacy benefits for corporations and Medicare.
And going forward, CVS intends to grow its role as a health care provider through its in-store MinuteClinics, where walk-in customers can get basic medical services from nurse practitioners and physician assistants.
CVS now operates about 800 MinuteClinics in 28 states, including Massachusetts, with plans to add more.
A major obstacle is regulatory, as illustrated in Rhode Island, where MinuteClinics sought permission to operate in 2005, but withdrew in the face of opposition from doctors, who argued the retail clinics could erode the quality of primary care.
Opponents have also pointed to the presence of cigarettes under the same roof as MinuteClinics as a reason they should not be allowed to provide medical services.
CVS last November submitted a new application to open seven MinuteClinics in the state. The R.I. Department of Health asked for additional information and has not heard back from CVS, according to spokesman James Palmer. Robert B. Hackey, professor of health policy and management at Providence College, said ditching tobacco should help CVS expand MinuteClinics, although it may not be enough to overcome opposition here in the company’s home state.
“I think it’s a smart business move that will differentiate CVS from competitors,” Hackey said. “But the Rhode Island regulatory climate is strict. Hospitals and physicians are weary of having low-cost competitors. In other states, especially the south and Midwest, I think it will definitely help, but I don’t know about Rhode Island.”
With 6,200 employees in the state at its Highland Corporate Park headquarters and 63 pharmacies, CVS is Rhode Island’s fourth-largest employer behind the state and two hospital chains.
Nationally, investors and analysts reacted favorably to CVS’ decision to get rid of tobacco.
The company’s stock price rose more than a $1 per share between the announcement of the tobacco decision and its fourth-quarter earnings – which beat expectations – five days later.
“CVS is taking definitive action to position itself as an integral part of the health care system, and as a key partner with managed care and government-plan sponsors in supporting the health of plan members and consumers,” wrote Frank G. Morgan, analyst with RBC Capital Markets in a note to investors. “In our opinion, the near-term financial impact … is far outweighed by the long-term strategic benefits, and we applaud CVS for this bold, first-mover decision.”
According to CVS estimates, that short-term financial impact is $2 billion in annual sales to tobacco shoppers, about 3 percent of total drugstore revenue.
But cigarettes are a traditionally low-margin product and Tim Howes, assistant professor of finance at Johnson & Wales University, said they aren’t worth relying on for a chain with CVS’ goals.
“From a brand-strategy standpoint it is a smart move because cigarettes are the worst of all evils: they’re clearly not a healthy thing and from a financial standpoint, the margins aren’t that good,” Howes said. “Many places might sell them at close to cost, but that might not be the type of customer CVS wants to bring in. I think if they can show more of a health care model, from a brand perspective, they will attract a more-educated customer with more money.” Now that CVS, the second-largest drugstore chain by locations, will stop selling tobacco, speculation has turned to whether other pharmacies will follow suit.
Walgreens, just ahead of CVS in number of stores, has said only that it continues to evaluate tobacco and all its products.
But Howes thinks at least some of the large chains will follow CVS and forgo already-declining tobacco sales for a sounder platform to expand in health care.
If that’s the case, the smaller mom-and-pop neighborhood stores, which do rely on cigarette customers, could come out the big short-term winners from CVS’ decision to exit that market.
And then there is the question of whether getting rid of tobacco could be a precursor to moving away from other products with questionable health effects, such as candy, snacks and sugary drinks.
At least for now, CVS is giving no indication it is seriously considering a healthier food inventory.
“Unlike soda, potato chips and candy, which are OK in moderation, no amount of tobacco use is safe,” CVS spokeswoman Amy Lanctot said in an email.
Hackey at Providence College said in some ways calls for CVS to ditch junk food punish the store for its progress on smoking and said customers shouldn’t expect the pharmacy to become a health-food store anytime soon.
“This was a business decision, and they seem to feel they have a business case for limiting access to tobacco,” Hackey said. “If they feel limiting high-fat food and snack items makes economic sense, they will, but cigarettes are only used by around 20 percent of the population. I don’t want to guess what percentage of people eats some junk food.” •

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