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Last week, CVS made the bold decision to take cigarettes off
their shelves. CVS will no longer be selling cigarettes since they endanger the
lives of their customers and that goes against their pharmaceutical values and healthcare promotion.
President Obama has commended CVS’s CEO, Larry Merlo, for
the decision. The company will obviously lose quite a bit of money because of
the decision, but the CEO believes the pros outweigh the cons.
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Some have said they support the decision while others say
it’s pointless since it won’t deter smokers—it will just send them elsewhere.
It’s interesting to me that CVS has chosen to make this “moral” decision
because it is not every day that a company chooses to take something off their
shelves in order to promote healthier behavior. Since CVS is private and made
this decision independently, it doesn’t bother me too much, but I generally
think that people ought to be making this decision for themselves. And I also
fall into the more cynical category of people for this issue—I suspect the percentage of smokers who will a)
quit or b) cut down on their consumption will be few and far between. CVS
will lose about 3 percent of their profits and over a billion dollars in
revenue. Quite a tradeoff for a business who has a goal of making money! What do you think about this decision? The economic
aspects? The political ones?
Thanks to Annika for the idea for this post!
8 comments:
It seems to me that CVS's rationale for coming to this conclusion is much more founded in business than in morality. CVS recognizes that tobacco is a declining business, and it's better for the company to jump off the boat now to look like a hero than to stay on a sinking ship to eke out a couple billion dollars in revs each year. CVS is ditching tobacco to focus on retail clinics, which is expected to grow at a 20-30% clip over the next few years. As you might imagine, there's an issue in operating a business that gets people sick and then later welcomes them back to treat them, so CVS stuck with the latter. The growth in the retail clinic segment should help CVS recoup lost revenue from tobacco sales, and eventually will grow to become more lucrative than tobacco (that's my guess). So while people applaud the company for looking out for customers, they're really just picking care over convenience as a long term bet, and it'll probably pay off.
I think that it is great that CVS decided to talk cigarettes off of their selves for the safety of the costumers. Although it may not make a difference, it had a symbolic impact of placing health over revenue. One way it could have a big impact is if CVS does not financially suffer from taking cigarettes, others could follow the example of CVS.
Quinn, great analysis from the economic standpoint. I actually hadn't read any articles that described the idea that CVS is just ahead of the curve (that is expected) and gets to benefit since they are earlier in getting out of the cigarette business and appear to be promoting change. Yes, it is a bit of a hypocritical institution if they get their customers sick only to later treat them. I'm quite interested to see if their bet pays off. Do you think other stores will get the hint and get on board? Or will they follow their consumers when the smokers actually stop wanting cigarettes? Will the CVS's clinic really grow enough to make up for the loss? After all, if fewer people are smoking cigarettes, theoretically the need for the care goes down. Are you instead suggesting that just in general CVS will expand and make up for the cigarette revenue loss?
Lorenz, interesting idea on CVS's move being more symbolic than intended to effect change. I doubt many will follow suit, at least until smoking really fades away, but I hope consumers will make better choices as time progresses. Do you think, give that it's been multiple decades since research showed how bad cigarettes are for people, that the current group of people smoking them will really stop smoking?
I agree with Kira's point that CVS's new refusal to sell cigarettes will probably not create a movement of people quitting smokers or something inspiring like that. And despite the drop in profits CVS will undoubtedly experience, I think that this is a smart move for CVS whether it was a moral or business choice for the company. As Quinn noted, the pharmacy looks like a hero for terminating its support for cigarettes, which has given it a degree of publicity and attention. Additionally, if CVS is trying to portray itself as a center of health care by ditching the cigarettes, its more medicinal, safe image could potentially help it greatly in the long term.
I read an interesting opinion in the Feb. 8 edition of the Boston Globe by Derrick Z. Jackson that brought up a point I hadn’t even considered. If cigarettes are exiting the shelves of CVS pharmacies nationwide, what will be next to exit the shelves? Jackson goes on to endorse the removal of all sugar-containing beverages, which would include crowd-pleasers and cha-ching inducing drinks like Coke, Pepsi, Gatorade, and Red Bull. He cites some staggering figures relating to added sugars. While the World Health Organization and the American Heart Association caution against consuming more than 10 percent of daily calories through added sugars found in processed foods, snacks, and beverages, approximately 71% of Americans exceed this amount.
I understand Jackson’s concern. It can be disconcerting to realize how much of one’s daily sugar is not even being eaten, but rather slurped up. Companies like Coca Cola do have the right to sell these; the nutritional facts are clearly labeled and healthy alternatives are always the next shelf over. Conversely, businesses like CVS have the right to remove such products, as Kira said. Unfortunately, if I owned a business, I would be more inclined to keep such products on the shelves because my losses could probably put me out of business. It’s weird to think that I would be making money off products that are bad for you, but it’s not the store forcing the consumer to purchase the product; that’s on them.
To tie this back to cigarettes, do you think CVS should continue limiting its products to prevent people from buying things that may be harmful to their health? Is the burden of making good choices on the provider or the consumer?
Boston Globe Opinion: http://www.bostonglobe.com/opinion/columns/2014/02/08/cvs-tobacco-ban-just-start-next-soda/6MUfQIsBuaS3dB77LGjqSJ/story.html
Quinn is entirely right: CVS's decision is entirely a business decision. I do believe that other companies in American will follow suit, but it is also worth noting that most cigarettes are actually bought at gas stations (the WSJ published a graphic on their front page last week). As Quinn said, in the long run, CVS's focus on the retail clinic growth will outweigh the short term effects of tobacco sale losses. Furthermore, with the Affordable Care Act implementation, CVS has significant interest to forge better relationships with hospitals and doctors. This article is worth the read.
http://www.forbes.com/sites/brucejapsen/2014/02/15/how-obamacare-helps-cvs-kick-the-habit/?partner=yahootix
And regarding the future of the tobacco industry, it is indeed declining in the United States and has been for some time. While this decision is another indicator that American society is beginning to turn away from smoking, the tobacco industry began moving away from the US long ago. From an economic standpoint, analysts have said that this move by CVS doesn't mean much at all. Right now, China is a growing market for tobacco products (the largest by far and growing). So while CVS's decision is a PR (and business) success, the impact is but a small ripple in the bigger picture.
http://features.blogs.fortune.cnn.com/2014/02/05/cvs-cigarettes/?source=yahoo_quote
Perhaps I'm just beating the figurative dead horse now, but while browsing my Pulse feed, I came across this interesting post on the Harvard Business Review blog (http://blogs.hbr.org/2014/02/cvss-lesson-carpe-diem/) that asserts that the boost to CVS's reputation alone justifies the relatively small cost in cigarette-related revenue. The writer argues that a company's reputation, while intangible, is its most valuable asset, and that CVS is simply removing a "reputational risk" by dropping cigarettes. Not only is the market for cigarettes declining, but as stated in the post, there have already been a number of movements to ban cigarette sales in pharmacies. CVS doesn't want the continued carrying of cigarettes to come back and bite them in a future when consumers don't want pharmacies to carry cigarettes, so they are taking them off the shelves now in a long-term investment in their reputation.
As the author of the post continues, the reason why many companies aren't willing and probably won't be willing to follow CVS is that they are too focused on the short-term and won't be able to explain to investors a billion-dollar revenue loss for a return that can't be quantified. However, in reality, the long-term benefits from a reputation boost will outweigh any short-term negative effects in stock price or investment; a good reputation, according to the author, has been proven through research to give a company a competitive edge in terms of supplier pricing, stock price stability, customer loyalty, and many other aspects of business. Real-world evidence seems to be confirming this as true: from a February 5th low of around $65/share following the big announcement, CVS's stock price has already rebounded to around $70/share as of the 14th. Thus, in reality, CVS isn't making a health decision for its consumers; it's making a business decision based on what consumers already want for their health.
As has been said countless times, moving away from tobacco is good business and health decision no matter which way you slice it. Cigarettes have falling out of favor for decades, and sometime in future some kids in history class will look back at laugh at the foolishness of man (and the few stragglers who still may use it in the future) abusing nicotine for no reason other than to look cool (it doesn't even make you feel happy like heroine). In the grand scheme of things, tobacco is a complete market failure. An artificially created demand that does nothing but kill people slowly, painfully and expensively in the form of tobacco production and health care costs. It's embarrassing, really. Cigarettes are probably one of the most glaring failures, up there with corn subsidies and environmental pollution. Their true costs are only felt years, decades and centuries later when it becomes the clear the trade-off was most definitely not worth it. Really the same can be said for any unhealthy, consumer product. But most tend to satisfy dopamine needs and are relatively cheap, and thus the winds of change that would take the products Annika mentioned off the shelves won't come for a while, if at all.
As for the Chinese market, the tobacco market is really just a vestige and completely self contained as mandated by their partial command economy. The China National Tobacco Corporation has a virtual monopoly, backed by the Chinese government no matter how often the WTO complains. Other countries, especially America, have a minuscule share, if even one at all. The government has already acknowledged smoking is a pretty bad problem and is looking at plans to phase the entire industry out without destabilizing that portion of the economy, trying to shift production slowly to more productive venues. Any analyst worth their salt would not put any stock in the Chinese tobacco market growing substantially or flourishing in the near and far future. Big tobacco cannot hope to exist indefinitely - its just a sinking ship riding out its last knots, although who's to say those who back tobacco won't shift to different products.
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