Sounding Board: Sending smoke(less) signals
By Len Lewis
By eliminating tobacco sales, CVS is doing more than just dropping a category. It is redefining the drug store. There is an old saying that when one door closes another one opens. A really big one has opened up in the drug store business—one that might come at the expense of supermarket sales. This is all about CVS’ decision to get out of the tobacco business, a move which industry observers believe that Walgreen, its main rival, is likely to follow as both chains push the envelope on becoming true wellness centers. Let me be clear. This is not a treatise on the evils of tobacco, protecting our youth or celebrating a Hallelujah, come-to-meeting moment in corporate America. This is strictly a business decision—plain and simple—that is likely to pay off tenfold and perhaps make the drug channel an even more formidable competitor. The company is embarking on a long-term strategic move to rebrand itself around health and wellness, something that many supermarkets—despite some opinions to the contrary—have failed to do adequately. Moreover, CVS is taking the altruistic high ground by challenging its competitors to follow suit. It will also establish and strengthen CVS’ position as a one-stop shopping destination for a large number of conventional food and nonfood categories—including such mundane staples as laundry detergent, cereal and paper goods, milk, juice, bread—and sets the stage for entry into perishables as well as healthy and convenient prepared foods. Just for background, the $125 billion CVS chain announced recently that it would stop selling tobacco products at its 7,600 stores by October 1. This will cost the chain an estimated $1.5-$2 billion in 2014 sales. Interestingly, it is not going to impact the company’s operating profits this year or its five-year financial projections. Cigarettes in particular have become a low margin, high shrink category whose sales continue to decline. Reductions in sales and profits will be offset by what CVS called “incremental opportunities.” Clearly, there are far better uses for that high-premium, front-end space. In the grand scheme of things, tobacco is small potatoes compared with the opportunities available in other categories. The chain’s Caremark division is a pharmacy benefits manager for large employers and insurers and accounts for about 60% of the company’s total revenues. The move away from tobacco will boost CVS’ reputation as an in-store clinic that can replace a doctor’s visit. This was taken to a new level in California, where, as of January 1, a new law allows pharmacists, now classified as healthcare providers, to prescribe and dispense certain medications, including smoking cessation meds. The bottom line is that it will drive more customers into CVS stores for its growing network of MinuteClinics, convenient care facilities staffed by 26,000 pharmacists, physician assistants and nurse practitioners. CVS plans to have 1,500 clinics in operation by 2017. Walgreen is expected to have 500 by year-end. Aside from the sheer number of units, it is important to realize that their staffs are now allowed to diagnose and treat common illnesses. This has already drawn fire from traditional healthcare providers, specifically pediatricians. But the use of these clinics is inevitable. And there is no doubt staffers will also be steering customers, including the millions of people now covered under the Affordable Care Act, toward other categories in this new one-stop healthcare shop—including over-the-counter medications and HBC items. One of the most concise points of view on the subject was offered by Ross Muken, an analyst with the ISI Group, who said in a recent interview: “The nature of the drug store is changing and companies like CVS are reinventing the box. The old model of the pharmacy as a convenience store is changing and companies are shifting to have a greater role in the healthcare continuum.” Reinventing the box! How many times have we heard that over the years? Yet how many have really done it?