CVS Blows It
The CVS decision to stop selling tobacco products has been widely praised, all the way to the White House. In forgoing a category that yields $2B in annual sales, the company hopes this is not just a short-term PR win, but a creator of durable consumer preference.
CVS deserves great credit for taking real risk in pursuit of their principles. If there is more innovation to come, it will be fascinating to see what that includes. But my initial take – purely from a business perspective – is that CVS made a mistake.
Let’s stipulate that underlying this decision is an honest belief that it is incompatible for a company whose purpose is ‘to help people on their path to better health’ to sell tobacco products. Then there are two possible ways this strategy wins: (1) That the PR benefit will cause consumers to see CVS in a new way that will create greater traffic and loyalty, and/or (2) that this is a high profile step in a longer term plan to revolutionize the modern drugstore as a more health-centered enterprise.
Let’s take these one at a time. If merely a bold PR strategy, here’s why it will fail:
1. Such PR wins are fleeting when the consumer values convenience and price above all
Given that just about every product category in today’s CVS can be widely purchased elsewhere, where to fill one’s prescriptions has much to do with convenience. Will the goodwill around tobacco removal cause consumers to travel an extra mile simply to reward the decision? Price also matters to the consumer – especially for parity goods – and the drugstore channel is competitive but not the low price leader in most categories. The PR bump will dissipate as consumers applaud the news with their hands but ignore it with their feet – or soon return to old patterns.
2. The dent will be bigger than $2B and they won’t replace the lost sales
While tobacco products are notoriously low-margin, $2B is nothing to wheeze at. Furthermore, the lost larger basket of purchases from those who previously visited CVS to buy tobacco will ripple across the business – making the revenue hit even greater. The reported $2B figure may ultimately be double or triple that when the other products tobacco-addled consumers were buying also go up in smoke. Yet the selling space they gain in removing the category from behind the counter is minimal. Not only are they bargaining that good vibes will increase overall customer traffic, they believe that those lost revenues can be counterbalanced elsewhere in the store. Unlikely – even in the long term. What potentially productive categories have drugstores not tried?
3. There will be smoker alienation that will outweigh non-smoker goodwill
18% of American adults smoke and, for better or worse, they have endured a sequence of body blows with the rash of regulations and public shaming of recent years. It is safe to assume that many will now consider CVS not only inconvenient, but downright hostile. Non-smokers seem to be more interested in their own quality of life rather than the wellbeing of their damaged acquaintances – they seek to restrict the impact of tobacco products on them (bar bans, public areas, etc.). So while non-smokers may view CVS more positively, the store environment itself is no better for them – as far as we know, it’s the same old CVS minus tobacco behind the counter.
4. They have set a standard they will be unlikely to live up to
It is easier to be clever than kind, and many commentators have hastened to temper their analyses with a laundry list of the unhealthy products CVS will apparently continue to sell. Fatty foods (don’t take my candy!), sugary drinks, even booze. So how far will they go? If the answer is ‘not any further,’ this entire episode will seem like a stunt with no long lasting effects other than lost revenue. If they do go further, that’s simply more lost revenue to make up.
Now let’s look at this decision as if it is part of a longer strategic arc towards a new kind of drugstore uniquely focused on health. There are more question marks here, but CVS faces significant challenges – remember the last retailer celebrated for trying to remake an entire retail category? How did that work out for JC Penney as they alienated existing customers in the process?
Maybe CVS strives to be a new kind of business and maybe it needs to be. Mass retailers sell everything – what can you get at CVS that you can’t at Walmart and Target? Some grocers have laid claim to health in a much more meaningful way – would you be more likely to associate Whole Foods or Wegman’s with healthy lifestyles compared to today’s CVS? Specialty retailers have cut off pieces of the business and expanded with greater focus – would the diehard GNC customer change their behavior if CVS replaced cheese curds with whey? Today’s drugstore is not the perceived leader in anything it sells – perhaps not even in prescriptions.
So let’s assume that the long-term vision is for less duplication of goods and something really new. There are indications that CVS Caremark is refashioning itself as a ‘healthcare company’ – 800 MinuteClinics in stores, the Caremark side of the business (pharmacy benefit management), the Pharmacy Advisor Program. A retail-focused non-medical way to pursue wellness, treat chronic illnesses and receive the care one needs short of a doctor or emergency room visit may represent a tilt towards the same (very) long term trends encouraged by the Affordable Care Act. Some predict this is the wave of the future. That’s why this in-between space already has many competitors (such as Urgent Care centers, mass retailers and other pharmacies).
If CVS is serious about completely remaking its business, this is where the JCP comparison actually has merit – how patient will CVS shareholders be if this is the (incredibly ambitious and risky) course the company seeks to chart? Is this new model a good fit for a retail behemoth with over 7,600 locations? What will they sell? Will it even work?
The modern American drugstore may need a new approach. There are signs that Walgreen’s is currently best positioned to deliver it, but CVS certainly has the presence to give it a shot. If removing tobacco is an isolated jolt of conscience they hope will lift the business in other ways, it is a short-sighted decision. If it is a major step in a long-term reinvention of the drugstore concept, they have a long road ahead with unpredictable reward.
I applaud companies that advance a system of belief and then live by it. But I think most commentators have confused the laudable aspects of the CVS decision with what’s best for business and the company’s shareholders.