CVS Pharmacy’s decision to stop selling cigarettes will cost them an estimated $2 billion. Good for them, and watch them come out way on top.
Focusing on health, this is a no brainer for any non smoker. Even libertarians will be pleased, seeing this as simply the market forces at work (see breakdown below) and not an affront to choice, similar to a tobacco tax or soda ban.
Let’s not forget cigarettes are the most heavily taxed product pretty much anywhere you look. In New York, the price has risen steadily towards the mid-teens, whereas most locals remember it was just $3 a pack 10 years ago. That’s not inflation, that’s a clear case of deterrents via government intervention.
Seeing the business side, lets focus on the margins which give us a view into the almighty profits. At a paltry 15% margin, 2 billion in sales per year equates to under 400 million profit in profit. That’s not much revenue for CVS, considering the amount of shelf space it requires to showcase the myriad brands and variants of each.
Compare that to the margins on health products, nearly 4 times greater (53%), and we see that the $2 billion in lost sales can be made up with under 3/4 of a billion from the rival category, and it most likely will for a few reasons.
First, focusing on health being the core trajectory of CVS (think pharmacy) will strengthen it’s brand, and second, that focus will drive margins up if it can dedicate more of its inventory allotment towards those products, higher margins being of course very good for bottom lines.
This doesn’t factor in the additional items bought by people who came in to make that initial purchase, the draw ins.
At first, one might assume this is an even trade-off, as either smokers or non-smokers may intend equally to shop when they go shopping, but it’s not. Smokers have nowhere to go other than straight to the front counter for their purchase, so if they go in for that, they’ll leave just as quick as they came, but health products are by the pharmacy which is off in the back. Clearly, the healthier products will draw a different crowd and keeping them there longer, and that was laid out by design it seems.
What’s really happening in CVS is that they are boldly choosing its customers, catering to the ones who offer them much better margins, making them both savvy and health-conscious. Yes, they are alienating a huge segment of the population, but they won’t even lose anywhere near $1 billion from that choice.
One last point: marketing. CVS will be labeled innovators as this type of switch was a long time coming, and you better believe vigorously planned. The time is now, nearly 20 years since Phillip Morris began its inevitable fall from grace. This move will be further boosted by the free press it warrants.
Bravo CVS, you deserve it for being trailblazers.