Packs of cigarettes are on display at a newsstand in Chicago. Illinois' $1-per-pack cigarette tax increase went into effect in June 2012.(Photo: Charles Rex Arbogast, AP)
Story Highlights
CVS said Wednesday that it will stop selling tobacco on Oct. 1
Sales will shift mainly to convenience stores, but they already have most of the market
CVS is repositioning itself as a health care company
Smokers who can't get cigarettes at CVS anymore will head to convenience stores and other places after the drugstore chain stops selling tobacco on Oct. 1, industry analysts say.
CVS announced its plan Wednesday to drop tobacco, saying the product was inconsistent with its health care mission.
That decision "is a positive" for convenience stores, says Wells Fargo tobacco industry analyst Bonnie Herzog.
Those stores will not only gain tobacco sales, they'll also ring up sales as cigarette customers buy other items, Herzog says.
"If more tobacco consumers are going into (convenience) stores, this bodes well for ... other non-tobacco merchandise sales," she says.
That sales bump will grow if more drug retailers follow CVS's lead, she says.
Convenience stores already have a strong base of tobacco buyers -- 86% of all U.S. cigarette sales are in those stores, says Jeff Lenard, a vice president at the National Association of Convenience Stores.
The overall sales lift from former CVS tobacco customers alone won't be huge, says CLSA Americas tobacco industry analyst Michael Lavery at CLSA Americas.
Drugstores represent just about 6% of the $107 billion in annual U.S. tobacco sales, which include cigarettes, smokeless tobacco and pipe tobacco, he says. Cigarette sales are about $90 billion of that.
CVS's 7,600-plus stores are only about 3% of all cigarette sellers in the USA, says Citibank analyst David Adelman.
CVS issued a statement saying it expects to lose about $2 billion in annual revenue but will find "incremental opportunities" to offset that. It did not say what they are and did not reply to requests for further comment.
CVS isn't first to make the non-tobacco decision. Target quit selling tobacco products in 1996.
CVS competitor Walgreens did not respond to questions except for a written statement: "We have been evaluating this product category for some time to balance the choices our customers expect from us with their ongoing health needs. We will continue to evaluate the choice of products our customers want, while also helping to educate them and providing smoking cessation products and alternatives that help to reduce the demand for tobacco products."
Rite Aid also released a statement,which said: "Rite Aid offers a wide range of products, including tobacco products, which are available for purchase in accordance with federal, state and local laws. Additionally, Rite Aid also sells a variety of smoking cessation products and provides additional resources, including our pharmacists, who are available to counsel people trying to stop smoking. We continually evaluate our product offering to ensure that it meets the needs and interests of our customers."
Walmart had no comment.
While CVS will halt tobacco sales, other stores have opted in. Lavery points out that Family Dollar and Dollar General have added tobacco products at many locations in the past two years.
With so many places to buy tobacco, any sales shifted from CVS "will be spread so thin that the uptick to anyone else will be minor," he says. "You'll see competitors benefit," but the overall rise will be "a drop in the bucket."
Cigarette prices across the country vary because each state taxes the product differently, but in general, a pack of cigarettes costs about $6, Lavery says.
One in five U.S. adults smoke, according to the Centers for Disease Control and Prevention.
The tobacco news comes as CVS tries to remake itself as a healthcare company, says Frank Morgan, a health care industry analyst who follows CVS for RBC Capital Markets. It has added services like in-store MinuteClinics, where customers can walk in without an appointment for primary care.
As the health care industry evolves under the Affordable Care Act and more people enter the health care system, Morgan says "there's still plenty of other growth opportunities" for CVS to make up its lost revenue from tobacco products.
CVS' Caremark unit is a major pharmacy benefits manager for private companies and Medicare. That gives it a financial stake in its customers' health that other retailers don't share, says financial and legal analyst Jerome Reisman, a senior partner at law firm Reisman Perez. in Garden City, N.Y.
"The move by CVS will have a small financial impact on retail sales but may in the long term help the Caremark division, as a health care provider, reduce illness caused by tobacco and increase the profitability of the Caremark division," Reisman says. "In the long run, you make more money if your customers are healthy because you are going to pay out less."
Smoking causes long-term health problems such as cancer but also inflicts immediate damage, causing ear infections and worsening asthma and other respiratory problems, research shows.
Quitting has immediate health benefits, reducing the risk of heart attack in just a day, says Stanton Glantz, a professor at the University of California, San Francisco. A middle-age smoker who quits smoking cuts his risk of a heart attack by 50% in just one year.
CVS made a smart public relations move that generated positive publicity and helped the company "ingratiate itself with the federal government," Reisman says. It also got out in front of a trend. San Francisco and Boston have banned cigarette sales in pharmacies.
"This may be a change that is going to come anyhow," Reisman says.
The American Pharmacists Association called for drugstores to end tobacco sales in 2010 and has called for states to refuse to renew licenses to pharmacies that sell cigarettes. Many medical groups have pressed drugstores to stop selling tobacco, including the American Medical Association, American Cancer Society, American Heart Association and American Lung Association.
Contributing: Liz Szabo