CVS Jettisons a Cash Cow

The pharmacy chain isn't the first retailer to stop selling tobacco products, nor the first company to forgo a chunk of revenue.

On Wednesday, CVS Caremark announced that it would stop selling cigarettes and tobacco products, a segment worth $2 billion in annual sales. Much has been written about the decision, which CVS says will erase 17 cents in from its earnings per share annually.

CVS/pharmacy on Garrett Road in Durha...

CVS Pharmacy in North Carolina. Photo credit: Wikipedia

Why would it make this kind of move? Partly to bolster its reputation. CVS will forever be known as the first big drugstore to drop cigarettes, in a country where anti-smoking public-service announcements are ubiquitous and smoking ban legislation is introduced every week.

Indeed, CVS got an immediate pat on the back from President Barack Obama, who thanked the CEO and board of directors at CVS for making “a choice that will have a profoundly positive impact on the health of our country.” The American Heart Association and American Lung Association also lauded the drugstore chain for its decision. In its earnings call, CVS said it would make up the loss in other areas of the business, including smoking cessation programs.

“I think it’s one of the most brilliant moves from a reputation standpoint that I’ve seen in the last ten years,” says Paul Argenti, professor of corporate communications at the Tuck School of Business at Dartmouth College. “There are other organizations that are doing things more quietly, but to have the courage to forgo $2 billion in sales to enhance your reputation and do the right thing — that’s gutsy.”

Gutsy, sure. Will it pay off financially? Not right away. But Argenti thinks it’s all part of a long-term strategy. ”By doing what they did, they aligned themselves more clearly with their strategy as a health company,” he says. “They [got] a bunch of [non-governmental organizations] off their back now and forever. They got first-mover advantage in terms of what they’re trying to do with health care. And they made their employees feel good about the organization.”

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