CVS and Its New Bottom Line on Cigarettes

By Kristiana Raube

When CVS Caremark announced on Feb. 5 that it will ban cigarette sales in all its drug stores, it raised fascinating questions about the link between corporate social responsibility and the bottom line.

 What motivates a for-profit corporation to voluntarily exit a line of business in the name of public health?  Will a company “do the right thing” even if it doesn’t contribute in some way its self-interest?  Is this just a PR stunt and a display of business as usual?CVS Quits

These are core issues at our institute, especially for scholars and students at the Center for Responsible Business.

I would argue that this was about the bottom line, but that it certainly was not business as usual. CVS is the nation’s second-biggest chain of drug stores, with $123 billion in annual sales.  Its cigarette sales alone total about $2 billion a year. 

Its decision to walk away from that business appears to have been totally voluntary. The government wasn’t demanding it.  Public-interest advocacy groups weren’t staging boycotts against it. And while Target banned cigarettes sales back in 1996, big competitors such as WalMart were still in the business and — for now — are staying in it.

In other words, CVS didn’t make its move either because it had to or because it hoped for an immediate financial pay-off.

At the same time, CVS clearly did make a strategic business calculation. As its executives explained, CVS is increasingly in the health care delivery business. On top of its pharmacies, it also operates 800 in-store “MinuteClinics” – and that business is expected to grow rapidly.  It was getting more and more untenable to sell health care under the same roof as products linked to 480,000 smoking deaths every year.

It’s also worth noting that CVS doesn’t expect that the loss of cigarette sales will lead to a decline in its profits.  Cigarette sales are a tiny fraction of CVS’s total sales, and the company hopes to ramp up other lines of business to pick up the slack.  

Investors seem to accept and even approve of all this.  CVS’s share price jumped from $66.11 on Feb. 4, the day before its announcement, to $69.49 as I write this on Feb. 13.

A cynic might say that CVS just put a good PR spin on a decision it was making anyway.  But that’s too simple. For one thing, it wasn’t a risk-free decision.  If WalMart and Walgreens are still selling cigarettes, CVS could conceivably lose some foot traffic that affects more than just cigarette sales.  

The more important point is that CVS appears to have decided that its social impact on public health affects its core goal of building shareholder value. CVS is positioning itself as a health care company, not just as a chain of stores that sell everything from greeting cards to cosmetics and just happen to have a pharmacy in one corner. The more that retail health care becomes a core business, the more cigarette sales undermine its strategic direction. 

This isn’t just about CVS’s clinics, either. Every company has important social stakeholders, from customers and employees to community and political leaders, who have a big impact on its overall business.  Smoking and cigarettes have become highly unpopular with a solid majority of Americans.  Just look at the very small number of public places where it’s even legal to smoke now.  As a result, cigarettes are not only bad for public health. They’re also bad for a corporation’s brand and reputation.  

The interesting question now is whether CVS’s dramatic move to be “good” will offer competitive advantages.  For the time being, for example, WalMart plans to keep selling cigarettes even as it offers health-care services in its stores.   But WalMart invests heavily in being a “good” company too, as illustrated by its effort to drastically reduce the carbon emissions associated with the products on its shelves.

I suspect CVS’s move will put its rivals under competitive pressure to follow suit.   In the meantime, it is likely to reap big rewards for being a front-runner in this area of corporate social responsibility.  If so, there’s a lesson here for other business leaders.

 

 

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