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CVS Moves Forward Without Tobacco

Despite revenue drop, drugstore chain looks to survive without tobacco sales by boosting other businesses.
May 26, 2015

​MCLEAN, Va. – When drugstore chain CVS pulled tobacco products from its more than 7,800 stores last fall, the decision came at a cost: $2 billion in annual sales. That decision may have been a tough call to make, writes USA Today, but time will tell if it proves to be the wrong one.

So far, exiting from tobacco sales has taken a hit on the drugstore chain’s fourth-quarter financial performance. Without tobacco sales, CVS says that its front-end revenue dropped 6.1%. “If you take out tobacco's impact on results, then front-end sales would have grown by about 2%,” writes USA Today. “That means exiting the tobacco business lopped off more than 8% from what would otherwise have been steady results.”

Last fall, CVS Health Corp (CVS) made national news when it announced that it would no longer sell cigarettes and other tobacco products in its 7,850 stores. CVS Health's decision to opt out of these products cost it $2 billion in annual sales, but does that mean CVS Health's decision was the wrong one? Let's take a closer look.

While walking away from $2 billion sounds crazy, the hit was lessened by the fact that CVS Health generates tens of billions per year from employers and health-insurance companies that contract with the drugstore chain to run their prescription drug plans (PBM). Therefore, looking long term, CVS Health’s pharmacy benefit management business, which generated nearly $24 billion in Q4 2014, is “far more important to the broader picture than the cigarette business,” writes the newspaper, adding that if the company “can leverage the elimination of tobacco products from its stores to win additional employers and insurers for its PBM segment, its anti-tobacco stance will prove to be brilliant.”

Other businesses operated by the drugstore chain are also growing, which will help make up for lost tobacco revenues. CVS opened up 15 new Minute Clinics last quarter alone, bringing the total of clinics to 986. 

So while removing tobacco products from its stores came at a price, writes the newspaper, long-term gains in other parts of CVS Health’s business will “more than make up for the decision.”