- September 9th, 2015
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When the Butt Stopped Here: What Banning Tobacco Has Meant for CVS
It has been a year since CVS Health banned the sale of tobacco at its stores, and retail marketers can learn much from this risky shift. But sales tell only part of the story – the bigger challenge involved aligning the brand to its values with a clear strategic direction.
CVS stopped selling nicotine products at its 7,600 stores on Sept. 3, 2014. The surprising move won the praise of health advocates and the White House but had many loyalty marketers wondering: Was the nation’s No. 2 pharmacy chain abandoning a sizable segment of its loyal customer base? A review of its public records reveals the answer, and what retail marketers can learn from the shift.
First, it is worth considering the importance of CVS’ loyalty program, ExtraCare, launched 14 years ago. It is one of the largest such initiatives in the country, with more than 70 million members at the time it cut tobacco sales.
With an estimated 44 million Americans smoking in 2014, according to the Centers for Disease Control and Prevention, it was likely CVS’ decision would affect some of its loyalty members.
Cigarettes, health care don’t mix
CVS, however, was resolute in its decision, saying the move was in sync with broader efforts to evolve from a traditional drugstore chain to a health care merchant.
“Now more than ever, pharmacies are on the front line of health care, becoming more involved in chronic disease management to help patients with high blood pressure, high cholesterol and diabetes,” Mike DeAngelis, CVS spokesman, told loyalty publication COLLOQUY at the time. “All of these conditions are made worse by smoking, and cigarettes have no place in a setting where health care is delivered.”
More than $6 billion
A year later, CVS has reinforced its health focus in many ways, from changing the company name from CVS Caremark to CVS Health to agreeing to acquire Omnicare, a move that will expand its presence in the senior health care market. Its sales performance, meanwhile, has not suffered at all, based on a review of public records and reports.
At the time of its decision, CVS projected the elimination of tobacco products would cost the company about $2 billion in 2014 sales (the estimated total of its tobacco sales). Instead, sales rose, to $139.4 billion from almost $126.8 billion in 2013. In 2015 sales continue to climb: Net revenue for the first six months of this year advanced by more than $6 billion, to $73.5 billion from $67.3 billion.
This is not to imply that the removal of tobacco had a direct correlation with increased sales. Store expansions, promotions and other efforts very well could be credited for the gain. In fact, I am sure CVS realized the risk involved in making such a big decision – one that could affect sales volume and customers. However, that risk can be more than offset if it is part of a holistic practice of aligning a brand to its values with a clear strategic direction, which we will explore next.
The decision by CVS put pressure on other retailers to follow suit and eliminate tobacco sales, but so far none of the major merchants has done so. Target had quit selling cigarettes in 2006, but Walmart, Walgreens and others have not followed suit. They may, in fact, have benefited from CVS’ cessation.
CVS and Target, meanwhile, have since become retail partners, as Target has agreed to sell its pharmacy business to CVS. As I wrote in June, the two merchants have much to gain from their alignment, expected to be complete in 2016. Shifting the pharmacy brand from Target to CVS improves the opportunity to attract more customers and foot traffic through Target stores, while unloading what was for Target a well-regulated distraction.
It also enables the two retailers to benefit from sharing the data derived from each one’s loyalty programs that have not been abandoned by smokers.
What can retail marketers learn from CVS’ shift away from tobacco? I note three important features of the decision:
• It was a partnership: Among CVS business partners and clients are health plan providers and physicians. Many of these physicians have been trying to get their patients off of tobacco, while health care providers are interested in ensuring their members take their medications and improve their health, Chief Financial Officer Dave Denton told analysts in June 2014. By removing tobacco products from its aisles, CVS is supporting its clients, a commitment that will likely pay off in dividends.
• It was part of something bigger: Once CVS decided to stop selling tobacco products, it aligned the entire company behind its commitment to the mission of healthy living. I suspect that many of its high-value, target customers are similarly focused on healthy lifestyles, and if so, CVS is in essence tailoring its offerings to the preferences of its customers.
• It relied on data: CVS knew it stood to lose $2 billion a year in tobacco sales, but it clearly also knew what its best customers value and aspire to. The company’s ExtraCare and MyWeeklyAd customized coupon programs are designed to help CVS connect directly with customers, CVS wrote in its annual report. This means it has a clear line of sight to what influences their purchase decisions – for example, the basket size and frequency among smoking and non-smoking customers.
With tobacco off of its shelves, CVS is reporting higher sales and profits and signing substantial partnerships with major retail partners. Few people complain they are worse off after quitting smoking, and the same may very well apply to CVS.
This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.