CVS (CVS) is kicking its cigarette habit, stubbing out a rich and addictive source of revenue in hopes of finding healthier returns elsewhere. The company announced that it would stop selling all tobacco products in all its 7,600 or so stores by October, saying the products conflict with its goal of helping people stay healthy. It won’t even sell e-cigarettes, which are purported to be less harmful than traditional smokes.
“Put simply, the sale of tobacco products is inconsistent with our purpose,” CVS Chief Executive Larry Merlo said in a statement. By the company’s estimate, the decision to drop tobacco means it will forgo about $2 billion in annual revenue, around 1.5 percent of total sales.
Consumers and investors alike took to Twitter (TWTR) to praise the decision, which came with its own hashtag. Even President Obama—no stranger to the charms of tobacco—lauded the decision this morning for saving lives and lowering health-care costs.
CVS, of course, will still sell plenty of other things that are less than ideal for the human body, including jumbo candy bars, weird dietary supplements, and malt liquor. And it’s debatable whether the decision will nudge anyone into kicking the habit. After all, there are plenty of other places to buy cigarettes—the nearest Walgreens, for one.
But CVS is betting that by taking the high, smokeless road it can cozy up a bit to insurers and doctors. Prescriptions for baby boomers, at the moment, have far more growth potential than cigarettes. And the pharmacy chain needs to buttress its core business, as shoppers increasingly turn to Amazon (AMZN) for such staples as toothpaste, toilet paper, and even those little tchochkes that choke the aisles around Valentine’s Day. A pile of pills and an army of well-trained pharmacists and health consultants are one of its few competitive advantages.
The move also sends a valuable message to consumers in a crowded and cutthroat pharmacy market, and it’s a positive image CVS hasn’t been shy about promoting this morning. With what seems like a drug store on every corner, the chain that best ties itself to a person’s life and lifestyle will win the day. Loyalty progams are a great way to do that, but they are no longer enough. A connection that goes beyond commerce is the new ideal.
Walgreen (WAG), the only drug-store chain bigger than CVS in the U.S., is already playing the healthy living card. In late 2012, it tied its loyalty program to health goals. It doles out discounts based on how much its customers walk or work out, a great way to get people to pull up its app every day.
Will there be fallout for CVS? Sure, but it may be less than one would think. In any given year, about half of U.S. smokers are trying to quit, according to government statistics. That’s about 22 million tobacco customers who will appreciate the company’s decision—to say nothing of the 81 percent of U.S. adults who don’t smoke.