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CVS becomes first big U.S. drugstore chain to drop tobacco

A CVS pharmacy is seen in New York City July 28, 2010. REUTERS/Mike Segar
A CVS pharmacy is seen in New York City July 28, 2010. REUTERS/Mike Segar

By Phil Wahba and Julie Steenhuysen

(Reuters) - CVS Caremark Corp will stop selling tobacco products at its 7,600 stores by October 1, the company said on Wednesday, making it the first national drugstore chain in the United States to take cigarettes off the shelves.

Public health experts hailed the precedent-setting decision by the No. 2 U.S. drugstore as a step that could pressure other retailers to follow suit. With pharmacies taking on a larger role in the U.S. healthcare system with walk-in clinics and services such as managing health plans, many experts say they should no longer offer unhealthy products like tobacco.

President Barack Obama, a former smoker, praised CVS, saying in a statement the move will help wider efforts to "reduce tobacco-related deaths, cancer, and heart disease, as well as bring down healthcare costs."

CVS expects the decision to hurt profits initially, along with a $2 billion hit to annual sales. But the company, whose Caremark unit is a pharmacy benefits manager for corporations and the U.S. government's Medicare program, believes the move will boost its appeal as a healthcare provider.

CVS hopes to replace some sales through signing up customers to smoking cessation programs, which will be a selling point with potential corporate contracts.

Analysts said CVS could eventually recoup lost sales through increased use of its healthcare services. But investors focused on the short-term pain. CVS shares fell 1 percent. Larger rival Walgreen Co, which will keep selling cigarettes, rose 3.9 percent, while No. 3 Rite Aid Corp which also will still offer cigarettes rose 2 percent.

Shares of cigarette makers Lorillard Inc, Altria Group and Reynolds American all slipped.

Pharmacists have long been a source of community health information, and drugstore chains have embraced that tradition by adding walk-in clinics. CVS is the largest U.S. pharmacy healthcare provider, with more than 800 MinuteClinic locations.

"I think CVS recognized that it was just paradoxical to be both a seller of deadly products and a healthcare provider," U.S. Centers for Disease Control and Prevention Director Thomas Frieden told Reuters.

CVS Caremark Chief Medical Officer Dr. Troyen Brennan said in a piece in the Journal of the American Medical Association that increased health coverage under the U.S. Affordable Care Act "comes with a price" of promoting public health.

Experts noted that healthcare organizations and advocacy groups such as Americans for Nonsmokers' Rights have been urging pharmacies for years to get out of the tobacco business.

Cornell University communication professor Jeff Niederdeppe cited "an evolving social climate that has become less and less supportive of the marketing, sale, and use of tobacco products in the U.S."

Some U.S. cities, including Boston and San Francisco, already ban the sale of tobacco products in pharmacies, and nonsmoking advocates hope other chains will follow CVS.

"This is a trend we're going to see many, many retailers and food companies jump on," said Alexandra von Plato, president and global chief creative officer of Publicis Healthcare Communications Group.

Only 18 percent of U.S. adults smoke, down sharply from 43 percent in 1965. But the habit still kills 480,000 Americans each year, remaining the leading cause of preventable death in the United States.

SHORT-TERM HIT

CVS said the decision to drop tobacco sales will cost the company 6 cents to 9 cents in profit per share this year. Analysts expect 2014 revenue of $132.9 billion and earnings of $4.47 per share, according to Thomson Reuters I/B/E/S.

Overall U.S. cigarette sales fell 31.3 percent from 2003 to 2013, according to Euromonitor International. And CVS faced more competition in selling to that shrinking market, as discount retailers Family Dollar Stores Inc and Dollar General Corp chains charge much less and have far more locations.

"We believe the move will be viewed as a positive long-term decision by CVS, despite the near-term profit drag, as it paves the way for increased credibility with both healthcare consumers and payers," ISI Group analyst Ross Muken wrote in a note to investors.

CVS has been bolstering its position in the healthcare market in recent months and in December, it said it expected pharmacy benefit manager revenue to rise between 7.25 percent and 8.5 percent in 2014, more than double the rate of retail business growth.

Tobacco companies shrugged off the announcement even as shares dipped on concerns about potential disruption to sales.

"It's up to retailers to decide if they're going to sell tobacco products," said Brian May, spokesman for Altria Group, maker of Marlboro and other popular brands.

RBC Capital Markets analyst Nik Modi said he expected little impact on tobacco companies. He noted that they rely on convenience stores for more than 75 percent of sales.

But Dr. Richard Wender of the American Cancer Society said CVS's move would have an effect.

"Every time we make it more difficult to purchase a pack of cigarettes, someone quits."

(Reporting by Phil Wahba in New York and Julie Steenhuysen in Chicago; Editing by Jilian Mincer, Lisa Shumaker and David Gregorio)

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