#CVSquits

The drug store chains move out of tobacco is big business, not altruism

The big story of the morning was CVS pharmacy’s decision to stop selling tobacco products in its 7,600 stores nationwide despite the estimated two billion dollar hit it’s going to take to its bottom line as a result. They should get a well-deserved pat on the back for striking a major blow against the proliferation of smoking, but make no mistake the move out of Tobacco is driven primarily by business strategy.

CVS operates in a mature and largely commoditized market. For a public company that is a problem because it makes it difficult to grow at a healthy rate and attract investors. Over the past several years CVS has begun to redefine itself as a “wellness” brand to compensate.

In store Minute Clinics and strategic partnerships with companies like the highly innovative insurance start-up Oscar are the most visible parts of this strategy so far. The basic idea is to evolve into something akin to a light weight primary care destination. A place where a mother can bring a sick kid to fill a prescription or have a nurse practitioner give a strep test. As it becomes more of a healthcare provider it can leverage its relationships with insurance companies and affiliated hospital networks to grow its wellness business as well as drive foot traffic through its stores.

However, In order for this to work consumers have to think of CVS as a healthcare destination instead of just a drug store. That means branding will be extremely important and CVS’s move to stop selling tobacco is a great way to jumpstart their effort to reeducate consumers about what they should expect from the new wellness focused CVS.

With the expansion of insurance coverage under the affordable care act, the large CVS retail presence in lower income communities and urban areas will be a competitive advantage in competing to provide primary care type services to newly insured populations. Look for major healthcare organizations to be knocking on the doors at CVS corporate hoping to gain access to that potentially lucrative population.

In short, don’t be fooled by today’s drop in CVS’s stock price. If anything, I see a bargain.