CVS’s smart no-smoking strategy


(Karen BLEIERKAREN BLEIER/AFP/Getty Images)

On Wednesday, CVS announced that it would stop selling tobacco products in its more than 7,600 stores by Oct. 1, a move that could mean giving up some $2 billion in annual sales, the company said. The decision was hailed as a "bold precedent" by the Robert Wood Johnson Foundation, praised by no less than President Obama as setting "a powerful example" and touted by a smoking cessation nonprofit as something that "from a purely commercial standpoint ... doesn't make any sense."

Oh, but it does. There's little question that CVS's move is a rare example of a corporation putting public health over short-term sales or profits. But make no mistake: Over the long term, this is not purely an act of altruism. It is also a strategic move that clearly defines the direction of the business and sends a strong signal from leaders about what they intend the company to be.

"This is a health care company, not a pharmacy," says Sydney Finkelstein, a professor at Dartmouth College's Tuck School of Business. He points to CVS's 2007 merger with Caremark, the pharmacy benefits manager (PBM), which runs prescription drug plans for insurers and employers. Removing tobacco "is a very sensible thing to do," he says. "I think it's actually going to enable them to grow revenue faster than they're going to lose sales. It's a win in terms of strategy, it's a win in terms of PR and it's a win in terms of internal motivation. Most employees in a healthcare company would see this as a good thing."

The company's Web site has a message from CEO Larry Merlo about the announcement, with a headline saying that "this is the right thing to do." Yet in an accompanying video, Merlo also says the move "more closely aligns us with our PBM clients, health plans and health care provider partners who like us are working to deliver better health outcomes while reducing health care costs." He says the company's leaders asked themselves "where we expect to be in the future as a health care company," and he closes the video by saying the decision "position[s] us for a growing role in the health care delivery system."

It already plays a fairly big one. Beyond its merger with Caremark, in 2006 CVS acquired its onsite clinic partner, MinuteClinic, where nurse practitioners offer shots or help with other routine health-care issues. CVS has also been developing relationships with health-care providers and doctors to help the company monitor patient care. Many of them were suspicious of the company's cigarette sales, CVS's chief medical officer told the Wall Street Journal. "This move gives us a competitive advantage because it shows our commitment to health care." Stubbing out cigarette sales, in other words, could also win them more partners.

Plus, by being the first national pharmacy chain to stop carrying tobacco, CVS has scored quite the publicity coup. Any retail outlet that does the same now risks looking like a follower rather than a company leading the way. CVS, Finkelstein says, "is getting all the free PR effect. Walgreens will do it in six months or six years and they won't get the same attention." (A Walgreens spokesman told the Post earlier Wednesday that it has been "evaluating this product category for some time to balance the choices our customers expect from us with their ongoing health needs.")

Finally, CVS's move is a clear way to send a signal to both investors and employees about its strategic direction. "What underlines the fact that it's serious is that it is going to take a hit for an indefinite period," says Joseph Badaracco, a professor of business ethics at Harvard Business School and author of The Good Struggle: Responsible Leadership in an Unforgiving World. The company estimates that it will lose approximately $2 billion in revenues on an annual basis, equivalent to roughly 1.6 percent of 2012 sales, though it believes it has some "incremental opportunities" to offset the hit to profits.

Forgoing sales and being first to the punch also lend a credibility to CVS's strategy that could lead to better engagement from employees. "If you're leaving a lot of money on the table and you're out there early, it shows you're willing to pay the price," Badaracco says. "You hear so many statements from so many executives that are just boiler plate and aren't spoken with conviction. This is conviction."

And good strategy, too.

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Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.
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