Quitting tobacco isn't easy for cigarette-selling CVS rivals

CVS Health Corp. has quit tobacco. Its competitors aren't finding it so easy.

Walgreen Co. and Rite Aid Corp. - retail pharmacies whose cigarette displays are the last thing customers see when checking out - say that helping tobacco users quit is enough, and that they don't plan to follow CVS and quit selling cigarettes, cigars and chewing tobacco.

CVS showed today it's possible to get out of the tobacco business and still grow. The pharmacy company reported third- quarter revenue today that grew 9.7 percent to $35 billion, led by a 16 percent gain in its pharmacy services unit that more than made up for the loss of cigarette sales.

Its rivals, which don't have pharmacy benefit management units, still need tobacco, said Jeff Jonas, a portfolio manager at Gabelli Funds. "They're just not performing as well, so they kind of need those sales," Jonas said. "Rite Aid needs it because of all the debt they have to service. Walgreen has some turmoil around the Alliance Boots acquisition."

That may eventually change as the drugstore chains bolster their balance sheets, Jonas said.

While Rite Aid needs the cash flow, Walgreen could get out of tobacco retail, said Ross Muken, an analyst with Evercore ISI. Public pressure on retailers to halt cigarette sales is also higher than ever, and elected officials and anti-smoking groups have pressed Walgreen and Rite Aid to imitate CVS.

CVS's choice may have been easier because of its Caremark unit, which manages drug benefits and makes up 54 percent of revenue. While CVS has said that dropping tobacco will cost it about $2 billion in annual sales, a good year by Caremark means it can afford to give up some of those retail sales.

More Than Offset

"They're having good enough earnings growth elsewhere that they can more than offset that," Jonas said. "The Caremark pharmacy benefits manager unit is becoming more and more important to them. That's what's growing double-digits; that's what's driving their results."

Walgreen and Rite Aid aren't diversified in the same way. "Rite Aid and Walgreen want to be retail stores," Muken said. "CVS wants to be an innovative health care delivery organization."

Cigarette smoking contributes to more than 480,000 deaths in the U.S. annually, including those caused by secondhand smoke, according to the U.S. Centers for Disease Control and Prevention. Smoking shaves 10 years from life expectancy, the CDC said.

Pressure to Quit

In March, attorneys general from 28 states and territories said they sent letters asking pharmacy chains to halt tobacco sales because it sends a "mixed message" to customers who shop there for health needs. Other groups, such as the Campaign for Tobacco-Free Kids, said having cigarettes available causes smokers trying to quit to have cravings and make impulse purchases.

Walgreen and Rite Aid say they're taking steps to fight tobacco use. Walgreen plans to offer customers access to an online smoking cessation program. Rite Aid's pharmacists coach people on how to cut nicotine use.

The companies don't have any public plans to quit selling tobacco. The companies have said it's better to stop nicotine addiction at its source, rather than make it more difficult to satisfy cravings.

Tobacco Reduction

"We believe that if the goal is to truly reduce tobacco use in America, then the most effective thing retail pharmacies can do is address the root causes and help smokers quit," Walgreen said in an email statement today. It also said that because pharmacy chains only account for about 4 percent of U.S. tobacco sales, it's unclear dropping tobacco would cut smoking rates very much.

Almost half of cigarettes in the U.S. are sold at gas and convenience stores, according to Euromonitor International, a research firm.

Rite Aid says it's always evaluating what it should be selling, Ashley Flower, a spokeswoman for the Camp Hill, Pennsylvania-based drugstore said. She didn't directly address questions about the company's cigarette sales.

The biggest U.S. retailer, Wal-Mart Stores Inc., and the biggest U.S. grocery store chain, Kroger Co., both said they have no plans to stop selling cigarettes. "Our inventory is driven by customer preferences and at this time we plan to continue to sell legal tobacco products in our stores," said Keith Dailey, a Kroger spokesman.

To contact the reporters on this story: Kelly Gilblom in New York at kgilblombloomberg.net; Michelle Fay Cortez in Minneapolis at mcortezbloomberg.net To contact the editors responsible for this story: Crayton Harrison at tharrison5bloomberg.net Drew Armstrong