CVS Pharmacies Snuff Out Cigarette Sales

In its announcement Wednesday morning, CVS cited an article on smoking cessation in the Journal of the American Medical Association:

The paradox of cigarette sales in pharmacies has become even more relevant recently, in large part because of changes in the pharmacy industry. … Most pharmacy chains are retooling themselves as an integral part of the health care system. They are offering more counseling by pharmacists, an array of wellness products and outreach to clinicians and health care centers…. Perhaps more important, pharmacies are moving into the treatment arena, with the advent of retail health clinics. These retail clinics, originally designed to address common acute infections, are gearing up to work with primary care clinicians to assist in treating hypertension, hyperlipidemia and diabetes – all conditions exacerbated by smoking.

The move will cost CVS about $2 billion against revenues of about $125 billion, although the company’s CEO said that cost cuts will eliminate any damage to profits.

While CVS’s move may improve its image, what impact does it have on tobacco companies like Altria Group Inc. (NYSE: MO), Reynolds American Inc. (NYSE: RAI) and Lorillard Inc. (NYSE: LO)? Combined the three firms are expected to post 2013 revenues totaling nearly $31 billion, so $2 billion in lost sales is far more significant. What is a 1.6% cut to CVS’s top line is a cut of nearly 6.5% to the combined revenues of the three major U.S. tobacco companies.

The tobacco giants probably will try to make that up by raising prices, but price hikes tend to encourage smokers to quit. In the United States, the percentage of smokers in the adult population has dropped from 42% in 1965 to 18% today. Internationally, smokers’ numbers are also declining, if fairly slowly.

This announcement from CVS is probably responsible for a drop of around 0.7% in Altria’s premarket price Wednesday morning. Altria’s shares traded at $34.20 in a 52-week range of $33.12 to $38.58. Neither Reynolds nor Lorillard were active in the premarket.