CVS Cigarette Ban Is Small Deal to Big Tobacco

By Joseph A. Clark

NEW YORK (AdviceIQ) -- The CVS drugstore chain's plan to stop selling cigarettes by October has large symbolic value. But the decision's impact on its own business and that of the tobacco industry likely is negligible.

For CVS Caremark, the positive public relations might be worth more than any lost earnings. The day after the announcement, CVS stock rose 1%. The chain has been on a roll, with shares more than doubling over the past five years.

The largest U.S. drugstore chain by sales, CVS estimates it will lose more than $2 billion a year in revenue. It could be even more as tertiary sales of candy, soft drinks and the like are entered into the equation. But compared with overall sales of $123 billion, that $2 billion is not a lot.

On the surface, the tobacco companies appear to be on the losing end. They are pariahs these days. The cachet they used to wield -- remember the Winston Cup racing series and the Marlboro Man? -- are just distant memories.

But they actually are in pretty good shape. Convenience sales make up 75% of cigarette sales. True, cigarette use is dropping: Only 18% of American adults smoke, versus 42% in 1965. But the rate of the decline is slowing; it dipped just 2.3% from 2003 to 2007, the last period measured.

Meanwhile, increased prices have buoyed the industry's profitability. Turns out that there's little price elasticity for tobacco, meaning that a price hike doesn't translate into much of a drop in sales. As a result, profit margins for the three major U.S. tobacco firms are a nice 30% or higher.