America’s Love/Hate Relationship With Smoking
In an intriguing move, CVS, the nation’s No. 2 pharmacy, announced it would stop selling cigarettes as well as all tobacco products at its 7,600 stores across the country. The move will reduce revenues by $2 billion a year.
The reason was CVS and its parent company, Caremark (CVS), wanted to bolster its reputations as a true health care company, and they apparently believed selling tobacco products, which have been proved to be harmful to one’s health, was contrary to this image.
Tobacco products, particularly cigarettes, represent a remarkable paradox. The government appears to go out of its way to discourage smoking yet cigarette taxes bring in some $32.6 billion in state and federal tax revenues, according to 2011 numbers from the Centers for Disease Control. In fact, in 2009, the federal government increased its tax on a package of cigarettes from 39 cents to $1.01. There is low elasticity of demand when it comes to cigarettes. According to the Centers for Disease Control, a 10 percent hike in taxes only reduced smoking by 4 percent.
Back to the CVS decision, Intuit Turbo Tax reports that 64 percent of cigarette sales occurred in convenience stores and the average convenience stores takes in $438,000 a year on cigarette sales. CVS’ average store sold $260,000 a year in cigarettes.
The question is why do governments (state and federal) try so hard to discourage smoking when they are earning so much revenue from smoking? Perhaps the answer lies in more Centers for Disease Control data, which reports that the U.S. spends $96 billion a year on health problems caused by smoking.
While CVS made its announcement, Walgreens (WAG), the nation’s No. 1 drugstore chain, has not followed suit as of yet. The investment community took 1 percent from the value of CVS the day of the announcement and increased the value of Walgreen’s shares by 3.4 percent that day.