American drug store giant CVS Caremark has taken a gamble in banishing tobacco from its thousands of stores
It was praised as bold and controversial when the giant US pharmacy chain CVS Caremark announced in February that it would no longer sell tobacco products at its 7,600 stores.
“Cigarettes have no place in an environment where healthcare is being delivered,” said Larry Merlo, the 58-year-old former pharmacist who is chief executive of CVS Caremark.
Although the move was widely applauded by medical professionals and politicians – “It will have a profoundly positive impact on the health of our country,” said president Barack Obama, who has kicked his own cigarette addiction since he’s been in office – it did not come without risk.
Tobacco, one of the most lucrative products for US pharmacies, generated $2bn in sales for CVS in 2013. The hit on revenue is expected to shave about 17 cents a share off 2014’s earnings. But that’s pocket change if the strategic repositioning of the company pays off.
“This is the right decision at the right time as we evolve from a drug store into a healthcare company,” Merlo said. In other words, this move is not just good for health; it’s good for business.
Paul Argenti, professor of corporate communications at Dartmouth’s Tuck School of Business, wrote in the Harvard Business Review: “CVS is now one of a small group of companies that have realised that their reputation is the most valuable asset they have and that building a stronger reputation by avoiding risks to that reputation can create a significant competitive advantage.”
Let’s be clear. CVS did not do this out of altruism. If that was its central motivation, it also would have dumped the mutual funds in its employee pension and stock ownership plans that hold $17m in tobacco company investments, including in RJ Reynolds, Lorillard, Imperial Tobacco, Philip Morris International and Altria (the parent company of Philip Morris). CVS hopes – it expects – to make up any lost revenue and more as it repositions itself to grow in what otherwise is a stagnant drug store market.
In recent years, CVS has begun introducing in-store health clinics, and is eager to expand relationships with healthcare systems across the US as part of its focus on its newly stated core value of being its customers’ medical services partner. But Cleveland Clinic, Emory Healthcare in Atlanta and many other healthcare companies have been wary of working with CVS because of its tobacco business.
“This move gives us a competitive advantage because it shows our commitment to healthcare,” says Troyen Brennan, CVS Caremark’s chief medical officer.
Jack Hough, columnist in the business magazine Barron’s, wrote recently: “A prescription deal with the Federal Employee Health Program, which expires at year’s end, [could be] worth 16 cents to 21 cents a share. For CVS, a good chance at renewal just became better, and there’s plenty more business to be won.”
In the weeks after the announcement, CVS actually raised its guidance for earnings in the first quarter of 2014 – the first report that will reflect consumer reaction to the tobacco sales ban. In other words, doing “good” can, in some situations (but not all), go straight to the bottom line.
The celebrated move has already put competitors on their heels. “We have been evaluating this product category for some time to balance the choices our customers expect from us, with their ongoing health needs,” says Michael Polzin, a spokesman for Walgreen, CVS’ largest rival.
The tobacco purge underscores a growing belief among large corporations that ethical and sustainability factors are central in managing reputational risk – and in turning challenges into opportunities. Dartmouth’s Argenti likes to quote Socrates when he reflects on this trend. The ancient Greek philosopher, acknowledging the importance of authenticity, wrote: “Desire to be what your endeavour is to appear.”
CVS is now aligning its practices with what it has said it wants to be, which in the fiercely competitive commoditised retail drug store industry could prove crucial. While Walgreen is likely to follow suit in pulling tobacco from its shelves it won’t get the transformative public relations fairy dust that has been sprinkled on CVS.
CVS is hardly the only company attempting to mitigate reputational risks by turning liabilities into assets. We are facing a global water shortage. In recent years, Coca-Cola has faced sharp criticism over the amount of water used in producing its products. In response, Coke and WWF have partnered in more than 100 countries to conserve priority river basins and catchments and return the water used in its finished beverage products back to the environment at a level that supports aquatic life. WWF says that Coca-Cola is now replenishing about 52% of the water that it uses to make its sodas, through 468 projects.
Be authentic, says Argenti. “If you do that you will be perceived as a more trustworthy organisation because you really are.
“Highly reputed companies are more stable, which means they have higher market valuation and stock price over the long term and greater loyalty of their investors, which leads to less volatility.”
Recent surveys suggest that corporations are more actively focusing on reputational risk. According to a recent Forbes Insights survey conducted on behalf of global consulting firm Deloitte, as recently as four years ago, reputation issues ranked third as the central focus of corporate risk managers, trailing “brand” and “economic trends”. Now “reputation” is the top priority.
A first quarter 2014 survey by the London-headquartered international law firm Clifford Chance has found the same result, with 55% of respondents saying reputation was their prime focus. In contrast, 38% are most concerned about share price and 32% financial loss.
“A company’s brand and reputation can be one of its most valuable yet most fragile assets,” notes David DiBari, US head of litigation for Clifford Chance. “A dip in financial performance is often forgotten as soon as the market improves, while an event leaving a reputational stain can continue to harm the brand indefinitely.”
The trends are not all positive yet. While there is a growing appreciation of reputational issues in the C-suite, just 27% of the respondents in the Clifford Chance global survey said they believe that risk management extends below the management level – meaning it may be more talk than action. Only 33% of corporations have integrated reputation risk metrics to evaluate staff performance.
So, what can companies do to better understand their stakeholders’ ethical and brand concerns, to help align them with corporate strategy, as CVS in tobacco sales and Coke on water usage appear to be doing? Vince Schiavone, chief executive of ListenLogic, a provider of enterprise social intelligence, believes that monitoring social media can give early warnings of problems and offer ways to float and test new strategic directions.
If reputation is so important, why aren’t more companies paying more than lip service to reputational risks? The reason, according to Argenti, is that “you can’t manage what you can’t measure”.
While CVS knew it would take a $2bn revenue hit from going cold turkey on tobacco, it struggled at first to put a figure on how much it might gain. When it finally did come up with metrics linked to its new healthcare business ventures and crunched the numbers, the company saw a potential bonanza.
Even though research suggests that intangible corporate assets can prove more valuable than short-term revenue flows, reflexively conservative senior managers often opt for the safety of short-term financial returns, especially when pay is tied to it. That’s short-sighted. “It takes 20 years to build a reputation and five minutes to ruin it,” Warren Buffett famously said.
CVS Caremark healthcare tobacco tobacco sales ban