Recently, the Caremark Corporation (Ticker: CVS) announced at they will end the sale of tobacco products in all of its CVS drugstores. This announcement was cheered by all antismoking groups and argued about by all stock watchers. Was this a good move for the company?
On the one hand, clearly the company, as stated, plans to closer align with health care. Smoking does not belong in any sort of healthcare mix. Even smokers agree that smoking is not healthy.
While the nay sayers for this move are focused on the lost sales that will result from the removal of tobacco, they may be missing the other benefits of removing tobacco from the store shelves.
First is security costs. While tobacco is a legal product, each state has laws on the books concerning it. Basically, sales to certain age groups is prohibited by law. That means security. The product is often under lock and key in the store and in special areas off the floor. Purchasers must often show proof of age prior to purchasing chewing up employee time. All of this costs time and money. Who hasn’t been in line behind someone trying to find an ID in a packed purse? Further, who needs the legal problems of selling to an underage person by mistake?
Security is needed also to prevent theft. Due to the high taxes, stolen smokes can easily be sold on the street for good money if a hefty discount from the legal price is offered. Don’t forget employees can be thieves, too. So, even after the cost of security, theft occurs as another cost to the company.
As we all know, tobacco products are highly taxes. As a result, anyone legally selling tobacco is required to collect and remit the taxes collected to the appropriate taxing authority. While it sounds simple, it is not. The store collects the taxes from the purchaser and forwards the money to the tax people. If only it were that simple.
First, a pack of smokes has a number of different taxes that are due different taxing authorities. Further, the rates can be different from state to state or even town to town. It is the seller’s responsibility to get the amount of taxes collected correct for each sale. In fact, should there be an error made, the seller is responsible to cough up the difference. This is a huge potential liability that will no longer exist.
Keeping track of the various different taxes and the remittance of them to the various taxing authorities requires computers, computer programs and accounting staff. Yes, this expense will also be reduced, as far as it relates to tobacco.
While the sales figures will show the loss of tobacco sales, all the behind the counter savings will be substantial. The PR value of this move more than offsets any decline in revenue, which is further offset by the other savings. Remember: it isn’t how much one sells, it how much one keeps.