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CVS: Committed Vs. Smoking

Pharmacy repositioned as people’s health care partner

Last week, CVS announced that it would become the first national pharmacy chain to halt tobacco sales – a decision that paid immediate dividends in positive publicity as the company basked in praise from anti-smoking activists, the health care community and policymakers including President Barack Obama.

Clearly, this was the right thing to do to advance public health. But as the economy continues to struggle with sluggish consumer demand, can there possibly be a solid business case for a large retail chain forgoing more than $2 billion in annual sales? Can CVS do good – and also do well?

I believe the answer is yes – the benefits of CVS’ bold move will far outweigh any short-term sales sacrifice.

First, there’s the brand-building benefit of CVS putting the health of its customers above quarterly profits. The move positions CVS not just as a retail drug store, but as a health care company.

That’s a smart strategy, when you consider today’s muddled retail landscape. Many retailers are trying to be all things to all people – pharmacies double as de facto grocery stores, while grocery chains sell prescription drugs. Big box stores like Wal-Mart have pharmacies. It’s hard for customers to differentiate, so they choose based on price or proximity.

By taking a principled stand and reaping the reputation-boosting reaction, CVS has a head start in rising above the noise as a trusted health care partner, not a convenience store that happens to fill prescriptions. It fits perfectly with the company’s strategy of providing basic health services through its network of on-site “MinuteClinics” while building relationships with doctors and other health care providers. In one fell swoop, CVS has cemented its ambitions of moving up the value chain in the eyes of health-conscious customers.

Beyond the credibility it gains as a health care provider, CVS will appeal to customers who put a premium on doing business with good corporate citizens. Social responsibility is a growing motivation for today’s consumers – especially in the up-and-coming millennial generation. Just look at the rise of “fair trade” and “cruelty-free” products. CVS has provided its customers with a reason to feel good about patronizing the chain.

We also shouldn’t underestimate the positive effect on CVS’ own workforce. When employees “own” a company’s brand, customers notice – and when they don’t, all the corporate credos in the world can’t help. This decision should energize CVS employees to feel that they are part of a health care-centric company, enlisting them in advancing the message as the face of the company to its customers.

Beyond customers and employees, the tobacco trade-off will also be a powerful appeal to physicians. Of course, doctors see firsthand the ravages of cancer and the chronic respiratory and cardiovascular conditions caused by smoking. Smoking-related care also puts a serious strain on the health care system, including Medicaid, where reimbursement rates are already a major concern for providers.

So physicians have the potential to become a more potent referral source for CVS – creating revenue growth opportunities that far outweigh its tobacco losses.

I should also note in passing that there is an immediate dollars-and-cents argument for halting tobacco sales aside from the benefits I’ve already mentioned. Tobacco is a shrinking market, with a significantly smaller profit margin than the health and beauty products that CVS also offers. So beyond any altruism or grand corporate reputation strategy, a case exists on the basis of pure inventory optimization.

CVS deserves our warm feelings as a company that has acted in the public interest – but also our respect for a shrewd business decision. The decision has endeared it to health care advocates, demonstrated its concern for its customers – and will ultimately prove a healthy boon for shareholders as well.

Philip L. Cochran is executive associate dean of Indianapolis programs, Thomas Binford Chair in corporate citizenship and a professor of management at the Kelley School of Business at Indiana University. He wrote this for Indiana newspapers.