This paper examines CVS Health's high-profile rebranding strategy, which included removing tobacco products from all store shelves and renaming the company from CVS Caremark to CVS Health. The paper explores the business rationale behind the decision, including alignment with the Affordable Care Act, expansion of MinuteClinic locations, and growth of pharmacy benefit management services. Using Porter's Five Forces framework, the competitive landscape of the retail pharmacy industry is analyzed. The paper also evaluates competitor responses from Walgreens and Rite Aid, the potential financial risks of forgoing tobacco revenue, and whether the strategy is likely to help reduce smoking rates in the United States based on evidence from San Francisco and Boston.
CVS removed tobacco from its store shelves one month earlier than originally planned. This move, combined with the alteration of the company's corporate name, was targeted at helping the company rebrand as a healthcare company. With a name like CVS Health, the company believes that exiting the tobacco distribution system is good for the company in the long term and is aligned with its new focus on health. CVS Health also announced that it would launch a campaign against smoking. Observers were surprised when CVS Caremark Corporation (NYSE: CVS) made the announcement concerning its stance on tobacco. The announcement was accompanied by a large banner proclaiming the company's new logo and name across the NYSE (Sheets, 2014).
Company officials stated that the rebranding was aimed at helping people achieve better health. The rebranding also positions the company for an even larger role in the provision of healthcare services — services extending beyond the traditional retail pharmacy business model. They noted that because they have always been at the forefront of innovation, they will continue delivering innovative products, enabling businesses, individuals, and communities to manage health more effectively and affordably through specialty pharmacy programs, medication adherence initiatives, and walk-in medical clinics. Earlier, the company had announced that stocking tobacco on its shelves conflicted with its mission and stance on good health. Officials stated that it was not a mere coincidence that this decision was made at the time of the rebranding (Cheney, 2014).
The company noted that its new name aligns with its goals as a new entrant in the healthcare services market. Officials said they are actively involved in shaping the future of healthcare by rolling out medication adherence programs, establishing walk-in medical clinics, and supporting patients with complex or chronic conditions. Some of their key offerings include:
Programs for the management of chronic conditions; programs connecting patients and pharmacists to help them adhere to prescribed medications; digital capacity to support these programs; and plans to liaise with health plans and physicians to provide medication, clinical support, chronic condition monitoring, and wellness programs.
The company is offering chronic condition management programs as a way of expanding its revenue stream. With the high cost of medical care, these offerings give patients an affordable way to manage their conditions, as CVS accepts most insurance plans and charges more manageable rates. Healthcare costs in the United States grow each year and are becoming prohibitive for a large portion of the population. CVS customers can take advantage of affordable offerings and realize savings in healthcare expenses.
Indeed, the company is positioning itself to capitalize on opportunities created by the Affordable Care Act, which has led to many Americans seeking access to healthcare. CVS is positioning itself to serve this fresh group of customers by expanding its product offerings. It now provides a range of healthcare products tailored for various needs, and its new branding efforts are consistent with that direction. With its new name, CVS Health, the company is more appealing as a destination for health services. More people can now visit a CVS store not only to buy drugs but also to access health services not typically offered at a standard pharmacy.
CVS has partnered with various providers in the health space to broaden its product offerings, consistent with its new focus on health. Various players in the industry have applauded CVS's recent decisions — especially the move to remove tobacco from its shelves. It is in CVS's interest to partner with health institutions in order to support their programs.
Digital programs are crucial as a supplemental offering to the various services CVS now provides. Competitors are running smoking cessation programs, and CVS is seeking to improve its own. Competitors have argued that stopping the sale of tobacco is completely unnecessary, claiming that reducing smoking in America cannot be accomplished simply by reducing the availability of tobacco. They tout their programs that tackle the root problem as more efficient and useful.
Company officials state that the rebranding efforts are intended to help CVS align with the larger roles it is to play in its expanded business model. Because of its culture of continuous innovation, the company must strategize to serve its clients effectively and meet their evolving needs (Cheney, 2014).
The rebranding will benefit CVS in two ways. First, health-conscious consumers and those seeking to quit tobacco use are likely to find the needed support at CVS and choose to shop there. Second, because of its commitment to healthcare, CVS will be taken more seriously by other market players and potential partners. Since a key component of the company's business model involves partnering with players in the health sector, this decision will go a long way toward smoothing future efforts. The company is currently affiliated with over 41 health providers and is working to grow that number, particularly as the Affordable Care Act has grouped healthcare providers among accountable care organizations.
While CVS may be the first pharmacy chain to halt tobacco sales in its stores, Target was the first major retail store to do so, back in 1996. Several smaller retailers followed, including Wegmans Food Market Inc. in 2008 (Sheets, 2014).
The decision CVS made has been a significant public health win. It is also a shrewd business move that can generate profits over time as the company positions itself as a major player in the healthcare provider space. This could also signal that CVS is aligning its operations with the Affordable Care Act. The Act creates substantial growth opportunities for CVS — not just in the pharmacy business but also through the expansion of MinuteClinics that provide basic primary care inside its stores. Plans exist to grow the number of stores offering this service from approximately 900 to an estimated 1,500 by 2017. The company is continually opening new clinics each quarter and its revenues are growing. A key component of these openings is partnering with hospitals and insurance systems, and stocking cigarettes directly contradicts that goal. New customers attracted by the decision are likely to remain loyal and fill their prescriptions at CVS — a strategy that is bound to generate more revenue than tobacco sales. The company can earn even more if it is perceived as a destination for both healthcare services and healthcare products (Friedman, 2014).
Porter's Five Forces provides a useful framework for understanding the competitive dynamics of the retail pharmacy industry:
1. Threat of Entry: There is a low threat of new entrants into the pharmacy market because of prohibitive entry costs. Entering a single local market such as Memphis is somewhat easier, since opening a single store is less capital-intensive (Itorbett, 2013).
2. Threat of Rivalry: There is a high threat of rivalry, as pharmacies can be found on nearly every corner. Price cutting is a common competitive strategy at the front of the store, though less so in the pharmacy itself, where prices are often set by wholesalers. Promotions such as gift cards and price matching are, however, common (Itorbett, 2013).
3. Threat of Substitutes: Substitutes exist for many front-store products, available at supermarkets and gas stations. Prescription medications, however, cannot be substituted (Itorbett, 2013).
4. Threat of Suppliers: Company operations are heavily dependent on suppliers. Without medication, there is no pharmacy. Displays also play an important role in attracting customers. Shortages can occur not only due to supplier issues but also at the manufacturing level (Itorbett, 2013).
5. Threat of Buyers: The buyer base for pharmacy benefit providers and pharmacies is limited. Smaller pharmacies are continually being acquired by larger chains such as CVS and Walgreens (Itorbett, 2013).
The inherent financial risk in CVS stopping tobacco sales was thought to be offset by the public relations goodwill generated. This differentiation might help the company win new business in other areas of its operations, such as prescription drug administration (Ziobro, 2014).
"Market ripple effects on CVS stock and rivals"
"Walgreens and Rite Aid stance on tobacco sales"
"Public health outcomes and smoking cessation impact"
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