Monday, November 11, 2019

Perception-Based Healthy Reputational Capital as a Strategic Competitive Advantage: The Case of CVS Health

In 2014, CVS drug-stores stopped selling tobacco products. The strategic choice rendered CVS Health more internally consistent on wellness. To be sure, the company continued to sell alcohol products, such as wine and hard liquor, which are harmful to human health. Yet the incremental correction was significant both in regard to the short-term hits to the bottom-line and the salubrious contribution to the health of customers. If the share of revenue (and profit) from the sale of alcohol increased in the meantime to make up the difference, the net effect on the bottom-line could have been zero or even positive, and the net impact on the health of customers and the company’s healthy image could also have been nugatory or even negative. Writing in 2019, however, Larry Merlo, President and CEO of CVS Health, saw a perfect convergence of the long-term bottom-line and making a contribution to society even at the expense of short-term revenue.
In his editorial at CNN, Merlo claims that an increasing number of businesses were “incorporating purpose into the values and operating models of their organizations.”[1] The implication that purpose only pertains to social performance ignores the fact that boards and managers act with purpose in manufacturing and selling widgets that are of value to customers. Presumably products and services are purchased because they reduce the suffering of customers or increase their happiness. What Merlo means by purpose is to have a positive societal impact (albeit by considering the best interests of stakeholders rather than society as a whole) besides the impact of the products or services sold. Hence balancing purpose and profit “can lead to better companies that are motivated to do what is right for all stakeholders—customers, employees, suppliers, communities, and, yes, shareholders.”[2] The owners of the wealth known as CVS Health (i.e., the company’s owners) come last on this list, but not least. Even so, if a management hired by stockholders (via their board representatives) unilaterally decides to orient the company to other stakeholders, the property right is subordinated and thus violated. Hence, the shareholders should decide whether their company’s mission is to be extended beyond the stockholder-default. Merlo makes no mention of any such stockholder involvement in the decision.
To be sure, the CEO points to the positive impact on the company’s brand as being centered on health. In his words, the sale of tobacco was “a barrier to the future growth of the company as a trusted health care provider.”[3] No longer selling tobacco products “helped validate CVS’s evolving role in the health care marketplace.”[4] In other words, the “fact that companies and consumers now see us as a convenient and affordable point of access for quality health care creates longer-term growth opportunities for our business,” Merlo claims.[5] This led to the company’s acquisition of Aetna. The combined company could have a competitive advantage that (presumably) a cigarette-selling CVS could not have. I’m skeptical on this point because CVS Health still sold alcohol and yet could acquire Aetna and claim to have a health-centered brand-image.
Not having analyzed it, I have no reason to doubt a 2017 study published in the American Journal of Public Health, which claims that “smokers purchased nearly 100 million fewer packs of cigarettes in states where a CVS Pharmacy had a 15% or greater share of the retail pharmacy market.”[6] Merlo cites this study to make the point that CVS no longer selling tobacco likely has had positive health effects societally (taken here narrowly as customers).  It is the purity of the company’s reputation for furthering health, and thus the impact of the reputation on the company being able to make forays further into health-care that I question. As a regular CVS customer over the years, I have noticed increasing shelf-space being devoted to the sale of alcoholic beverages. As of 2019, a customer could walk down an aisle—typically a front aisle—with such wine and liquor stocked on both sides, and see still more bottles near the cashiers’ area. In his essay, Merlo only lightly touches on the short-term hit to the bottom line. Perhaps CVS merely substituted one ill for another—perhaps with alcohol selling at a higher premium than cigarettes—such that only a slight drop in revenue during the transition was all that the company had to sacrifice in increasing its reputational capital? If so, the company could play off the societal perception that alcohol is less toxic than cigarettes.
To be sure, CVS became a less hypocritical company in refusing to sell tobacco products, especially relative to Walgreens, whose slogan “Wellness at Walgreens” near the pharmacy area was at odds with the liquor and cigarettes highly visible at the front end of the stores. Admittedly, such egregious hypocrisy may bother only the ethically-sensitive customer while leaving little or no financial trace because the vast majority of customers do not notice the hypocrisy or simply don’t care. An interesting question, however, is whether CVS actually reduced its hypocrisy if alcohol got more shelf-space (and was more profitable!) to make up for the loss of revenue from tobacco. The enhanced reputational capital could be based on an illusion, yet interestingly even that may helped the company acquire Aetna.
Of course, the hypocrisy may be in us; it may even be a societal norm. We may compartmentalize our healthy and unhealthy practices just as Walgreens had “Wellness at Walgreens” painted in very large print above the pharmacy area in at least some stores in 2019, while alcohol and cigarettes were salient in the front half of the stores. If so, customers would not even notice the store-level hypocrisy, so little benefit could come to the company simply by reducing the hypocrisy within a store. Instead, a company’s brand-image could be solidified by advertising nonetheless, and the resulting reputational capital could aid in attracting potential acquisitions.

[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.