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.
[1]
Larry Merlo,”CVS
Chief: Getting Rid of Tobacco Taught Us an Important Lesson. We Hope Our
Journey Inspires Other Businesses,” CNN.com, November 5, 2019.
[2]
Ibid.
[3] Ibid.
[4]
Ibid.
[5]
Ibid.
[6]
Ibid.
