How Deep a Tobacco Hole Would Walgreens Leave?
By Angel Abcede on Feb. 09, 2017DEERFIELD, Ill. -- The quickly growing influence of stockholders today is putting public companies such as Walgreens on the defensive. With investors pressuring the drug-store giant to retreat from tobacco just as rival CVS decided to do in 2015, the hole Walgreens would leave could trigger a major windfall for convenience retailers.
As reported in CSP Daily News earlier this year, the Deerfield, Ill.-based drug chain has had to respond to growing shareholder concerns that its health-and-wellness mantra runs contrary to tobacco sales. Woonsocket, R.I.-based CVS said such a contradiction led to its withdraw from the category.
While saying it is currently not considering such a drastic divorce, Walgreens officials did leave open the possibility for ongoing discussion.
Here’s what a potential end to tobacco sales at Walgreens would mean to c-stores and other tobacco retailers …
Apples to apples
The two major drug chains battle continuously for the top spot. At press time, Walgreens ranked No. 2 in terms of U.S. numbers with 8,175 stores in 50 states, the District of Colombia, Puerto Rico and the Virgin Islands, according to its website. CVS outpaced Walgreens by about 20% with 9,665 retail stores, including pharmacies in Target stores in 49 states, the District of Columbia and Puerto Rico, its website said. Without the 1,660 Target pharmacies that CVS purchased in 2015, the count falls below its main competitor at 8,005.
Since CVS began rivaling Walgreens in terms of store count in the 2000s, the two have become synonymous with the drug-store format, typically running competing locations mere blocks from each other in most metropolitan markets.
$2 billion windfall
When CVS dropped tobacco sales, panelists at the NACS State of the Industry (SOI) conference said c-stores received a $2 billion gift. In 2015, increased frequency at c-stores combined with CVS’ departure from the category turned flat-to-declining tobacco sales into an increase of 3.4%, according to the SOI report. With CVS achieving virtual parity with Walgreens in terms of store count, c-stores may see an equivalent surge if the other shoe of Walgreens were to drop.
Less any such drama, the tobacco prediction for 2017, according to New York-based RBC Capital Markets, calls for a shift back to “normalcy” that would amount to 3.5% in sales declines.
Bigger boost with Walgreens?
A 2016 survey of 300 tobacco consumers reaffirmed the theory that c-stores benefitted from CVS’ pullout from cigarettes, with 39% saying that “gas stations” were the next choice for their cigarette purchases in light of the CVS move.
What may be more telling is that after gas stations, Walgreens and Wal-Mart, Bentonville, Ark., tied for second in terms of where customers would buy cigarettes post CVS, each receiving 20% of customers’ preferences. That would suggest two things: First, that Walgreens got a bump in sales from the CVS’ departure and second, if Walgreens subsequently exited tobacco, c-stores would probably receive an even greater boost than what they got from CVS.
Walgreens did not detail tobacco sales figures in its most recent investor report.