The publicly traded corporation frequently serves the interests of its shareholders via the trading price of the stock, or so the conventional thinking goes.  Any decision that threatens to curtail earnings, for any reason, must offer significant justification to overcome the short term drop in share price.  Simplistic thinkers tend to reduce their views of organizational performance to something akin to ‘more profit = good,’ but the problem is that this type of reductio fails to incorporate what is really going on both in terms of strategy and values.  While the public generally assumes that industry analysts will do the real work of critically thinking, in a manner that captures a broad picture of what is really happening in the competitive landscape, however the unfortunate reality is that financial ratios utterly fail to capture the foresight of strategy and the social norms that successful organizations must adapt to.

CVS is to stop selling cigarettes in their stores by October is an excellent example when we can point to a business strategy and tactical positioning that aligns with the mantra of ‘doing well by doing good.’

Noting that the sale of tobacco products account for less than 2% of their revenues, the move is more one of aligning a business with the values and market position that it aims to transition into.  However, if the move is to morph the retail drugstore into a mini health clinic, then how is the sale of alcohol, soda, and other products not conducive to the maintenance of well being justified?  Undoubtedly, health advocates and considerable media space will be devoted to this very question over the next few days.  What makes this a particularly interesting move is the fact that it was the company itself making the move, and not one that appears to be in response to buying patterns of the market or  public outcry.

I’m sure some Fox pundits will posit questions amounting to a charge of ‘curtailing freedom’ or the specter of ‘nanny state,’ implying that the lost sales and profits are sacrilege, but the real story is one of just how the metrics of CVS will change if its competitors do not follow suit.  Gauging the performance of a firm is easy if they are all competing in a similar space with similar products.  However, if CVS becomes a hybridization of retail and health provider, then benchmarking performance directly to Walgreens and RiteAid may be inappropriate.

The question now for RiteAid and Walgreens… will the consumer, or enough of them, find it morally repugnant that they continue to profit from products that feed the need to consume more healthcare services?  Secondly, will CVS become associated with the experience of health maintenance and well being, such that they become the first choice of retailers… if CVS successfully morphs, then CVS may benefit from a quasi-doctor type of relationship that appears particularly resistant to free-market arguments (most don’t abandon their family doctor due to a sales promotion or advertising)… thus a very durable customer loyalty results.

Transactional selling broadly characterizes a rapidly diminishing business model, to which lowest price and availability dominate.  The model is just fine if you are Wal-Mart, but for just about any other business illustrates weaknesses.  Transactional selling focuses on merely providing a supply with a view that the demand will snatch it up.  Each interaction with the consumer is fungible with any other, such that a retail or service provider is akin to a vending machine.  The more difficult, yet more desirable, model is relationship selling to which points of differentiation and return customers are the marks of success.

In many markets, RiteAid, Walgreens, and CVS are within one block of each other (in many cases directly across the street), such that they illustrate head to head direct competition.  However, these three retail chains are not the only ones in the competitive space for the products they peddle, Wal-Mart, Target, Safeway, etc., thus the accessibility of a bottle of aspirin, prescriptions, candy bars, or even cigarettes are widely available.  Winning your business becomes a race to the bottom in terms of advertising dollars and sales promotions that erode profits.  Therefore, the better model is to develop a business model that develops a relationship that is less vulnerable to price competition.

As the NYTimes article notes, CVS is transitioning to a business model that incorporates health monitoring and maintenance into their stores.  In some cases, the store is not only a retail outlet, but a sort of quasi-clinic to get limited health care services.  If CVS incorporates clinics that offer non-emergency and preventative care, then a relationship may develop with the physician’s assistant or nurses that help monitor blood pressure, remind you of getting a flu-shot, or performed a physical.  Frequently CVS then becomes a place that you go to consume health services because you have a developed and durable relationship, and not so much a place to pick up a bottle of aspirin that you could get from any number of retailers or at the grocery store on your way home from work.  Relationship selling is superior to transaction based models specifically due to the fact that your customer base requires less advertising spend and effort to earn the return sales AND the customer is less susceptible to the enticements of your competitors.  Lululemon athletica is an excellent example of a firm that fully embraces relationships, such that they offer free yoga classes in their outlets AND allow yoga instructors to advertise their classes in the store… Oh, and, by the way, they also happen to sell yoga apparel.  As a result, the retail outlet is a key player in the environment of healthy living… the apparel sales, still a focus, but not to the exclusion of their interdependence on other related businesses.  The firm benefits by fostering healthy lifestyles, and not a myopic focus on just getting the customer to buy another pair of yoga pants.

The decision to stop selling cigarettes… a good one that provides an opportunity to analyze business strategy and observe change management to realize a new paradigm of an organization.

Are soda and potato chips the next logical thing to transition out of?  My guess is that someone is currently considering revisions to their shelf space strategy that incorporates healthier alternatives.  Social norms still embrace soft drinks, such that such a strategic move may go too far ahead of the public… but even Coke and Pepsi recognize that soda sales are down… enter Dasani, Smartwater, and a whole host of other packaged beverages.

CVS’s direct competitors may be RiteAid and Walgreens… and by extension even Safeway, Target, and Wal-Mart, but it may be possible that it is repositioning itself, such that someday we may view WholeFoods as a closer competitor than the current mix.

If CVS manages the change in strategy well, and exploits an underserved and emerging niche… then we may look back on this tactical move to stop selling cigarettes as the most salient evidence of a firm redefining themselves proactively.

My own view amounts to praise for the move… relationship selling is by and far the superior strategy.  The trick is to execute it properly.  Customer loyalty cards and clubs have become so pervasive as to have lost any real strategic appeal in retaining customers.  Focus on the experience of the customer in the door… everyone else is focused tracking their purchases to formulate ways to get them back in the door.  This is a good move for CVS.

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