Category Management

Will CVS' Decision to Eliminate Tobacco Drive Beer Sales For Competitors?

By Rebecca Otis • December 18, 2014

 

 

“This is the right thing to do,” asserted CVS Caremark’s CEO Larry Merlo in February 2014 as he announced the drugstore will discontinue selling tobacco products in its nearly 8,000 nationwide locations. Cutting tobacco products from their inventory was a bold decision that showcased their commitment to well-being and exemplified their contribution to a healthier society and brand reputation, even if it meant taking a loss of $2 billion in tobacco sales. However, will their losses only be limited to tobacco products? What about the loss in revenue on the sale of items a consumer typically purchases with tobacco? For convenience store retailers, this drug store news has significance that could impact their bottom line…for the better.


How Will the Second Hand Smoke Clear?

It is important for CVS and its competitors, like convenience stores where tobacco is purchased, to understand consumers’ behavioral habits to predict the impact on product sales other than tobacco in their stores. The projected $2 billion loss in sales by removing tobacco products from CVS shelves is only part of the story. 

Tobacco and beer companies, along with all of their resources, will be closely watching how purchase behaviors change for shoppers, given that tobacco (20-30% of sales) and beer (6-12% of sales) are top performing categories for convenience stores (NACS). Given that beer is one of the most profitable items in a convenience store, billions in contribution dollars may be shifted from CVS to other drug, convenience and grocery stores.

“With the access to information convenience retailers have today about how their customers typically combine purchases in a transaction, it’s clear that this change by CVS will cost them more in sales than just for cigarettes and that convenience retailers can capture more of that lost business” shared Bill Bishop, Chief Architect at Brick Meets Click, which helps retailers analyze their performance and strategically grow. The role of the their supplier partners who help to merchandise the beer category will be increasingly important to help CVS maintain sales without its typical tobacco buddy.

Beer, which we have observed is purchased approximately 3% to 6% of the time with tobacco products, may imply CVS will lose between $66 million to $133 million in high-margin beer sales that would have been purchased alongside tobacco, based on industry data capturing the average dollar value of tobacco and beer baskets. Previous CVS tobacco customers may choose to alter their typical basket purchase while in their stores, and shop at alternate locations where they can buy tobacco and beer together in the same shopping trip.

Shoppers make choices about what to buy that go beyond where to shop, and it’s up to retailers to know them intimately to have the products they demand before they walk in the store. By mining point of sale data, CVS and its competitors can prepare to adjust its beer inventory, promotions, and make merchandising decisions to compensate for a potential loss in beer and other item sales as well.

ABC_Action_News_-_CVS_drugstore_pulls_tobacco            Source: abcactionnews.com

How to Capture the Market
Savvy competitors, especially within a mile of CVS stores, should use pending market shift to dive deep into point of sale analytics to extract insights and capture share in beer and tobacco sales by:

  • Identifying Basket-Level Trends like item affinities and day parts (time of day shopping trends) to understand what items sell with tobacco across different times and days of the week.
  • Planning promotions and product deals when these products tend to be purchased. By analyzing dayparts, beer purchases can range from 0.0% to over 30% of all merchandise sales for a given hour in a week. 
  • Adjusting beer and tobacco inventory to ensure products are in-stock and available when these new consumers enter your store
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