Contrary to some headlines you may have read this week, Costco Wholesale (COST) is not phasing out the sale of tobacco products from its stores.
But the warehouse operator has drastically reduced the number of locations that sell cigarettes and products of that ilk in the last few years because of slowing demand rather than any philosophical stand Costco wanted to take. Earlier this week, theStreet.com first reported that Costco, the second largest U.S. Retailer, was phasing the sale of cigarettes.
While it is true that only 189 Costco warehouses (including its business centers) now sell tobacco products out of a fleet of 488 locations, down from a majority of its stores a decade ago, the company is not planning a CVS Health (CVS) style tobacco exit.
“We’re not phasing out of tobacco,” B ob Nelson, Costco’s vice-president of financial planning and investor relations told Coins2Day in an interview. “T here’s no grand phase-out plan. For all merchandise, we have regional reviews on a quarterly basis.”
It’s not surprising that cigarette sales have shrunk over the years- smoking rates have sharply declined over the past decade — from 20.9% of American adults in 2005 to 16.8% in 2014, according to the Centers for Disease Control and Prevention. And it is entirely possible that market forces will ultimately lead Costco to drop cigarettes altogether at some point.
But for now, Costco is not following CVS’ lead, given that cigarettes are an important item for Costco’s business members, which include convenience stores. (Costco’s largest direct rival, Wal-Mart Stores’ (WMT) Sam’s Club sells cigarettes, as do CVS rivals Walgreens (WHA) and Rite Aid (RAD).)
In CVS’ case, the tobacco exit was part of a broader effort to reposition itself as a healthcare company, all the more important given that CVS’ pharmacy benefits manager unit, Caremark, is expected to generate revenues of $121.5 billion this year. In contrast, giving up tobacco meant CVS was walking away from a mere $2 billion in sales ($1 billion on actual tobacco products, and another billion dollars on products people would buy when they came in to buy smokes.)