Julia Terbrock

J2000

Transcript
Interview with Dr. David Ruggeri
October 20, 2014
Dr. David Ruggeri
1:12 What is your general impression of CVS's new tobacco ban?
1:19 As a general statement I think it's a pretty good PR move, as, you know in
alliance with the safety and health of consumers and I think it goes to the image of
what CVS is trying to portray. They're trying to become an all around health resource
for you know, consumers and neighborhood people. So, their business model is to
put CVS's on every corner, almost want people to be able to walk to them wherever
they live no matter where they live. I think it's going to help build the we care about
your health so we are implementing certain things and obviously getting rid of
tobacco is one of them
3:28 So, in terms of business models, how does CVS's models compare to
their main competitors and how does that relate to their public policies on
tobacco bans?
3:47 So I think their models they're trying to be an all in one health clinic. They're
opening up, they're having testing centers and other more diagnostic type facilities
inside of CVS to where you can go and talk to physicians assistants or you can get
blood drawn and you can get other tests done there. So, what they're trying to do is
to basically be almost a replacement before you go to the doctor for other things. So,
I think with their tobacco band and eliminating tobacco from their stores I think
they're trying to project the image that they care more about the health of the
consumers than the other stores. So I think that that's why they're foregoing those
things.
4:41 How do you think this will affect smaller businesses in the economy?
4:47 That's a good question. Depending on what kind of businesses you're talking
about, I think smaller businesses such as convenience stores like Dirt Cheap
cigarettes and those type places I think that's going to help them because, in the
short run people need to buy cigarettes somewhere. if they can't go to CVS then
they have to go to other places. So, I think that as far as businesses in the area that
sell cigarettes, they're probably happy to see that. All CVS has a small market share,
but for a very small convenient store, any additional revenue will probably be very
welcome at this time. But as far as other businesses go, I think local pharmacies and
other places like that are probably going to see a small loss of customers as they
move towards this all in one health care setting that CVS is trying to create.
6:01 As CVS grows, and they become more entrenched, smaller businesses will
have a hard time competing with that. CVS has a lot of economy scale advantages.

They have some price advantages, their purchasing power advantages, name
recognition, and things like that that some small businesses in the pharmacy area
are going to have a difficult time competing with. It's not that they can't do it, it's just
going to be harder because the competition they're just fighting a growing giant.
6:59 So, I guess it depends on the business model they're going for, but for
businesses which is the better way to go: the long term effect of showing that
they have a good public image or the short term effect of selling cigarettes?
7:25 As far as CVS goes, I think in the long term effect this is going to be beneficial
to them. Cigarettes is a declining market. Only 18% of the country now smokes
compared to 50% of the country that smoked in the 60s. so, in the long term, fewer
and fewer people are just buying cigarettes. That number is going to continue to
drop, I don't think it'll ever be zero but it's going to continue to drop and you know for
CVS to dedicate shelf space for products that are low margin they don't make much
off cigarettes when people buy them compared to other things they sell like bandaids
or things like that. Then it makes sense in the long term to do that. In the short term
they are going to take a hit because obviously people are going to go to CVS for
cigarettes they're not going to be there. They may leave and there's a change that
they never come back. another thing that happens is when people go to buy
cigarettes they go to buy other things, right? They go there to buy soda, pick up their
toilet paper, or they, you know, whatever it may be, and they're going to lose that as
well since the reason people are going there is to buy cigarettes. I think that will level
out over time because as people we are driven by price a lot and CVS has their
weekly sales and other items and people will just buy cigarettes at gas stations when
they fill up. And then they'll go by CVS to buy their other stuff. So in the short term,
some estimates I've read is that they're going to lose about 500 million in sales from
non tobacco items purchased by tobacco users. Does that make sense? So people
who are tobacco users aren't going to go to CVS and buy those extra goods while
they're standing there in line. But I think that'll level out. I think that... people will start
going back to CVS for those items because CVS sells stuff that you can't buy at a
gas station or convenience store, right? You're not going to go in to get a lot of
medication or a blood test and they're doing other types of things there now [like
blood tests]. So, in the long term and in the short term they've warned that their
projections for their earnings are going to take a hit but I think that will bounce back
and I think that some people a small percentage will now go to CVS because of that.
Esp initially right? people will say well CVS is a good place so we'll go there and
they'll test it out versus Walgreens.
10:27 In the future what effect do you think that the recent initiatives and public
policy to reduce people smoking will have on the economy?
10:41 Overall, from a big pic standpoint, it should help. We should be healthier as a
society. there should be less health care costs down the road. So, in our society, half
of all of our health care total cost we spend in the last six motnhs of our lives. So we
are very... we spend a ton of money right at the end because we're a society that we
do not go gently into the goodnight, right... so we just try everything, people don't

want to give up where other cultures of societies when people get old and really sick
people accept the fact that this is what happens to people and they die. Our culture
is not like that. WE do everything. Because of that there's been a lot of health care
costs. And there's a lot of avoidable cost in that. and a lot of those avoidable costs
are directly correlated with cigarette smoking. I think the estimates are 400,000500,000 people die a year because of things directly related to cigarette smoking. So
if we can eliminate that, then there will be a lot more resources available for that.
People are also more productive, less sick days, things like that. You know, cigarette
smoking takes off about 14 years on average of a person's life for a lifetime smoker.
So, if we can eliminate a lot of health care costs and we can increase productivity
during that time because people get sick or they get cancer or they get other things,
heart disease because of smoking, then they're not going to work as much and
they're not as productive and when they work they're not as productive and when
they're there. So in a long term the health benefits are there, but from a public policy
standpoint, you have to also gauge the freedom aspect. do we have the freedom to
choose to do something that we know is unhealthy? that's another debate in its own
right. so people think that we should be able to choose if i wanna smoke and I know
the risks, It was different back in the 60s when cigarette companies were lying to
people and they were denying that it was correlated to cancer and other illnesses
and at one point they used to say that cigarette smoking was actually good for you,
that it would cure allergies and cold things like that. But now you'd be hard pressed
to find somebody that didn't think that cigarette smoking was bad for you. So, wth
that being said, the costbenefit is, I think, the benefit of people not smoking
outweighs the benefit of people's right to autonomy and all that. but then you can
also expand it to fast food and other things which people have done, and that's just
kind of a loose issue, that just makes it more complicated when you start going down
the list of things that we think people shouldn't be doing because it's unhealthy.
18:03 So, I read somewhere that the pharmacies in America only make about
4% of the total sales in the tobacco product industry, with this statistic do you
think that other pharmacies around the country will start to do the same as
CVS since they make up so little of the overall percentage?
18:37 I think so. I think small pharmacies have to cater to everyone... Now that CVS
has started this, they have more of a reason to decide to stop carrying certain
products. A concern for small pharmacies is that you have customers that are
coming in to buy a specific thing like cigarettes... It's an item you purchase over and
over again obviously. So you don't want to alienate any of your existing customers
when they have other choices to get to. So if a small pharmacy stops carrying
cigarettes, then that person is going to go to maybe CVS or Walgreens. Now that
CVS has done that, then maybe small pharmacies will start to consider that may be
the norm... They may see, if it works, which i think it will, I don't think CVs is going to
be hurt, that bad by this at all, but I think that some small pharms will start to think of
it more as a business decision than "I have to cater to everyone decision"

20:04 In general, how did CVS's policy change affect the marketing strategies
of other places like Walgreens and how do you think that.. do you think that
larger companies were pressure to make the decision about tobacco bans?
20:31 I think that they're definitely having the conversation about bans... I don't know
if they're going to directly ask Walmart... They may, but I would be surprised if they
just come right out.. and say what are you going to do about tobacco because it's so
new... but i bet behind the scenes they're all having this conversation about what to
do. As far as their marketing scheme goes, CVS is in a good spot because they can
advertise they no longer sell cigarettes, we care about you, your health is important,
blah blah blah... where walmart and walgreens can't really advertise well we sell
tobacco come to us because that's not a very good message to send out there. So i
think they're forced to stay quiet and have peopel know they're still selling it. as far
as a marketing campaign I think CVS has an advantage in the market to where they
can go out... and say we care and that type of slant where walgreens is not going to
say we still sell tobacco... which isn't a good message.
25:25 So CVS is not selling tobacco products anymore and so Walgreens is
getting their profits now or at least a portion of it, do you think that the hassle
of putting cigarettes on the shelves is worth selling them still at Walgreens?
...CVS is taking a loss of $2 billion on tobacco sales.
25:51 Obviously Walgreens thinks it is for whatever reason.... one reason is probably
the extra products that smokers buy as well.. they... think at this point in time that it is
worth it. I don't know how they did their analysis and they have more inside
information than I do but obviously they think it's worth it because they're still doing it
so... but I think that's changing... and it's changing with... the proliferation of the
cigarette stores like Dirt Cheap and they have price advantages and that caters to a
different market... they buy cartons instead of packs and things like that... but the
size of the Walgreens selection has definitely gone down over the years.... at some
point it won't be worth it to them and CVS has already made that decision obviously.
For whatever reason, they think it's worth having it there. If it stays, I doubt that it
would stay for a long time. I mean, at some point, it's just not going to be worth it...
they just have a different number from CVs.... what I would imagine what Walgreens
would do is that they're going to closely watch CVS and see how that really impacts
them... Watch how their sales reports and going to see how they're going to perform
over the next year. Then they're probably going to reevaluate and make a decision.
CVs could be wrong, I don't think so, but this could back fire on them. It could be a
mistake. It's one that they can't undo... even if they do hit these losses... and lose
more money they can't now start selling cigarettes again, they'll just recooperate
their loss. If CVS does see some bumps in the next couple years, then Walgreens
will follow suit.
31:03
Could you tell me more about the government's public policies and their taxes
on cigarettes?
31:09

Those are called excise taxes... commonly referred to as sin taxes... There's a
federal tax on cigarettes and states and local municipalities can also levy their own
taxes. So... a pack of cigs in MO is just over 5 dollars with taxes inc. If you go to NY
or IL, you're looking at 11-12 dollars a pack. The vast majority of that is because of
the local taxes. NYC has a 7/pack tax that just the city collects. So a pack of cigs is
basically the same price everywhere because a store buys a million packs of cigs
and they get charged the same. the rest of that is taxes. it's a huge swing. you're
talking about an 8 dollar difference between states on cigarettes. it's just because
the local municipalities do it. within a state a pack of cigs in Columbia it's going to be
a little different from KC or STL because local governments have imposed their own
tax on top of state and federal tax.
32:45
Overall how much does it affect how many cigarettes are bought in each
state?
33:00
As the price goes up people smoke less. But.. it doesn't happen as much as iwth
other good because there's an addiction factor. There's also a factor about trying to
be cool and peer pressure.. when kids start smoking and they don't care about the
price because their friends are doing it and they're stealing cigarettes or one person
buy s a pack and they all share it but as a general rule... as the price goes up people
do smoke less, but not as dramatic as other things like the movies... as the price of a
movie ticket goes up people go to movies less.. it's a far greater percent change than
with cigarettes. cigarettes are a unique good because there's an addiction factor and
other factors that go into it. but it has successfully... have fewer people that smoke
[in areas with high taxes]
34:08
Is there a reason why some states make their taxes higher than others?
34:43
That's just because of their philosophy on health. NYC for ex is so high because of
Bloomberg... A very adamant pro health advocate. he has a lot of policies focused
on health. they also banned trans fat from restaurants... they also increased taxes on
non diet soda and things like that. theres definitely a philosophical reason for it.
States like KY and MO who have a low tax are tied to farming communities where
families have made a living off of tobacco farms... historically pretty big tobaccco
farming areas... pretty unpopular when politicians in their areas try to run with i'm
going to put taxes on crops... farmers don't like that so that's part of the reason too.
NY state is a pretty rural place... so NYC is really really high compared to the rest of
the state. so there are a lot of philosophical reasons that add to that.
36:47
End