Costco is quietly getting rid of its smokes

Discussion
Mar 15, 2016

Costco has been quietly reducing tobacco SKUs in its clubs over the last several years. In fact, according to retail analyst Brian Sozzi, the retailer has cut the number of locations selling tobacco to 189 (Costco operates 488 clubs).

During Costco’s second quarter earnings call earlier this month, CFO Richard Galanti said tobacco sales were “negative in low-double digits as we continue to eliminate tobacco SKUs from various locations.”

Costco, according to Mr. Sozzi’s report, has intentionally low-keyed the elimination of tobacco in its clubs. Costco’s decision to cut back is supported by its financial analysis, which has found the category to be a low margin business with high levels of shrink. In the end, Costco management believes it can use the same space to generate greater revenues and profits.

Costco’s reduction of the tobacco category is a stark contrast to the CVS experience. The drugstore, which pulled all tobacco products from its stores in Sept. 2014, positioned the decision as being based on its brand proposition. Simply put, selling tobacco was inconsistent with CVS Health’s role as a health provider.

One year after eliminating tobacco sales, CVS published a study that found a drop in cigarette sales in states where it operates stores and has a market share of 15 percent or greater in pharmacy. According to the research by the CVS Health Research Institute, the average smoker in those states purchased five fewer cigarette packs. In all, 95 million fewer packs of cigarettes were sold in the states studied.

Last week, CVS announced it will donate $50 million over the next five years to anti-smoking groups.

DISCUSSION QUESTIONS: Do you expect Costco to fully eliminate the sale of tobacco products in the near future? Do the low margins and high shrink associated with tobacco lead you to the conclusion that many other food, drug and mass retailers will discontinue the category over the next five to 10 years?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Yes, I believe that all retail tobacco products will eventually be sold in specialty stores and that Costco will get out of this business. Costco can not only drive more sales but do so more efficiently as they can eliminate the need for an employee to manage the cage."
"Yes, I expect more and more retailers to eliminate tobacco products as they determine they can get away from it. But, I don’t necessarily think it has to do with margins and shrink."
"Costco has a somewhat well deserved reputation as a "conscious" company, so I am surprised that they would be stealthy about eliminating tobacco as opposed to up front about it like CVS."

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17 Comments on "Costco is quietly getting rid of its smokes"


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Michael Day
Guest
Michael Day
6 years 2 months ago

Yes, I would expect Costco to eventually fully eliminate the sale of tobacco products. If you look closer at the 189 clubs that still sell tobacco, there is most likely a direct correlation with wholesale c-store business member purchases/demand, not for B2C/Gold Star member demand, etc.

Anne Howe
Guest
6 years 2 months ago

I would like to think that any retailer that eliminates tobacco sales would do so as part of its brand positioning, and be ready to claim to shoppers that it stands for healthy living. So Costco’s quiet elimination is pretty meaningless to me. Given the shopper base is older, Costco may not be willing to take a stand like that.

But personally, I’d be more willing to support a retailer who has the backbone to take a stand and stick to it.

Roger Saunders
Guest
6 years 2 months ago

The mass market retailers will continue to step away from the tobacco space for the reasons outlined by George: lower relative margins and significant shrink. Additionally, a number of retailers have issues with teenagers 16 to 17 handling the products at point of sale.

Tobacco is not going to completely disappear. Specialty tobacconists may make a bit of a comeback in selected markets, as well as the package liquor stores of a previous time. Watch for the savvy entrepreneurs who will capitalize on the opportunity.

J. Peter Deeb
Guest
6 years 2 months ago

Yes, I believe that all retail tobacco products will eventually be sold in specialty stores and that Costco will get out of this business. Declining sales are the driver that will speed up the decision. Costco can not only drive more sales but do so more efficiently as they can eliminate the need for an employee to manage the cage.

Ryan Mathews
Guest
6 years 2 months ago

Yes, I expect more and more retailers to eliminate tobacco products as they determine they can get away from it. But, I don’t necessarily think it has to do with margins and shrink.

Shrink is a convenient “public face” for the idea of dumping tobacco products because you also operate a pharmacy. By leveraging it this way retailers such as Costco get to do “the right thing” without offending smokers.

David Livingston
Guest
6 years 2 months ago

I don’t think Costco will fully eliminate the sale of tobacco products. In some areas, like rural Canada, tobacco is a huge draw and Costco controls the market. In other areas though, Costco tends to cater to an upper-middle class and educated customer, where tobacco is not a part of their lifestyle. Retailers serving the lower income, less-educated customer will most likely continue with tobacco sales. Like lotto tickets and liquor, it is low margin, but often a necessary product that returns huge dollars back to the government. CVS is trying a different angle, perhaps going after the high margin tobacco cessation market.

Tony Orlando
Guest
6 years 2 months ago

Costco will eventually phase out all tobacco in their stores, as margins and much higher taxes have led to decreased sales. I got rid of all tobacco in my store in 2015 and really don’t miss it as the cost of smokes continue to rise, and soon will hit $10 a pack if the new taxes kick in. The profits for that space could be used better anyway, and Costco is not stupid and will do what it needs to makes as much per square foot as they can, and they are the best at it. Smoking is now something reserved to very few public venues where you can enjoy a drink and a smoke, except for casinos, which are a haven for chain smokers. Thanks goodness I never started, as it is a very expensive bad habit.

Camille P. Schuster, Ph.D.
Guest
6 years 2 months ago

If the margins at Costco stay the same or continue to decrease, the availability of the items will probably continue to decrease. If sales are so low, elimination of the items will not be noticed by many customers. There may be some loyal, profitable customers who purchase tobacco products but it should be easy to figure out which products they purchase and how often they purchase them. Costco appears to be making a financial assortment decision rather than a decision based on policy. If that is true, the category is likely to continue to shrink but may not be eliminated at all stores.

Mel Kleiman
Guest
6 years 2 months ago

It would fit Costco’s model to eliminate tobacco not for health reason alone but because it does provide the revenue per square foot and the high cost of handling the product does not generate the revenue to support it.

Tobacco will be gone within the year. Most Costco shoppers will never miss it.

Paula Rosenblum
Guest
6 years 2 months ago

Good for them. And I don’t think I mind that Costco is not making a lot of noise about their decision.

It doesn’t make money, it makes people sick. Let’s see … do we keep it? Nope.

Tom Redd
Guest
6 years 2 months ago

Yes … if Costco does it more will follow. There will always be places to pick up some smokes. At times they are needed — cigars for the new baby (that no one smokes, but you give them out) and cigs in case of a zombie attack or when some form of end of the world is nigh. Great for bartering, and why not smoke? The world is ending. For some, this is any day due to car emissions.

And the real story is that more yuppies and Millennials smoke pot on a daily basis and they do not want smokes.

TRedd – Has a pack of MB Lights hidden for “End of the World as you know it!!!” Rock on….

Lee Kent
Guest
6 years 2 months ago

Costco doesn’t need to make a lot of noise about this decision. They are not in the health business, but are rather looking at this from a business-only perspective.

Smart retailers should always be assessing their product lines and eliminating those not profitable.

For my 2 cents.

Craig Sundstrom
Guest
6 years 2 months ago

I don’t know how Costco displayed its tobacco, but given that most stores now have it behind the counter, I don’t see how it can have any shrink (unless it’s employee theft).

Back to the question: I expect we’ll see it eliminated from more general merchandisers and moving (more) to specialty/convenience stores.

Ed Rosenbaum
Guest
6 years 2 months ago

I find it interesting that Costco has quietly reduced sale of tobacco products and there has been no uproar, no complaining and the world is still rotating on its axis. Unlike when CVS announced its intent to eliminate tobacco and the smoking world screamed unfair. Good for you Costco. Maybe a few of your brother competitors in the warehouse business will follow your lead. They have followed you in the past. Now let them do it again.

Gajendra Ratnavel
Guest
6 years 2 months ago

Yes I do. If someone is buying cigarettes from Coscto, they would probably buy in cartons as is the store’s model of bulk. It’s not a place you walk in for a pack.

Drug stores and gas stations do well because you can walk in and grab a pack and leave quickly. It’s just part of the experience.

Martin Mehalchin
Guest
Martin Mehalchin
6 years 2 months ago

Costco has a somewhat well deserved reputation as a “conscious” company, so I am surprised that they would be stealthy about eliminating tobacco as opposed to up front about it like CVS.

Bill Hanifin
Guest
6 years 2 months ago

Based on the path are walking, it seems inevitable that Costco will fully eliminate sale of tobacco products. Each retailer will have to make a decision based on its own brand promise. There is obvious rationale for other health related businesses beyond CVS to eliminate tobacco sales. I would not be surprised to find that in 5 years, the “go to” place to purchase tobacco products are convenience stores.

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Braintrust
"Yes, I believe that all retail tobacco products will eventually be sold in specialty stores and that Costco will get out of this business. Costco can not only drive more sales but do so more efficiently as they can eliminate the need for an employee to manage the cage."
"Yes, I expect more and more retailers to eliminate tobacco products as they determine they can get away from it. But, I don’t necessarily think it has to do with margins and shrink."
"Costco has a somewhat well deserved reputation as a "conscious" company, so I am surprised that they would be stealthy about eliminating tobacco as opposed to up front about it like CVS."

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