CVS's move could be a boon for e-cigarette makers

In the short-term, CVS’s (CVS) decision to stop selling tobacco will cost the nation’s second-largest pharmacy chain more than it will cigarette manufacturers. In the longer term, it may increase the number of people who quit smoking and provide an opportunity to e-cigarette makers.

Speaking on “CBS This Morning,” CEO Larry Merlo said banning these products “is the right decision” for the company even though doing so would cost it some $2 billion annually in tobacco and related sales.

Walgreen (WAG), the nation’s largest drugstore chain, said it's still mulling the sale of tobacco at its stores.

Walgreen spokesperson Emily Hartwig said in an email, "We have been evaluating this product category for some time to balance the choices our customers expect from us, with their ongoing health needs. We will continue to evaluate the choice of products our customers want, while also helping to educate them and providing smoking cessation products and alternatives that help to reduce the demand for tobacco products."

Even if Walgreen were to follow CVS’s lead, it wouldn’t do much harm to the cigarette companies. Drugstores account for only 4 percent of cigarettes sold in the U.S., whereas nearly half come from gas stations. Dollar discount stores may make up for whatever sales are lost because of the CVS move. Last year Dollar General said it was doing an “aggressive rollout” of tobacco products and now sells them in about 10,000 stores.

According to market researcher Euromonitor International, U.S. retail tobacco sales -- the vast majority from cigarettes -- totaled $107.7 billion in 2012.

The publicity around the CVS decision comes at a time when American cigarette use is already falling because of because of health concerns, higher prices thanks to tax hikes and social pressure.

In 2001, major tobacco companies sold or gave away 402 billion cigarettes in the U.S., according to the Federal Trade Commission. By 2011, that number had fallen to 274 billion. That same year around 19 percent of U.S. adults smoked cigarettes, compared with about 33 percent in 1980, according to the Centers for Disease Control and Prevention.

The makers of electronic cigarettes are using CVS’s action as a marketing opportunity with claims that their product is a safe alternative to smoking. E-cigarettes are plastic tubes that turn liquid into water vapor to simulate smoke, delivering nicotine and the sensation of smoking. Neither the CDC nor the Food and Drug Administration have yet found significant health risks from e-cigarettes.

Andries Verleur, CEO of VMR Products, which makes V2 Cigs, praised CVS’s decision and called on the chain to sell e-smokes, which it doesn't currently carry.

"We applaud CVS for their bold and thoughtful decision to no longer sell traditional tobacco products, like combustible cigarettes," he said in a statement. "Decades of research have confirmed the harmful and deadly effects of inhaling burning tobacco and we believe in the mission to create a tobacco-free generation. With this in mind, we are also pleased that CVS will continue to emphasize the importance of alternatives to tobacco and hope that they will ultimately recognize the impact of electronic cigarettes, which do not contain tobacco, in this category."

E-cigarette sales are increasing rapidly, perhaps exceeding $1 billion last year, according to analysts at Wells Fargo. If so, that would be double 2012's sales.

Although the industry was started by small entrepreneurs, big tobacco companies are quickly buying their way into it. Two years ago Lorillard purchased Blu ECigs for $135 million. Lorillard, which is the third-largest tobacco manufacturer in the U.S., has increased Blu ECigs distribution to more than 80,000 stores. In 2013, Altria Group -- the nation’s largest cigarette maker -- launched its MarkTen brand of e-cigarettes.