Short term benefits vs. Long Term Results

For those that do not know much about sailing, a regatta is an aggregate of individual races, akin to golf.  You need to be consistent throughout all races to win the regatta; it is (normally) not one single race that gets you the trophy.  Even if the final race decides the regatta, consistency got you to that point.  If you are doing well in a regatta, with every crossing (see previous posts), every decision, you cannot be sucked into thinking about just *this* race.  You need to do what is best for the long term.  If that means giving up the first place in a particular race, to ensure your key competition does not advance on you, then that is what you have to do.

I remembered this concept a few days ago in the news.  On 5-Feb-2014, CVS Caremark announced that it would no longer sell tobacco products in its stores.  The following morning, I happened to hear Jim Cramer from CNBC talking about the decision.  He disagreed with it, saying that a corporation’s only focus should be on profits.  While I appreciate that a business’ fundamental priority is to generate a return for its stakeholders, there are many paths to do so.  I do not believe that a strict focus on short-term results helps corporations in the long term.

It reminded me of the days when Target was being downgraded in the market because it offered its employees medical insurance and benefits, while Wal-Mart did not.  Analysts asked Target to get their SG&A costs in line with Wal-Mart, and Target refused.  “What’s wrong with offering our employees benefits?”  In this case, Target bet that its move would improve morale, decrease turnover, attract better candidates, and more.  This would in turn lead to increase productivity and therefore would overcome the hit to SG&A.  At first, analysts disagreed.  Eventually unions and governments filed lawsuits against Wal-Mart, and only then did the market react and “allow” Target some leeway to do so.  However, it was only the expensive threat of litigation that convinced analysts to adjust.

I would like to think that Target was correct in the first place: without the threat of litigation, Target would recover the hit to SG&A several times over by productivity.  The problem is that analysts do not account for that kind of intangibles well in their models.  It is simply about the numbers.  If management believe, yes, they’ll take a hit in the short term, and in the long run the benefits will come through in the earnings; well, there’s no way to account for that today.

Another tangent is companies “going green,” and other Corporate Social Responsibility (CSR) efforts.  It may take firms significant capital to move to a “Green” workplace; equipment and facilities that is more expensive than “non-green,” training to be more “green,” and much more.  Ultimately, reducing something like paper consumption might decrease costs, and therefore improve the bottom line.  There is also though the intangible marketing, whereby a consumer might choose a slightly more expensive product in favor of one that does not perform CSR.  

In the above examples, benefits and CSR, both are short-term costs that may/could boost the bottom line in the end.  Mike, what does this have to do with CVS Caremark’s move?  Glad you asked!  The analogy holds true here.  

Yes, in the short run, there will be decreased revenues from tobacco products.  I would argue that the margins on such products are not likely very high, given taxes and competition for such commodity products.  Being fair, it is possible that it will increase the total customer “basket,” that is a customer goes to the store looking for a smoke, and remembers they need milk or something else.  I can tell you as a non-smoker, I go to CVS quite often as it is; I cannot see this being a significant hit.

There is another aspect; CVS Caremark is making it harder for their employees, and their customers to smoke.  The dangers from smoking are now transparent for all; there is no debating it.  By this move, CVS Caremark is taking the very long-term view that they are increasing the medical costs for their employees, and potentially increasing the longevity of its customers.  That, plus the CSR benefits, for not contributing to the growing national concern.

Therefore, Mr. Cramer and other analysts, with all do respects, while I agree with a focus on profits, I do not agree that you must sacrifice all else for the short term.  A balance of short term and longer-term initiatives is key.

I believe that is what CVS Caremark is doing here: giving up the win in this race, to win the regatta.