Walgreens to Close "Significant" Number of U.S. Stores Amid Declining Profits and Shifting Consumer Habits
As the retail landscape continues to evolve, pharmacy giant Walgreens has announced plans to shutter a large number of its U.S. stores. This unprecedented move comes on the heels of a struggling retail sector and declining profits, forcing the company to re-evaluate its strategy and optimize its footprint. While Walgreens is facing its own set of challenges, the decision is a stark reminder of the broader pressures impacting the pharmacy industry, particularly the shift in consumer behavior and the increasing dominance of pharmacy benefit managers (PBMs).
Key Takeaways
- Walgreens is closing a "significant" number of its 8,600 U.S. stores by 2027, a move driven by declining profits and the fact that only 75% of its locations are currently profitable.
- The retail pharmacy industry is undergoing a transformation. The waning importance of traditional drugstores as a one-stop shop for general goods is a major contributor to the industry’s struggles.
- Shrinking reimbursement rates from PBMs are putting pressure on pharmacy margins, making it increasingly challenging for retailers to maintain profitability.
- Walgreens’ front-of-store retail sales continue to decline, hampered by uncompetitive pricing and a lackluster product selection.
A Shifting Retail Landscape
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For decades, pharmacies like Walgreens were a cornerstone of many communities, offering a convenient location for both prescriptions and essential household goods. However, the landscape has drastically changed. Rising online shopping, the increasing availability of grocery stores with pharmacy counters, and the growing popularity of subscription drug delivery services have eroded the traditional role of retail pharmacies. As a result, many chain drugstores are finding themselves caught in a tight spot, unable to compete with the evolving consumer preferences.
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"Pharmacy chains used to really be the heart of communities," says Neil Saunders, managing director of GlobalData Retail. "They’re the place you went for prescriptions, but they’re also the place you went to buy general goods. And really over the past 20 or so years, that has changed dramatically."
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This shift in consumer behavior has left many retailers struggling to maintain profitability. Walgreens’ front-of-store retail sales have declined for consecutive quarters, with the latest drop registering at 4% in the fiscal third quarter. Saunders attributes this to unappealing product offerings and higher prices compared to other retailers.
The Looming Shadow of PBMs
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Compounding the challenges facing the retail pharmacy industry is the increasing dominance of pharmacy benefit managers (PBMs). PBMs are middlemen in the pharmaceutical supply chain, negotiating drug prices between insurers and pharmacies. While they play a crucial role in controlling healthcare costs, they have also been criticized for squeezing pharmacy margins through decreasing reimbursement rates.
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"Pharmacy benefit manager reimbursement has been in decline for years, and so every year they start with a headwind on reimbursement," warns John Ransom, managing director at Raymond James. "CVS has sized this at about a billion dollars a year, and CVS and Walgreens have kind of similar-sized pharmacies."
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This shrinking reimbursement, coupled with rising operating costs and waning sales, has put significant pressure on pharmacy margins, forcing retailers to make tough decisions.
Walgreens’ Strategies for Survival
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Walgreens’ decision to close a significant portion of its U.S. stores signifies a drastic shift in the company’s strategy. The company is aiming to streamline its operations, focusing on its most profitable locations while eliminating underperforming stores. This approach is a strategic response to the changing retail landscape and the increasing pressure on pharmacy margins.
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"They’re going to continue to shut down locations that are not doing well," says Saunders. "They’re going to focus on their most profitable stores…and they’re going to try and make their stores more compelling."
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In addition to store closures, Walgreens is also exploring other avenues to improve profitability. These include:
- Strengthening its digital presence to compete with online pharmacies and subscription services.
- Focusing on value-added services such as health screenings and immunizations to attract customers.
- Improving its product selection and pricing to appeal to a wider range of consumers.
A Look Ahead
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The future of the retail pharmacy industry remains uncertain. The industry is facing significant challenges, including changing consumer habits, shrinking reimbursement rates, and increasing competition from online retailers. However, there are also opportunities for growth, particularly in areas such as personalized care, preventative health services, and digital health solutions.
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"I think there’s a strong future for pharmacies," says Saunders. "But they need to be very, very careful about how they respond to the changing environment. They need to be innovative, they need to be efficient, and they need to be customer-focused."
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As the industry continues to evolve, it will be interesting to see how the major players respond to the challenges and opportunities ahead. For Walgreens, the decision to close stores is a necessary adjustment as they navigate the changing retail landscape. The future of the pharmacy industry will be shaped by those who can effectively adapt to the evolving needs and demands of both patients and the healthcare ecosystem.
