Pharmacy Chains Struggle as Walgreens Announces Store Closures

In a recent report to investors, Walgreens revealed plans to shut down a significant number of its 8,600 stores in the United States. CEO Tim Wentworth stated that only 75% of the chain’s stores were currently profitable, leaving the remaining 25% at risk of closure by 2027. This move comes amidst a series of closures in the retail pharmacy sector, with CVS also shutting down stores and Rite Aid filing for bankruptcy.

Changing Landscape of Retail Pharmacies

Traditional pharmacy chains used to serve as community hubs where people not only picked up prescriptions but also purchased general merchandise. However, over the past couple of decades, this dynamic has shifted drastically. Neil Saunders, the managing director of GlobalData Retail, noted that there has been a significant change in consumer behavior and preferences, leading to a decline in the retail aspect of pharmacy chains.

Aside from external factors such as a challenging consumer environment and pressure on pharmacy margins, Walgreens is also confronting internal struggles. The front of the store, where general merchandise is displayed, has been experiencing consistent declines in sales quarter after quarter. Saunders criticized the selection of brands and products, stating that they lack innovation and are priced higher than competitors.

Walgreens heavily relies on its pharmacy revenue, which accounts for approximately 60% of its total sales, to offset the weaknesses in its retail division. However, the pharmacy sector itself has been grappling with shrinking margins due to declining reimbursement rates from pharmacy benefit managers (PBMs). John Ransom, the managing director of Raymond James, highlighted that the reimbursement rates have been decreasing annually, creating additional challenges for pharmacies.

Implications for the Industry

The closure of thousands of pharmacy chain stores, including those of Walgreens, signals a larger trend within the industry. As consumer behavior continues to evolve and external pressures mount, traditional brick-and-mortar pharmacies are facing unprecedented challenges. To remain competitive and sustainable, pharmacy chains will need to adapt to the changing landscape and find innovative ways to attract and retain customers.