Walgreens, CVS and Rite Aid are closing or have already closed thousands of brick-and-mortar stores in recent years, a trend that is being driven by several different factors.
Last week, the CEO of Walgreens Boots Alliance, the holding company that owns Walgreens Pharmacy, announced that the company is planning to close a large number of its approximately 8,600 stores across the United States. While CEO Tim Wentworth didn’t reveal how much, he did say Wall Street Journal would represent a large proportion of locations.
“We understand where we are is a turning point,” Wentworth said. “We understand that we need to focus on those parts of the business that we believe are contributing and have a future, and some of that needs to change.”
Additionally, Rite Aid filed for bankruptcy in October and had about 2,000 stores at the time, but is expected to emerge from Chapter 11 with only 1,300 locations remaining. CVS has also closed stores at hundreds of locations since 2019.
So what gives?
The answer is multifaceted, according to Peter Cohan, an associate professor of management practice at Babson College who is considered one of the top retail experts in the US.
Cohan told him Washington Examiner that, at least for Walgreens and Rite Aid, a major problem has been corporate mismanagement. He pointed to Rite Aid’s bankruptcy in October and self-admitted problems with Walgreens.
Walgreens, for example, recently fell short of expectations for quarterly revenue and lowered its guidance for the full year. Wentworth said Walgreens is now reviewing many of its unprofitable stores and evaluating where, and how deeply, to make the cuts.
“Approximately 25% of Walgreens stores are not contributing to our long-term strategy,” a company spokesperson said in a statement to Washington Examiner. “We are finalizing an optimization program that we expect will include closing a significant number of these locations over the next three years.”
But there is more to the general trend of pharmacy closings. One factor involves something called pharmacy benefit managers, or PBMs. These PBMs act as intermediaries between insurance providers and drug manufacturers, including negotiating discounts.
“And they’re paying lower amounts of money to the pharmacy, so they’re getting less money for the drugs. And so that’s a big thing,” Cohan said of one of the major barriers to profitability for stores.
Cohan said Walgreens’ prices are also too high and that the company needs to expand its private label products. Private label products are goods manufactured by a third party and sold under the brand name of the pharmacy. They are often cheaper than national brand products and can drive traffic by undercutting the prices of brand-name goods.
For example, a bottle of Listerine’s Cool Mint mouthwash sells for $8.99 on the CVS website, but a comparable bottle under the CVS mast costs $6.29. Many such products tell the consumer to compare the ingredients in the private label product to the more popular brand offering.
“So there are a lot of consumers who are price sensitive and would prefer to buy those products, especially if they’re compatible quality, and Walgreens doesn’t have enough of those private label products,” Cohan explained.
Exacerbating the price issue, inflation has risen in recent years to the highest level in generations. Since January 2021, inflation has risen more than 19%, according to the consumer price index, making life much less affordable for shoppers.
But beyond that, the entire business model for companies like CVS, Walgreens and Rite Aid has been enhanced by massive changes in technology and shopping models. Amazon has come to the fore and has been offering ever lower prices as well as very fast delivery options.
Cohan said drugstores tend to block merchandise other than pharmaceuticals and medicine in the front of the store, things like shampoo and snacks, in hopes they can charge a higher price for them.
But now Amazon and wholesalers like Costco have been able to lure more price-conscious shoppers away from drugstores with better deals. In many parts of the country, if a consumer wants something like body wash, he or she can order it and get it delivered the same day through Amazon for less than the local Walgreens.
“I think pharmacies need to understand that there is a lot of competition and consumers don’t mind not going to a pharmacy to buy something if they can get it at a lower price and at a reasonable speed,” Cohan said.
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Another problem facing retailers, and not just drug stores, is the rise of retail crime. In recent years, videos of individual thieves and mobs of criminals brazenly entering stores and stealing merchandise before fleeing, often with little resistance, have circulated on social media. The phenomenon increased during the pandemic.
Cohan said he’s not entirely sure how big of an impact retail crime has had on store closings, though he said it could be something that’s still contributing to profitability problems at certain store locations.