Walgreens said Tuesday it will close 1,200 stores. Rival drugstore chain CVS recently laid off thousands of workers to cut costs.
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Not long after Tim Wentworth became CEO of Walgreens, he announced a startling figure: About a quarter of the pharmacy chain’s stores were not making money.
On Tuesday, he said 1,200 of these stores will be closed over three years. That’s two weeks after rival CVS announced it was laying off 2,900 company employees. Both chains are making billions of dollars in cost savings — closing hundreds of locations, cutting thousands of jobs and, indeed, rethinking their role in American life.
The slow simmer of mistakes and misfortunes has come to a boil for the largest US drugstore chain. They have accumulated a large number of stores while changing the habits of shoppers. They are saddled with many government fines and a particularly painful relationship with insurance.
Shop problem
CVS and Walgreens have some notable differences. Walgreens, which also owns the British drugstore Boots, is more focused on its pharmacy business. CVS has expanded into healthcare through mergers with Aetna insurance and Caremark, a pharmaceutical benefits manager that helps insurers negotiate prescription drug coverage and costs. But both companies made the same mistake.
The easiest part of the problem is scale. CVS and Walgreens grew nationwide with more than 9,000 and 8,000 stores, respectively. They gobbled up a mom-and-pop shop and signed a long-term lease for a prime location on the street corner.
A chain with a padlock secures the freezer door at a San Francisco Walgreens store in July 2023. The store locks the freezer with a chain and padlock to deter thieves who have stolen frozen pizza and ice cream.
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Today, shoppers regularly complain about stores that are understaffed, and products are locked to prevent theft. A shelf of snacks, makeup, greeting cards and cleaning products intended to increase profits. But sales have been declining for years — the result of a losing battle with Amazon, Walmart, Costco, grocery stores and dollar stores.
CVS and Walgreens “probably have too many stores because they are over-expanded, but the big problem is that they are not very good stores,” said Neil Saunders, a retail analyst at the GlobalData firm.
The chain has failed to add new incentives for shoppers, beyond printing photos or releasing shopping returns, said Anshuman Jaiswal, a longtime consultant to retailers and pharmacies. And no chain has created a meaningful online presence designed to give customers what they need.
“If you go to CVS.com or Walgreens.com, if you order cough syrup, why don’t I sell chicken broth as a product recommendation?” Jaiswal said. “It’s about reimagining the business model.”
Prescription problem
Because of retail’s struggles, pharmacies may simply drop their stores and focus on selling drugs — unless CVS and Walgreens say it’s harder and harder to turn a profit from that part of the business.
Last year, a major shift in the balance of power between pharmacies and health insurance showed the limits of drugstore influence.
“Historically, there was a perception that there was a lot of customer loyalty to specialty retail pharmacies … and patients, or consumers, would be worried if they were forced to move their prescriptions,” said Brian Tanquilut, health care. services analyst at investment bank Jefferies.
Walgreens tested this theory about a decade ago during a public battle with Express Scripts, a pharmacy benefit manager that works with major health insurers.
Walgreens and Express Scripts are playing a game of chicken over how much Walgreens should get from prescriptions – and Walgreens disappeared. For some time, the insurance network was used by millions of people, who simply went elsewhere to get drugs at a lower price in the network.
“What we’re doing is proving that the patient’s loyalty is not to the retail pharmacy, but actually to whatever the insurance pays for,” Tanquilut said. “And that opens the door for payers to continue to lower prices at retail pharmacy chains.”
I hope reinvention is the cure
Today, CVS and Walgreens face tough competition from pharmacies that do not rely heavily on prescription profits because they are part of retail giants, including Walmart and Costco. The pharmacy chain has also spent millions of dollars in government fines over allegations of unsafe staffing levels, overbilling government insurance programs and contributing to the opioid epidemic.
Over the years, CVS and Walgreens have sought to reinvent themselves as health care centers, developing primary care clinics. But this operation takes time and money.
On Tuesday, Walgreens CEO Wentworth said the chain is “reorienting to its legacy strengths as a retail pharmacy-led company.” It’s CVS reportedly considering separation to cancel the merger with Aetna and Caremark.
Both companies also propose new structure for how they are going to pay to fill the prescription, it has been taken big in the arm they have to.
“I’m very confident that in two to three years, we will reset the framework for the repayment discussion,” Wentworth told investors on Tuesday. “We are in the early stages which will take time.”
