Walgreens and CVS Announce Major Store Closures Amid Industry Challenges

CVS Health Corporation and Walgreens, two of the United States’ largest pharmacy chains, have announced plans to close numerous stores as they attempt to navigate a shifting landscape in the pharmacy industry. Walgreens disclosed on Tuesday its decision to close 1,200 stores, which constitutes about one-seventh of its total locations. This announcement comes in the wake of CVS’s recent decision to cut 2,900 corporate jobs and close additional outlets.

The closures appear to be a response to evolving consumer behaviors, increased competition, and significant shifts in the pharmacy sector. Tim Wentworth, CEO of Walgreens, remarked to The Wall Street Journal in June that approximately 25% of Walgreens’ stores are not profitable, prompting the chain to reevaluate store locations, especially those in close proximity to each other or those experiencing high levels of theft.

Besides shoplifting concerns, Walgreens and CVS, along with other pharmaceutical retailers, are grappling with dwindling profits due to changes in reimbursement rates for prescription drugs. Industry analysts have pointed out that pharmacy benefit managers (PBMs), who negotiate with drug manufacturers on behalf of insurers, have been reducing reimbursement rates in an effort to enhance their own profits, thus squeezing the revenues of pharmacies.

The business model for many of these drugstore chains appears unsustainable, Wentworth acknowledged, as pharmacies attempt to adapt amidst lower drug reimbursement rates and rising fees. Efforts to diversify and expand services, such as Walgreens’ acquisition of a stake in VillageMD, a primary care network, have not produced the desired financial results for the company.

Moreover, pharmacies are also facing challenges on the retail front. Non-pharmacy product sales have diminished as consumers increasingly turn to online platforms like Amazon and physical store alternatives such as Walmart, which offer a broader range of products. This strategic disadvantage has been acknowledged by retail experts who criticize the inability of CVS and Walgreens to adapt their physical and online shopping experiences to meet new consumer demands.

In trying to pivot towards health care services, both CVS and Walgreens have funded clinic expansions with aspirations of becoming comprehensive health service hubs. Despite these efforts, success has been limited by high operational costs and a complex regulatory environment. Following years of additional financial strain from legal fines related to misbilling and opioid prescriptions, the chains are now reassessing these strategies.

Further shifting away from mergers and acquisitions, CVS is re-evaluating its relationship with Aetna and Caremark, while Walgreens is reportedly focusing more on optimizing its core pharmacy operations. “We are in the early stages of a turnaround that will take time,” Wentworth indicated to investors, emphasizing ongoing adjustments in prescription reimbursement strategies.