Why Walgreens And CVS Are Shutting Down Thousands Of Stores

Summary

In June 2024, Walgreens announced plans to close 2150 stores by 2027 due to declining revenues and profits, reflecting broader industry challenges. The retail segment faces competition from dollar stores and big-box retailers, while the pharmacy segment contends with telehealth services and lower reimbursement rates from pharmacy benefit managers (PBMs). The closures could exacerbate 'pharmacy deserts,' impacting low-income urban areas. Potential solutions include FTC lawsuits against PBMs and state-level regulation to ensure equitable healthcare access.

Takeaways

• 💊 Walgreens announced plans to close approximately 2150 stores by 2027 due to financial struggles.
• 📉 The company's share price fell over 55% between January and July 2024, reflecting ongoing challenges.
• 🛒 The retail segment of Walgreens is experiencing a decline, with a 4% year-over-year drop in Q3 sales.
• 💸 High inflation and competition from cheaper alternatives like dollar stores and big box retailers are affecting sales.
• 🔒 Theft and shrinkage issues contribute to the decision to close certain high-theft locations.
• 💉 Pharmacy and health services are Walgreens' largest source of income, making up 76% of U.S. retail pharmacy revenue and 60% of total company revenue.
• 📉 The pharmacy business is declining due to telehealth services and lower reimbursement rates from pharmacy benefit managers (PBMs).
• 🏥 PBMs' control over drug prices and reimbursements creates misaligned incentives and pressures pharmacies financially.
• 🏢 The Federal Trade Commission plans to sue the three largest PBMs for allegedly driving up drug prices.
• 🌳 'Pharmacy deserts' are areas with low geographic access to pharmacies, affecting approximately 15.8 million Americans.
• 🏠 Closures of chain pharmacies could lead to a resurgence of independent pharmacies, especially in underserved areas.

Q & A

Why did Walgreens announce plans to close a significant number of stores in June 2024?

Walgreens announced plans to close stores because only 75% of their stores were effectively bringing in their revenues and profits, and the company was trying to stabilize its struggling financial situation.

What were the two main reasons cited by CEO Tim Wentworth for Walgreens' challenges in the Q3 report?

The two main reasons cited by CEO Tim Wentworth were pressure on the consumer and challenging trends in the pharmacy space.

How has the retail segment of Walgreens been performing?

The retail segment of Walgreens has been in a downward slide, with a 4% year-over-year decline in Q3, continuing a trend of poor performance over recent years.

What is the impact of inflation on chain pharmacies like Walgreens?

Inflation is squeezing customers, making it difficult for chain pharmacies to compete with cheaper alternatives like dollar stores and big box retailers.

What is the role of Pharmacy Benefit Managers (PBMs) in the pharmacy industry, and how do they affect pharmacies like Walgreens?

PBMs act as intermediaries between insurance and pharmacies, negotiating drug prices, determining coverage, and setting reimbursement rates. They have been shrinking reimbursement rates and pushing patients towards generic brands, which makes it harder for pharmacies to make money.

What is the significance of the FTC's plan to sue the nation's three largest PBMs, and how could it potentially benefit pharmacies?

The FTC's plan to sue the largest PBMs could potentially shine a light on their practices and lead to changes that might lessen the impact of pharmacy closures by addressing issues like drug pricing and reimbursement rates.

What is a 'pharmacy desert' and how does it affect communities?

A 'pharmacy desert' is a place with low geographic access to pharmacies, which can be detrimental to communities, especially in areas where access is already an issue, leading to inequities in the distribution of pharmacy services.

How do pharmacy closures impact the customers and pharmacists?

Pharmacy closures impact customers by potentially reducing access to healthcare services and forcing them to travel farther for prescriptions. It also impacts pharmacists and staff by increasing their workload as they have to handle more customers from closed locations.

What is Walgreens' strategy to address the challenges it faces?

Walgreens is focusing on areas like health and beauty, women's health, and potentially renegotiating with PBMs for better reimbursement rates. They are also considering the impact of closures on communities and aiming to ensure a smooth transition for customers and team members.

What is the role of independent pharmacies in the current pharmacy landscape, and how do they compare to chain pharmacies?

Independent pharmacies are seen as a potential solution in areas where chain pharmacies are closing, as they are more likely to open in underserved neighborhoods and rural areas. They offer an alternative to chain pharmacies and can provide personalized services.

Outlines

00:00

💊 Walgreens' Struggle and Store Closures

In June 2024, Walgreens announced plans to close 2150 stores by 2027 due to only 75% of them being profitable. This decision is part of a broader effort to address ongoing issues like CEO turnover, stagnant profits, and a 55% drop in share price. CEO Tim Wentworth identified 'pressure on the consumer' and 'challenging trends in the pharmacy space' as key reasons. The retail segment is struggling with a 4% year-over-year decline, and the company is not adapting well to the changing retail landscape. High theft rates and the need for anti-theft measures are also contributing to the decline in store experience.

05:03

💼 Impact of PBMs and Pharmacy Closures on Communities

Pharmacy Benefit Managers (PBMs) have been reducing reimbursement rates, pushing patients towards generic brands, which is beneficial for PBMs but not for pharmacies. The three largest PBMs in the US manage nearly 80% of all US prescriptions, and their practices are under federal scrutiny. CVS owns its own PBM, Caremark, which can set its own rates, unlike Walgreens, which is at a disadvantage. The Federal Trade Commission plans to sue the largest PBMs for allegedly driving up drug prices. Pharmacy closures can lead to 'pharmacy deserts,' areas with limited access to pharmacies, which disproportionately affect low-income urban areas. Both CVS and Walgreens claim to consider this issue when closing stores, but there are concerns about the actual impact on communities.

10:04

🏥 Shift in Focus and the Rise of Independent Pharmacies

Walgreens is shifting its focus towards health and beauty, particularly women's health, acknowledging areas of growth it has not capitalized on, like premium beauty. The company is also looking at improving its pricing power in negotiations with PBMs. There's potential for a new contract with Caremark in 2025, which could improve reimbursement rates. Amidst chain pharmacy closures, there's a resurgence of independent pharmacies, especially in rural and underserved urban areas. These independent pharmacies could fill the gap left by chain pharmacies, offering personalized services and potentially better serving communities that chains are leaving behind.

Keywords

💡Walgreens

Walgreens is a prominent pharmacy chain in the United States. In the video, it is highlighted as a company facing significant challenges, including the closure of a substantial number of its stores due to financial struggles. This situation exemplifies broader issues within the pharmacy industry and serves as a focal point for discussing the economic and social impacts of such closures.

💡Pharmacy Desert

A 'pharmacy desert' refers to an area with limited or no access to pharmacies, which can negatively affect the health and well-being of residents. The video discusses how closures of pharmacy chains like Walgreens can lead to the creation of pharmacy deserts, particularly in low-income urban areas, exacerbating health disparities.

💡Telehealth Services

Telehealth services are remote clinical services provided through telecommunications technology. The script mentions that the growth of telehealth has impacted traditional pharmacies like Walgreens, as patients increasingly use these digital platforms for healthcare needs, which can lead to reduced foot traffic in physical pharmacy stores.

💡Pharmacy Benefit Managers (PBMs)

Pharmacy Benefit Managers are entities that act as intermediaries between insurance providers, pharmacies, and drug manufacturers. They negotiate drug prices and set reimbursement rates. The video explains how PBMs have been reducing reimbursement rates, which puts financial pressure on pharmacies, contributing to their struggles.

💡Generic Brands

Generic brands are pharmaceutical products that are bioequivalent to their brand-name counterparts but are sold under a different name. The script notes that the FDA estimates a high percentage of prescriptions in the US are for generic brands. The shift towards generics has financial implications for pharmacies, as they often have lower profit margins on these products compared to name brands.

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video script mentions that inflation is squeezing customers, affecting their spending habits and causing them to seek cheaper alternatives to traditional pharmacies.

💡Retail Segment

The retail segment of a business, such as a pharmacy, includes the sale of non-pharmacy items like over-the-counter medicines, cosmetics, and other consumer goods. The video discusses how Walgreens' retail segment is experiencing a decline, with a year-over-year decrease in sales, indicating a need for adaptation in their retail strategy.

💡Store Closures

Store closures refer to the permanent shutting down of physical retail locations. The video script details Walgreens' plan to close approximately 2150 locations by 2027, which is a strategic decision aimed at reducing costs and stabilizing the business amidst financial challenges.

💡Independent Pharmacies

Independent pharmacies are locally owned and operated, as opposed to chain pharmacies. The video suggests that the closures of chain pharmacies may create opportunities for independent pharmacies to fill the gap, particularly in areas at risk of becoming pharmacy deserts.

💡Equitable Access to Healthcare

Equitable access to healthcare means that all individuals have fair opportunities to attain health services. The video discusses how pharmacy closures can disrupt equitable access, especially in underserved communities, and the role of legislation and corporate responsibility in addressing this issue.

Highlights

Walgreens announced plans to close a significant number of stores by 2027.

Only 75% of Walgreens stores are effectively bringing in revenues and profits.

The company's share price fell more than 55% between January and July 2024.

CEO Tim Wentworth cited pressure on the consumer and challenging trends in the pharmacy space as reasons for the decline.

Walgreens is not evolving and adapting in retail, seeing a 4% year over year decline in Q3.

Inflation is squeezing customers, making it hard for chain pharmacies to compete with cheaper alternatives.

Walgreens announced plans to lower costs on 1400 front of store items.

The way we shop has changed, with Amazon and Walmart offering better prices and quicker delivery.

High theft locations are a factor in determining which Walgreens stores will be closing.

Anti-theft measures, like locking necessities behind glass, can drive away paying customers.

Pharmacy and health services are Walgreens' largest source of income, making up 76% of U.S. retail pharmacy revenue.

Telehealth services and lower reimbursement rates for PBMs are contributing to the decline in pharmacy business.

The growth of PBMs has attracted federal attention, with the FTC planning to sue the three largest PBMs.

Pharmacy closures can create 'pharmacy deserts,' areas with low geographic access to pharmacies.

Pharmacy closures predominantly affect low-income urban areas with higher reliance on Medicare or Medicaid.

CVS and Walgreens are acknowledging pharmacy deserts and claim to consider them when closing stores.

Pharmacies offer health clinics, Covid testing, and vaccines, impacting both customers and staff with closures.

The resurgence of independent pharmacies could be a solution in areas left by chain pharmacies.

Transcripts

In June 2024, pharmacy chain Walgreens made a shocking announcement.

They plan to close a significant number of stores.

At this point, only 75% of stores bring in what is effectively their revenues and

profits.

The iconic chain is rapidly reducing its footprint, with approximately 2150 locations

on the chopping block by 2027.

This is just the latest effort by the struggling company to right a ship that has seen a rotating door

of CEOs, stagnating profits and its share price fall more than 55% between

January and July 2024.

In the Q3 report, CEO Tim Wentworth cited two reasons pressure on the consumer and

challenging trends in the pharmacy space.

They don't have infinite time to stabilize this before it's too late.

But Walgreens problems are just the latest sign of trouble for the entire industry.

Cvs has been closing stores all along.

Rite aid is filing for bankruptcy.

So what is happening to American pharmacy chains?

How did Walgreens go from record highs to a bottoming stock price in just under a decade?

And what does all of this mean for you?

In order to better understand the headwinds facing chain pharmacies, we have to separate the store into

two parts. First, there's front of store or retail.

You know, your over-the-counter cough medicine, paper towels, makeup, candy bars, that kind of

stuff. Then there's back of store or pharmacy.

We'll get to that later. First, let's start where everyone starts walking in the front door.

Walgreens of today looks very much the same as the Walgreens of yesterday.

It hasn't really evolved and adapted.

When it comes to retail. Walgreens is in the midst of a downward slide, seeing a 4% year over year decline in

Q3, a continuation of a rough few years for its retail segment.

The front of store offer, where the general merchandise is the beauty products, isn't that

good. It often doesn't look very good.

The brands that they have aren't very interesting.

The prices are often much higher than other destinations, and a lot of people will think, well,

yes, I'm here, but why bother paying over the odds.

Every couple of years, I hear, here's our new plan for the front end, and it's always some new gimmick.

And then that doesn't work. And then they don't talk about it anymore.

As inflation squeezes customers, chain pharmacies are struggling to compete with cheaper alternatives like

dollar stores and big box retailers who offer larger selections and have their own in-house

pharmacies.

Particularly our consumer is definitely pressed both from a, you know, the

ongoing inflation that we've seen, albeit at somewhat moderating, as well as the amount of money

that they just have as we move forward.

Now Walgreens realizes this is an issue and recently announced plans to lower cost on 1400 front of store

items. But it might be too little, too late.

Because it's not just the economy that's changed, but the way we shop.

Anybody with a pulse would know what's happening with front end, which is, you know, they're in a pincer

movement with Amazon and Walmart getting better and better.

They have better price points.

Um, the delivery options are getting, you know, quicker and quicker.

Another frequent pain point for retailers shrinkage or loss of merchandise, often due to damage

or theft. In an interview with The Wall Street Journal, CEO Tim Wentworth cited high theft locations

as a factor in determining which stores would be closing.

Store experience has deteriorated with employee cutbacks and with shoplifting in some

locations, as you know, locking the Gillette razors behind the case.

The problem is anti-theft measures aren't popular, as locking necessities behind glass cases doesn't just

deter thieves, but it drives away paying customers.

Locking things away behind cabinets is the biggest advertisement for Amazon that

you could possibly make, because it just says to the customer, this is a really hard

place to shop.

And that's just the headwinds up front.

8 million vaccines this year at the back of the store already.

That's a health care business, right?

That's not just putting pills in bottles.

When it comes to back of house operations.

Pharmacy and health services are Walgreens largest source of income.

In Q3 2024, pharmacy sales made up 76% of Walgreens U.S.

retail pharmacy revenue and 60% of the company's revenue as a whole.

But that's been a declining business for Walgreens, largely thanks to telehealth services and lower

reimbursement rates for pharmacy benefit managers or PBMs.

Pbm is a company that acts as an intermediary between your insurance and the pharmacy.

Pbm started with the idea of being a claims processor.

So when you bring a prescription to the pharmacy, the pharmacy can build a PBM.

The role of PBMs has since expanded beyond just facilitating reimbursements.

They also negotiate drug prices with manufacturers, determine which drugs are covered, set copays, set

prior authorization criteria, and decide which pharmacies a patient can go to.

And I think where the traditional PBM pricing model fell apart, and where there's so much

concern is that the entity is being paid to manage drug costs, but

typically benefit when drug prices increase and it creates a misaligned incentive.

The issue for pharmacies is PBMs have been shrinking the reimbursement rates and pushing patients towards

generic brands over name brand, a move that helps the PBMs but makes it harder for pharmacies

to make money. The FDA now estimates 91% of prescriptions written in the US are for

generic brands.

Historically, pharmacies made more money on generic, less money on brands.

Is that with the growth, particularly of the glp1 for diabetes, the brand volume

has increased.

And where pharmacies weren't making as much money on brands as you increase that volume, it creates more and

more pressure. Reimbursement pressure on the pharmacies.

Currently, the three largest PBMs in the US are CVS Caremark, Cigna's, Express Scripts and Unitedhealth's

Optum RX. These three companies alone manage almost 80% of all US

prescriptions. And yes, you heard that right.

Cvs owns its own PBM.

Caremark, which is owned by CVS and CVS stores.

Caremark can set whatever rate it wants with itself and it's just left pocket, right pocket.

Whereas with Walgreens they're just a straight up price taker.

However, the growth of PBMs has attracted federal attention, which is potentially good news for

pharmacies as the Federal Trade Commission recently announced it plans to sue the nation's three largest

PBMs, accusing them of illegally driving up drug prices.

So I think anytime we can shine a light on that, put pressure on that to make sure that everyone

knows what they're paying for and why they're paying for it.

And so at the end of the day, people can afford the medications that they need.

And that's another thing, what's happening to all the people who need these pharmacies?

What happens to communities who rely on these pharmacies once they're gone?

Pharmacy closure can be detrimental, especially in areas where access is already an issue.

Creating something called pharmacy desert, or a place with a low geographic access to pharmacies.

The definition of this depends on several things the density of the area and the resources of a

neighborhood, including the median income of a neighborhood and how many, you know, the vehicle

ownership of that neighborhood.

According to the National Institutes of Health, approximately 15.8 million Americans live in a pharmacy

desert. An NIH survey of census tracks identified over 4600 pharmacy deserts in the US,

with the majority being in urban areas.

There are neighborhoods in the South Side of Chicago that do not have any pharmacies in, like the downtown

area. You might have a CVS next to a Walgreens next to a Rite Aid.

Those neighborhoods are wealthier, they're whiter, and they're just more resource than the neighborhoods that

don't have pharmacy. So it's not even on average, there's just inequities in the distribution of pharmacy

deserts.

Pharmacy closures predominantly affect low income urban areas where the majority of people are on Medicare or

Medicaid plans with lower reimbursement rates compared to private insurers.

If that is really a rightsizing, they would be closing in the neighborhoods that have the most pharmacies, not

the neighborhoods, the counties, including rural areas that have fewer pharmacies on average.

Both CVS and Walgreens acknowledged pharmacy deserts are an issue and claim to be taking that into account

when closing stores.

Walgreens CEO told investors, we are the only thing standing between those places and being pharmacy

deserts, and our goal is not simply to be the last one to leave.

Our goal is actually to find new ways to work together.

Cvs CEO Karen Lynch also commented on this topic earlier this year, and.

We are also committed to making sure that there's not pharmacy deserts, so we won't close stores where people

need access to medication.

If it's a footprint. The argument that doesn't make sense, because we know we do have evidence of like

where they're closing and it's not in the neighborhoods that have the most pharmacies.

Of course, pharmacies aren't just for picking up prescriptions.

Chain pharmacies offer health clinics, Covid testing, vaccines.

And it's not just the customers who are impacted.

The pharmacist and nearby pharmacy staff who now have to shoulder the burden of displaced customers all at a

time where pharmacists are already staging walkouts and ringing alarm bells over insufficient staffing and

corporate mandates.

The problem is, the average American has almost no say on if a pharmacy stays open or closed in their area,

meaning the solution largely falls on legislation to fix.

Regulating PBMs and potentially increasing reimbursement rates for pharmacies that are serving the

most marginalized.

Neighborhoods. So the FTC lawsuit we mentioned earlier could actually lessen the impact of closures, and

there's already been movement on the state level.

States obviously have a role.

They can also regulate PBMs.

They can also ensure that, for example, their Medicaid programs provide higher reimbursement rates for certain

pharmacies.

In a statement to CNBC, Walgreens stressed we share a deep commitment to offering equitable access to

healthcare in the communities we serve.

Our priority is to ensure a smooth transition for our customers and team members during that time.

While painful for communities from a business standpoint, closing low performing locations is the

solution to a lot of the issues these companies face.

And we know it works because someone already did it.

11.3% same store sales increase at the front of the store for the pharmacy.

I mean, that's that's pretty impressive.

What drives gains like that?

Part of it was that they just had greater volumes at the pharmacies.

And I remember CVS has been closing stores all along.

They expect to close up to 900 by the end of this year, from where they were a couple

of years ago.

Other attempts to cut costs include Walgreens pulling out of its primary care endeavor, VillageMD and

Walgreens Q3 investor call.

CEO Tim Wentworth gave investors ideas of where Walgreens is shifting its focus next.

Health and beauty and women's health.

It certainly hasn't taken advantage of very strong areas of growth in the US,

like premium beauty.

It's allowed Ulta and Sephora and others to really eat up market share in that

arena.

Unless pharmacies also means better pricing power when it comes to negotiating with PBMs.

One light at the end of the tunnel is on the pharmacy reimbursement.

Caremark. I mean, they have said, look, we recognize that what's going on in US or the drug retail market is

not sustainable. So Walgreens could get a new contract from Caremark in 2025.

Now, on the consumer level, there's been an unlikely trend emerging out of these pharmacy closures, a

resurgence of independent pharmacies.

It's true that independents close.

They close at a much higher rate, but it's actually a question of turnover.

So they're more likely to open in rural areas.

They're more likely to open in neighborhoods of color and low income neighborhoods because that's where

chains aren't.

In New York City, less than 1% of the population now lives in a pharmacy desert, a city where as of

2023, only 15% of pharmacies were chains, meaning the mom and pop

businesses that were run out by the chain pharmacies could be the solution when those same chains

leave.

It definitely creates a business opportunity for an entrepreneur to come in and start their independent

pharmacy and service, that area that needs it.