Why are Walgreens and CVS closing thousands of stores?

Walgreens, one of the largest pharmacy chains in the United States, has announced plans to close a significant number of its approximately 8,600 stores. The decision comes at a time when the pharmacy industry is facing a number of challenges, including theft, competition and failed growth strategies.

Walgreens' problems

According to CEO Tim Wentworth, roughly 25% of Walgreens $WBAstores are unprofitable. The company plans to close stores that are close together or that have theft problems. Since the pandemic, Walgreens and other retailers have experienced an increase in theft, which has led to stores with high theft rates closing or locking up merchandise. However, Walgreens' problems go much deeper and include competition and failed growth strategies. The company admitted last year that it underestimated the impact of theft on its business.

Store closures as a trend

The move is part of a broader downturn not just for Walgreens, but for other drugstore chains after years of growth. Walgreens announced 200 store closures in 2019 and added another 150 closures last year. Tim Wentworth (WBA's chief commercial officer) said the current pharmacy model is not sustainable.

Similarly, CVS $CVS, the largest pharmacy chain in the US, closed a total of 244 stores between 2018 and 2020 and announced plans to close another 900 stores in 2021. Rite Aid even declared bankruptcy last year and plans to close up to 500 stores.

Declining profits from drug sales

Analysts say drugstore chains are struggling with declining prescription drug reimbursements. Most of pharmacies' sales come from dispensing prescriptions, but profits from that business have been declining in recent years because of lower reimbursements and higher fees.

The drug prices that customers pay and the payments that pharmacies receive are mostly determined by pharmacy benefit managers (PBMs), who negotiate discounts from drug manufacturers for insurance companies. PBMs reduce reimbursements to increase their own profits, which adversely affects pharmacies. The pharmacy industry complains that PBMs have too much control over the industry and may push pharmacies to unsustainability. PBMs argue that they help keep drug prices down.

Changes in the retail industry

The front-end of pharmacies, where food and household items are sold, is becoming less profitable as customers increasingly buy these items online or at stores like Amazon, Walmart and Costco. The growth of chains like Dollar General is also negatively impacting pharmacy chains in rural areas.

Walgreens and other pharmacies are trying to attract customers by expanding primary care, adding doctors' offices to hundreds of stores. In 2021, Walgreens invested $5.2 billion in the VillageMD primary care network. However, VillageMD has not been profitable for Walgreens, leading to some store closures and plans to divest the company.

Impact on access to healthcare

While the planned store closures may help the companies' financial situation, they will likely worsen the availability of health care for patients. When pharmacies close, some patients have to travel further to obtain needed medications, which can lead to health risks, such as older adults who stop taking their medications. Finally, the loss of a pharmacy can mean significant hardship, especially for low-income households.

According to a study published in the Journal of the American Medical Association, approximately one in eight pharmacies closed between 2009 and 2015, disproportionately affecting independent pharmacies and low-income neighborhoods. The study found that pharmacies with a large proportion of customers on public insurance, those with lower reimbursements than private plans offer, and independent pharmacies were at the greatest risk of closure.

Disclaimer: You'll find plenty of inspiration on Bulios, but stock selection and portfolio construction is up to you, so always do a thorough analysis of your own.