Walgreens, CVS, and Rite Aid are closing up or have already shut down thousands of brick-and-mortar stores in recent years, a trend being driven by a few different factors.
This past week, the CEO of Walgreens Boots Alliance, the holding company that owns the drug store Walgreens, announced the company is planning to shutter a large number of its roughly 8,600 stores across the United States. While CEO Tim Wentworth didn’t reveal how many, he told the Wall Street Journal it would represent a large share of the locations.
“We recognize where we are is a turnaround,” Wentworth said. “We recognize that we need to be focused on what are the parts of the business that we believe are contributing and have a future, and some of those need 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 up shop 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 U.S.
Cohan told the Washington Examiner that, at least for Walgreens and Rite Aid, a major problem has been corporate mismanagement. He noted Rite Aid’s bankruptcy in October and self-acknowledged problems with Walgreens.
Walgreens, for instance, recently fell flat on expectations for quarterly earnings and lowered its guidance for the full year. Wentworth said Walgreens is now reviewing many of its stores that aren’t turning a profit 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 provided to the Washington Examiner. “We’re finalizing an optimization program that we expect will include closing a significant portion of these locations over the next three years.”
But there is more to the general trend of drug store closures as well. One factor involves something called pharmacy benefit managers, or PBMs. Those PBMs act as intermediaries between insurance providers and drug manufacturers, including negotiating rebates.
“And they are paying lower amounts of money to the pharmacies, so they’re getting less money for the drugs. And so that’s a big thing,” Cohan said about one of the major profitability obstacles for stores.
Cohan said that Walgreens’s prices are also too high and that the company needs to expand its private-label products. Private-label products are goods produced by a third party and sold under the drug store’s brand name. They are often cheaper than national brand-name products and can drive traffic by undercutting the prices of the brand-name goods.
For instance, a bottle of Listerine’s Cool Mint mouthwash retails for $8.99 on the CVS website, but a comparable bottle under the CVS masthead goes for $6.29. Many such products tell the consumer to compare the ingredients in the private label product to the better-known brand’s offering.
“So there is a lot of consumers who are price sensitive and would prefer to buy those products, especially if they’re of compatible quality, and Walgreens doesn’t have enough of those private label products,” Cohan explained.
Making the pricing matter worse, inflation has increased in recent years by the most in generations. Since January 2021, inflation has surged 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 upended by massive changes in technology and shopping patterns. Amazon has come to the fore and has offered increasingly lower prices as well as very fast delivery options.
Cohan said drug stores tend to jam goods other than pharmaceuticals and medicine in the front of the store, things such as shampoo and snacks, in the hope they can charge a higher price for them.
But now Amazon and wholesale retailers like Costco have been able to attract more price-conscious customers away from drug stores with better deals. In many parts of the country, if a consumer wants something like body wash, he or she can order it and have it delivered on the same day through Amazon for cheaper than the local Walgreens.
“I think pharmacies need to recognize that there’s a lot of competition, and consumers have no problem not going into a pharmacy to buy something if they can get it for lower price and reasonably quickly,” Cohan said.
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Another problem facing retailers, and not just drug stores, is a rise in retail crime. In recent years, videos have proliferated on social media of individual thieves and hordes of criminals brazenly entering stores and stealing merchandise before fleeing, often with little resistance. The phenomenon grew during the pandemic.
Cohan said he isn’t quite sure just how big of an impact retail crime has had on stores closing, although he said it could be something that is still contributing to profitability problems at certain store locations.
