The nation's largest drugstore retailers are turning to real estate cutbacks as a prescription to help deal with the fallout from the added costs and other issues hitting the industry.
A challenging mix of shifting consumer habits, lower reimbursement rates and added competition from rivals such as Amazon or Walmart have left pharmacies scrambling to stay afloat, a struggle spotlighted by the news that Walgreens Boots Alliance plans to scrutinize more than 2,000 of its locations to determine whether they're worth operating or getting rid of altogether.
"The severity and duration of the challenges in the operating environment have only added urgency to our strategic and operational review, and we are addressing them directly," Walgreens CEO Tim Wentworth told analysts of the company's restructuring plan. "We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently."
The looming closings land as pharmacy chains across the country are facing myriad burdens in terms of maintaining their longstanding hold on the retail market. Philadelphia-based drugstore giant Rite Aid filed for bankruptcy protection in October last year, a decision that has so far resulted in closing hundreds of locations and rejecting scores of leases as it worked to weed out underperforming outposts.
Other chains such as CVS Health have steadily downsized their real estate holdings for the past several years after failing to respond to customers that no longer picked up last-minute items at their brick-and-mortar locations or instead looked to shop online.
"They used to be a key destination for convenient purchases of things like snacks and household essentials," Neil Saunders, a managing director at GlobalData, told CoStar News. "This position has been undermined by the expansion of dollar chains and fast-delivery e-commerce."
About 3,000 fewer drugstores were open for business at the start of this year compared with the same time in 2019, according to an analysis of 15 pharmacy chains by RetailStat.
Losing Market Share
Some of these retailers have blamed their current financial woes on issues such as retail shrink — an industry term for inventory loss due to theft, damage or errors — as well as shifting habits among shoppers and dwindling profits from filling prescriptions, once a cash cow for companies such as Walgreens that have struggled to pivot into more lucrative areas of the healthcare industry.
In their quest to take on a larger role as a primary-care provider, CVS in 2018 acquired health insurer Aetna, while Walgreens took a majority stake in primary care network VillageMD, a share it is now looking to sell.
Walgreens, based in Deerfield, Illinois, is taking "a multifactored disciplined way of looking at where to close," the company's Retail and Chief Customer Officer Tracey Brown told analysts on the company's earnings call Thursday. "Yes, shrink is an issue in some stores, but we have our eyes on our high-shrink stores all the time. The [other factor] is consumer behavior, consumer trends and where you look at the market and where our stores are located in terms of the markets that are growing versus the markets that are declining."
The pharmacy chain's review will scrutinize about one quarter of its more than 8,600 locations across the United States. Of that real estate portfolio, company executives said, only about 75% contribute to all of Walgreens' adjusted operating income that fell by more than 35% for the second quarter of the year.
It may take a while for financial markets to determine whether Walgreens’ strategy of closing nonprofitable stores and reducing its majority stake in VillageMD will turn the chain’s fortunes around, Edward Jones analyst John Boylan said in a note to investors.
“It is difficult to discern how these potential changes may impact the company's financial prospects over the next few years as we await more details,” Boylan said. “Having said that, we believe Walgreens is doing the right things, but it will take time for its strategy to unfold, and in the meantime the company faces a tentative and changing consumer.”
The majority of Walgreens' retail footprint, about 95%, is leased through long-term arrangements while the company owns the remaining 5%, according to information filed with the Securities and Exchange Commission.
For CVS, the company has recently said it is addressing the many challenges it faces and that its move to permanently close stores will represent about 10% of its total retail footprint. About 85% of Americans will still live within 10 miles of a CVS pharmacy after the scaling back ends later this year, according to the company.
Even with the closings, retail analysts such as Saunders say the struggles facing Walgreens and other drugstore chains aren't expected to dissolve anytime soon.
"Prices in drugstores are not particularly competitive, and in the current environment, that's pushing more shoppers to cheaper alternatives like mass merchants," Saunders said. What's more, "drugstores do themselves no favors with poor selling environments that include uninspiring and depressing interiors, locking up products and poor customer service. Unless drugstores address these issues by creating more compelling retail propositions, they will continue to lose market share."