What is going on with America's drug stores?
Walgreens and other chains overexpanded during the 1990s and 2000s to drive out competitors and draw more customers. They are now shutting down because of shifting consumer habits, competition and changes in the pharmacy industry.
Around 25% of Walgreens' stores aren't profitable, CEO Tim Wentworth said in an interview with the Wall Street Journal in June, and the chain will look to close stores that are right by one another or struggling to hold down theft.
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Walgreens and other retailers say they have been hit by shoplifting since the pandemic, and resorted to locking up items or closing high-theft stores. But shoplifting alone doesn't explain Walgreens' problems, and the company subsequently admitted last year it "cried too much" over the impact of the would-be scourge. Meanwhile, increased competition and failed growth strategies, like acquiring primary care providers, continue to have reverberating impacts on drug stores.
"We are at a point where the current pharmacy model is not sustainable," Wentworth said in June.
CVS, the largest US chain, closed 244 stores between 2018 and 2020. In 2021, it announced plans to close an additional 900 stores. Earlier this month, CVS said it planned to cut about 2,900 jobs corporate jobs.
And Rite Aid filed for bankruptcy last year, closing up to 500 stores.
Shifting trends
Drug store chains are struggling because of lower reimbursement rates for prescription drugs, according to analysts who cover the industry.
The majority of drugstores' sales comes from filling prescriptions. But their profits from that business have dropped in recent years as reimbursement rates for prescription drugs fall while fees rise.
The prices customers pay for drugs and the payments pharmacies receive are largely determined by companies known as pharmacy benefit managers, or PBMs, which negotiate rebates from drug manufacturers to insurers. PBMs have been cutting reimbursement rates to boost their own profits, Elizabeth Anderson, an analyst at Evercore IRI, previously told CNN.
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The pharmacy industry has complained that PBMs have too much control and can squeeze pharmacies. PBMs argue that they help keep drug prices down by negotiating with drug makers.
"If reimbursement rates start to come down and drug stores can't offset it with other growth, then it has a negative impact on their profitability," Anderson said.
At the same time, the rest of the store is struggling.
The front end of drug stores, which sells snacks and household staples, have become less profitable as shoppers buy more of these items online from Amazon and at big-box chains such as Walmart and Costco. Both have grown in recent years. Dollar General's growth has also hurt drug store chains in rural areas.
"The front end is suffering like other retailers," Anderson said.
To try to draw customers, Walgreens, CVS and other drug stores have moved into primary care, adding doctors' offices to hundreds of stores. For example, Walgreens took a $5.2 billion stake in VillageMD, a primary care network, in 2021.
But VIllageMD has not been profitable for Walgreens, and Walgreens has tried to cut costs. The chain has been closing VillageMD locations and said over the summer it will divest from the company.
Helping the company, hurting the consumer
Walgreens' coming closures might help the company's bottom line, but are likely to hurt access to health care.
When pharmacies close, some patients have to travel farther to get the medications they need. Researchers find pharmacy closures lead to health risks such as older adults failing to take medication.
The loss of a retail pharmacy can leave a void, especially for lower-income households.
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Roughly one out of every eight pharmacies closed between 2009 and 2015, which disproportionately affected independent pharmacies and low-income neighborhoods, according to a study published in the Journal of the American Medical Association.
The study found that pharmacies at greatest risk for closures are those with a large customer base on public insurance, which have lower reimbursement rates than private plans, as well as independent pharmacies.
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