Why Walgreens, CVS and Rite Aid are closing thousands of drug stores across America

New York (CNN) — Walgreens said Thursday that it plans to close a “significant” number of its roughly 8,600 stores in the United States. Around 25% of Walgreens’ stores aren’t profitable, and the chain will look to close stores that are right by one another or struggling to hold down theft, CEO Tim Wentworth said in an interview with the Wall Street Journal.

Walgreens and other retailers have been hit by shoplifting and resorted to locking up items or closing high-theft stores since the pandemic, but Walgreens’ problems are much deeper, including competition and failed growth strategies. Walgreens admitted last year it “cried too much” over the business impact of shoplifting.

The latest closures are part of a larger downturn, not just for Walgreens, but for other drug store chains, too, after years of expansion. Walgreens said in 2019 it would close 200 stores and last year announced an additional 150 store closures.

“We are at a point where the current pharmacy model is not sustainable,” Wentworth said.

CVS, the largest US chain, closed 244 stores between 2018 and 2020. In 2021, it announced plans to close 900 stores. And Rite Aid filed for bankruptcy last year and will close up to 500 stores.

Shifting trends

Drug store chains are struggling because of falling 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 because of lower reimbursement rates for prescription drugs and higher fees.

The prices customers pay for drugs and the payments pharmacies receive are largely determined by pharmacy benefit managers, known as PBMs, which negotiate rebates from drug manufacturers to insurers. PBMs have been cutting reimbursement rates to boost their own profits, said Elizabeth Anderson, an analyst at Evercore IRI.

The pharmacy industry has complained that PBMs have too much control over the industry 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,” she said.

At the same time, the rest of the store that’s supposed to pad the profit margins aren’t doing it so much anymore.

The front end of drug stores, where they sell 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.

Walgreens, CVS and other drug stores have moved into primary care to try to lure in shoppers, adding doctors’ offices to hundreds of stores. 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. It has been closing VillageMD locations and said Thursday 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.

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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