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

Walgreens announced Thursday that it plans to close a “significant” number of its roughly 8,600 stores in the United States. About 25 percent of Walgreens stores are not profitable, and the chain will look to close stores that are right next to each other or have problems curbing theft, CEO Tim Wentworth said in an interview with the Wall Street Journal.

Walgreens and other retailers have been affected by shoplifting and have begun locking up merchandise or closing stores with high theft rates since the pandemic. But Walgreens' problems run much deeper and include competition and failed growth strategies. Walgreens admitted last year that it had “cried too much” because shoplifting had business consequences.

The recent closures are part of a larger downturn affecting not only Walgreens but other drugstore chains after years of expansion. Walgreens said it would close 200 stores in 2019 and announced last year that it would close another 150 stores.

“We have reached a point where the current pharmacy model is no longer sustainable,” Wentworth said.

CVS, the largest U.S. 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.

Changing trends

According to industry analysts, drugstore chains are struggling with declining reimbursement rates for prescription drugs.

Pharmacies make the majority of their revenue from dispensing prescription drugs, but their profits from this business have declined in recent years due to lower prescription drug reimbursement rates and higher fees.

The prices customers pay for drugs and the payments pharmacies receive are largely determined by pharmacy benefit managers (PBMs), who negotiate rebates between drugmakers and insurers. PBMs have been cutting reimbursement rates to boost their own profits, says Elizabeth Anderson, an analyst at Evercore IRI.

The pharmaceutical industry complains that PBMs have too much control over the industry and can squeeze pharmacies. The PBMs argue that by negotiating with drug manufacturers, they help keep drug prices low.

“If reimbursement rates start to decline and pharmacies cannot compensate for this with other growth, it will negatively impact their profitability,” she said.

At the same time, the other businesses that should actually improve profit margins are no longer doing so to the same extent.

The front end of drugstores, where snacks and household goods are sold, has become less profitable as customers increasingly buy those items online at Amazon and at major chains such as Walmart and Costco, both of which have grown in recent years. Dollar General's growth has also hurt drugstore chains in rural areas.

“The front end is suffering like other retailers,” Anderson said.

Walgreens, CVS and other drugstores have moved into primary care to attract customers, adding doctor's offices to hundreds of stores. Walgreens acquired a $5.2 billion stake in VillageMD, a primary care network, in 2021.

But VillageMD was not profitable for Walgreens, and Walgreens was trying to cut costs. The company has closed VillageMD stores and announced Thursday that it would divest from the company.

Help the company, harm the consumer

While Walgreens' upcoming closures could improve the company's bottom line, they will likely have a negative impact on access to health care.

When pharmacies close, some patients have to travel further to get the medications they need. Researchers have found that pharmacy closures lead to health risks, such as older adults not taking their medications.

The loss of a pharmacy can leave a gap, especially for lower-income households.

About one in eight pharmacies closed between 2009 and 2015, with independent pharmacies and low-income neighborhoods disproportionately affected, according to a study published in the Journal of the American Medical Association.

The study found that pharmacies with a large customer base in statutory health insurance, as they have lower reimbursement rates than private health insurers, and independent pharmacies are at greatest risk of closure.

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