Walgreens Boots Alliance, one of the largest pharmacy chains in the United States, has announced plans to close up to 25% of its approximately 8,600 U.S. stores over the next three years. This decision comes as the company grapples with a challenging business environment marked by inflation, changing consumer behaviors, and industry-specific hurdles.
CEO Tim Wentworth, who took the helm in 2023, revealed the closure plans during a recent earnings call with investors. He emphasized that the current pharmacy model is unsustainable and that significant changes are necessary to turn around the struggling business. Wentworth noted that 75% of Walgreens’ U.S. stores account for all of its adjusted operating income, prompting the company to scrutinize the remaining 25% for potential closures. This could result in approximately 2,150 store closures.
“Changes are imminent,” Wentworth stated, although he acknowledged that some specifics are still being finalized. He added that while a number of underperforming stores will definitely be shuttered, other locations might be restructured to achieve profitability.
Inflation has significantly impacted Walgreens’ business, with consumers becoming increasingly selective and price-sensitive. Analysts have pointed out that Walgreens’ issues are not solely due to external factors. Neil Saunders, managing director of GlobalData, criticized the chain for its lackluster proposition and uncompetitive prices compared to mass merchants. He argued that selective promotions are insufficient and that a more fundamental overhaul of the retail offer is needed.
In response to these challenges, Walgreens recently cut prices on 1,300 products, following the lead of other retailers like Target. Despite these efforts, the company does not anticipate large-scale layoffs, as it plans to transfer most employees from closing stores to other locations.
“You don’t need to have the number of stores we have today,” Wentworth said, expressing confidence that Walgreens will retain most of its prescription-filling business from the soon-to-be-closed locations. He added that reducing capacity could be beneficial from a payer standpoint, as the company can serve payers effectively with a smaller footprint.
The announcement of store closures came after Walgreens reported worse-than-expected third-quarter earnings, leading to a 22% drop in its stock price. The company also lowered its full-year profit outlook, citing persistent pressures on U.S. consumers and eroding pharmacy margins.
Walgreens is not alone in facing difficulties in the U.S. retail pharmacy sector. Rite Aid, for instance, recently announced plans to close 154 stores nationwide as part of its bankruptcy filing. Pharmacies across the country are struggling with low reimbursement rates for pharmacy care and low dispensing fees for Medicaid enrollees. Additionally, the end of the pandemic-era Medicaid enrollment boom has resulted in millions of people losing coverage, further impacting the pharmacy industry.
Walgreens and other pharmacies often lose money on brand-name drugs due to agreements with pharmacy benefit managers (PBMs), who negotiate prices with drug manufacturers and set reimbursement rates for pharmacies. Wentworth acknowledged that the company’s playbook is outdated and that they are working with PBM partners to make necessary changes.
Labor issues have also plagued the pharmacy industry, with pharmacists at Walgreens and CVS Health walking off their jobs last year to protest longer hours and insufficient staffing.
In an effort to revitalize its business, Walgreens has been making strategic changes. The company has removed eight national brands from its stores, replacing them with similar items produced by its house brands or preferred partners. This move is part of a broader strategy to improve profitability and better serve customers.
Despite the challenges, Wentworth remains optimistic about the future of retail pharmacy and Walgreens’ role in it. He believes that human-to-human interaction is essential in healthcare and that it will continue to be a core foundation of Walgreens’ business.
The company has also been closing VillageMD primary care clinics that it had been installing next to its stores. These clinics were part of an aggressive expansion under previous CEO Rosalind Brewer, but Walgreens has since reversed course, closing around 160 of the clinics. Wentworth noted that these clinics are now on a clearer path to profitability.
Walgreens’ financial struggles have been exacerbated by declining profits from filling prescriptions, lower reimbursement rates, and new competition from Amazon. The front end of drugstores, where they sell snacks and household staples, also faces pressure from larger competitors like Target and dollar stores.
The company reported $344 million in earnings for its fiscal third quarter, with adjusted results totaling 63 cents per share. Revenue rose nearly 3% to $36.35 billion, but these results fell short of analysts’ expectations. Walgreens has now lowered its adjusted earnings forecast for the fiscal year, which ends in August.
Despite the disappointing financial results, Wentworth remains committed to turning the company around. He emphasized that the company is actively discussing fair payment with PBM and supplier partners and is working to grow other parts of its business, such as specialty pharmacy.
As Walgreens embarks on this significant restructuring effort, the company aims to adapt to the evolving retail pharmacy landscape and better meet the needs of its customers.
Source: CBS News, CNN
