Pharmacy Giants CVS, Walgreens, and Rite Aid Set to Shutter Nearly 1,500 Stores

 

Pharmacy Giants CVS, Walgreens, and Rite Aid Set to Shutter Nearly 1,500 Stores

The nation's largest pharmacy chains are feeling the heat and they've resorted to a familiar prescription for their ailments: store closures.

Rite Aid, the third-largest pharmacy chain in the nation, is grappling with $3.3 billion in debt and pending opioid-related lawsuit settlements. In an attempt to weather these financial challenges, Rite Aid is poised to file for bankruptcy. As part of ongoing negotiations, they propose closing 400 to 500 of their 2,100 stores, though bondholders are advocating for even more closures. Last year, Rite Aid's retail pharmacy segment generated $17.8 billion in revenue and $288 million in adjusted EBITDA.

CVS, the second-largest pharmacy chain, recently concluded a strategic review and unveiled plans to shut down 900 stores between 2022 and 2024, having already closed 300 locations. GlobalData analyst Neil Saunders criticized the deteriorating condition of many CVS stores, citing issues like poor lighting, uninviting interiors, disorganized merchandise, and a limited product range. CVS generated $106.6 billion in retail revenue last year and operated nearly 8,000 stores, in addition to 2,000 pharmacies in retail chains, including Target.

Meanwhile, Walgreens, the largest pharmacy chain, including Duane Reade, with nearly 9,000 stores in its U.S. pharmacy segment, recorded $109.1 billion in sales. Walgreens announced plans to close 150 stores as a cost-saving measure, along with reducing operating hours in around 1,100 stores. CEO Rosalind Brewer acknowledged that economic headwinds, such as higher inflation and interest rates, reduced SNAP benefits and tax refunds, and economic uncertainty, were affecting their customers.

Although these three pharmacy giants have different reasons for shuttering stores, their common ailment is the high cost of operation coupled with a lack of differentiation to attract cost-conscious customers.

The retail pharmacy landscape lacks distinctiveness – one major drugstore seems indistinguishable from another. They stock similar items and employ similar retail strategies. Attempts to diversify their product offerings, such as introducing upscale beauty lines, put them in direct competition with Ulta and Sephora, known as consumers' primary beauty destinations. They also sell greeting cards, as do Hallmark and Walmart, and convenience store staples. Some drugstores carry basic grocery items, but they cannot compete with dedicated grocery stores.

This diversification has blurred the message to consumers, eroding their position as health and wellness partners. Independent pharmacies, on the other hand, prioritize being a dedicated drugstore and have seen their numbers grow over the years, outpacing the relatively stable count of chain pharmacies.

Consumers now prefer shopping for groceries and filling prescriptions simultaneously at grocery chains like H-E-B, Wegman's, Publix, and others, which scored higher in customer satisfaction than chain drugstores, according to the J.D. Power 2023 study. Mass merchants like Costco, Walmart, Sam's Club, and Target, with co-branded pharmacy services, also outperformed stand-alone chain drugstores.

Frequent theft concerns have led many chain drugstores to lock high-demand, easy-to-steal items behind glass, inadvertently dissuading customers and causing sales losses of 15% to 25%. This security measure sends a message that shopping in these stores might be risky.

Online retailers, notably Amazon, have seized the opportunity to offer prescription services, bypassing the need for customers to visit physical stores. Amazon's RxPass service, included in its Prime membership, allows customers to fill generic prescriptions for common health conditions for a flat $5 monthly fee with no delivery charge, further threatening the traditional pharmacy chains.

The impact of the COVID-19 pandemic highlighted the pharmacy chains' performance. While they have been expanding into healthcare services, such as CVS's MinuteClinics and Walgreens' Village Medical primary care, these efforts may not fully address the challenges facing their core retail operations.

The National Association of Chain Drug Stores reports that 90% of Americans live within five miles of a pharmacy. However, with multiple options available, consumers can now choose where to fill their prescriptions, and they increasingly find alternatives that offer a superior experience. This vulnerability underscores the need for leading drugstore chains to adapt to changing consumer preferences and the evolving retail landscape.