Walgreens And Rite Aid To Close Nearly 1,500 DrugsStores
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Walgreens And Rite Aid To Close Nearly 1,500 DrugsStores

Walgreens And Rite Aid To Close Nearly 1,500 DrugsStores

In the face of mounting challenges, the nation’s largest drugstore chains are resorting to a common strategy to remedy their woes: store closures.

Rite Aid, the third-largest pharmacy chain in the nation, finds itself grappling with a daunting $3.3 billion debt burden and impending settlements related to opioid lawsuits. Faced with these financial woes, the company is on the brink of bankruptcy. In an attempt to navigate these troubled waters, Rite Aid is considering closing between 400 to 500 of its 2,100 stores. However, bondholders are pushing for even more extensive closures. Last year, Rite Aid’s retail pharmacy segment raked in $17.8 billion in revenue and $288 million in adjusted EBITDA.

Meanwhile, CVS, the second-largest player in the industry, recently concluded a strategic review and unveiled plans to shutter 900 stores between 2022 and 2024, with 300 stores already closed.

Neil Saunders, an analyst at GlobalData, expressed concerns over the deteriorating condition of many drugstore locations, citing issues like poor lighting, uninspiring interiors, cluttered displays, and a limited product selection. These shortcomings have left these stores bereft of becoming customer destinations, relying mainly on customers’ necessity.

CVS reported $106.6 billion in retail revenue last year, operating nearly 8,000 stores alongside approximately 2,000 pharmacies within retail chains, including Target.

At the forefront of the industry, Walgreens, with its U.S. pharmacy division, operating close to 9,000 stores, generated $109.1 billion in sales. In a cost-cutting maneuver, Walgreens has announced plans to close 150 locations and reduce operating hours in approximately 1,100 stores.

CEO Rosalind Brewer acknowledged the economic headwinds affecting their customers during the latest earnings call, including higher inflation, rising interest rates, reduced SNAP benefits, tax refund fluctuations, and economic uncertainty.

Although each of the three drugstore chains has distinct reasons for downsizing, the prescription for their woes remains the same: the high operational cost of chain drugstores and the lack of compelling differentiation to attract cost-conscious consumers.

TheStreet columnist Thomas Lee cautioned that not all store closures should be viewed equally, pointing out that Walgreens, in particular, should be a cause for concern. He highlighted the fact that Walgreens primarily sells essential goods, which are considered relatively immune to inflation, making the worsening economic climate a matter of concern for the entire industry.

The Generic Shopping Experience In essence, shopping at one major drugstore hardly distinguishes itself from the experience at another. They offer similar products presented in a nearly identical manner. Attempts to differentiate through additional product offerings, such as upscale beauty lines, have only pitted them against strong competitors like Ulta and Sephora. Similarly, they stock greeting cards (also found at Hallmark and Walmart), snacks (akin to local convenience stores), and a limited selection of basic groceries, an area where supermarkets excel.

As chain drugstores diversified their offerings, they inadvertently confused consumers and undermined their identity as health and wellness partners. This created an opening for independent pharmacies, which prioritize their role as true drugstores.

According to a study by the Pharmaceutical Care Management Association, the number of independent pharmacies increased by 13% from 2010 to 2019, growing from 20,427 to 23,061, while the number of chain pharmacies remained static at around 39,000. The shop-local movement has significantly boosted the appeal of independent pharmacies, where personalized health advice and a sense of community prevail.

The Prescription Predicament Chain drugstores have evolved into destinations primarily for prescription fulfillment. CVS, for instance, attributes roughly 75% of its sales to pharmacy services, with only 25% coming from the front of the store. The front-of-store offerings are designed to entice prescription customers to make additional purchases.

However, customers increasingly find it more convenient to fill their prescriptions while grocery shopping, leading many grocery chains to incorporate pharmacy services. According to the J.D. Power 2023 study, supermarkets score significantly higher in customer satisfaction (704) compared to chain drugstores (659), based on a survey of over 12,000 customers.

Other mass merchants with pharmacy outposts, including Costco, Walmart, Sam’s Club, and Target (partnered with CVS), also scored well (702), reinforcing the notion that customers prefer filling prescriptions while shopping for groceries or other goods.

Shopping at a drugstore while waiting for a prescription doesn’t offer the same allure.

Security Concerns A looming threat over many chain drugstores is retail theft, which cost the industry $112.1 billion in losses last year, a 19% increase from 2021, according to a study by the National Retail Federation. Pharmacies are among the retailers with the highest average shrink rates.

In response to organized retail crime, drugstore chains placed high-demand, easily stolen items, such as health, beauty, personal care, and baby care products, behind locked cases. Unfortunately, this theft-prevention measure inadvertently hindered sales, with some sources indicating a 15% to 25% loss in revenue. Additionally, locked cases sent a concerning message to customers about in-store safety.

Embracing Disruption

Amidst these challenges, Amazon and other online retailers have stepped into the fray, offering prescription services without requiring customers to set foot in a physical store.

While the J.D. Power survey revealed that 18% of mail-order pharmacy customers are considering switching pharmacies in the coming year, customer satisfaction with mail-order options increased by nine points compared to the previous year, reaching an average score of 684, outperforming chain drugstores at 659.

Recognizing their vulnerability, Amazon launched its RxPass service earlier this year, available to Prime members. This service allows members to fill generic prescriptions for over 80 common health conditions for a flat $5 monthly fee, with no delivery charge. Amazon also offers a full-service pharmacy, including PillPack.

Analyst Tom Forte from D.A. Davidson believes that Amazon will indeed capture market share, with CVS and Walgreens ripe for disruption. Research and Markets predicts that online pharmacy revenues will grow at a CAGR of 19% from 2020 through 2026.

The Covid Wake-Up Call

During the pandemic, drugstore chains had a golden opportunity to demonstrate their value to customers. However, their ongoing struggles suggest they may have missed the chance to establish a unique place in their customers’ hearts and minds.

To adapt, these chains are increasingly focusing on healthcare services, such as CVS’s MinuteClinics and online CVS Health Virtual Primary Care Service, as well as Walgreens’ introduction of Village Medical primary care. While these efforts may help turn the tide, they do not fully address the other challenges plaguing their core retail operations.

The National Association of Chain Drug Stores reports that 90% of Americans live within five miles of a pharmacy, suggesting that losing around 1,500 chain store locations out of 39,000 will likely not significantly alter this statistic. However, with numerous alternatives available, customers can be discerning about where they choose to fill their prescriptions. The fact that superior options exist outside of the chain stores underscores the vulnerability of these leading drugstore chains.

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