In its fiscal third-quarter earnings report released in late June, pharmacy chain Walgreens announced plans to close a significant number of its 8,600 US locations. CEO Tim Wentworth revealed that only 75% of the chain’s stores are currently profitable, with the remaining 25% slated for closure by 2027.
This announcement highlights ongoing challenges within the retail pharmacy sector, which has recently seen similar struggles from competitors, including CVS’s planned closures and Rite Aid’s bankruptcy filing in October.
Neil Saunders, Managing Director of Global Data Retail, noted the shift in the role of pharmacy chains over the past two decades. “Pharmacy chains used to be central to communities, serving not only as places for prescriptions but also for general goods. This dynamic has changed significantly,” Saunders remarked.
Walgreens cited macroeconomic factors, such as a deteriorating consumer environment and pressures on pharmacy margins, as contributing to the store closures. The company also faces specific challenges with its retail operations. The front-of-store segment, which includes general merchandise and beauty products, has experienced a consistent decline, including a 4% year-over-year drop in the fiscal third quarter.
“The front-of-store offering, including the brands and pricing, is less appealing compared to other retail destinations,” Saunders added. “The products and prices are often not competitive.”
Walgreens relies heavily on its pharmacy revenue, which constitutes nearly 60% of total sales, to offset weaknesses in retail. However, this revenue stream is under pressure due to declining reimbursement rates from pharmacy benefit managers (PBMs). John Ransom, Managing Director at Raymond James, noted, “Pharmacy benefit manager reimbursement has been declining for years, creating a persistent headwind. CVS estimates this impact at approximately $1 billion annually, and Walgreens faces similar challenges.”
This shift underscores broader struggles in the retail pharmacy sector and the need for adaptation in response to evolving market conditions.
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