Why pharmacy chains like Walgreens and CVS are shuttering locations

In its fiscal third-quarter earnings report to investors in late June, pharmacy chain Walgreens announced plans to close a “significant” number of its 8,600 U.S. stores.

CEO Tim Wentworth said only 75% of the chain’s locations were making a profit, and that the other one-quarter of them faced the chopping block by 2027.

This was just the latest sign of weakness out of the retail pharmacy space following a slew of CVS closures through the end of this year and Rite Aid filing for bankruptcy in October.

“Pharmacy chains used to really be the heart of communities,” said GlobalData retail managing director Neil Saunders. “They’re the place you went for prescriptions, but they’re also the place that you went to buy general goods. And really over the past 20 or so years, that has changed dramatically.”

While citing macro issues, like a worsening consumer environment and pressure on pharmacy margins, as cause for the closures, Walgreens is also grappling with its own set of issues.

The retail side of the business — or front of store — continues to see declines quarter after quarter, with the most recent year-over-year decline of 4% in the fiscal third quarter.

“The front of store … where the general merchandise is, the beauty products, isn’t that good,” Saunders said. “The brands that they have aren’t very interesting. The prices are often much higher than other destinations.”

Walgreens leans heavily on its back-of-store pharmacy revenue to make up for weakness in retail, an arena which itself has struggled with shrinking margins. While representing nearly 60% of Walgreens’ total sales, pharmacy revenue has largely fallen victim to shrinking reimbursement rates with the increasing importance of pharmacy benefit managers, or PBMs.

“Pharmacy benefit manager reimbursement has been in decline for years, and so every year they start with a headwind on reimbursement,” said Raymond James managing director John Ransom. “CVS has sized this at about a billion dollars a year, and CVS and Walgreens have kind of similar-sized pharmacies.”

Watch the video above to learn more about what is leading U.S. pharmacy chains to close thousands of stores.