The closures of CVS, Rite Aid and Walgreens across the U.S. in recent years do not come as a surprise to industry experts, who anticipate more closures as the industry adjusts and adapts.
“We’ve been watching this car crash in slow motion for years,” George Hill, managing director and senior equity research analyst at Deutsche Bank, told FOX Business.
CVS in 2021 announced plans to close 900 locations over three years, citing factors such as population shifts, consumer purchasing patterns, store density in communities, access to pharmacy services and future health needs. Two years later, Rite Aid filed for bankruptcy and quickly embarked on a store optimization plan that involved the immediate closure of 154 locations.
This week, Walgreens became the latest to announce that it will close about 1,200 unprofitable stores over the next three years.
For more than a decade, Hill said the industry has watched companies that manage prescription benefits – also known as pharmacy benefit managers, or PBMs – merge, ultimately giving them greater buying power in the prescription drug market.
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Hill explained that there is a difference in power between those who buy prescription drugs, such as PBMs, and the pharmacies that sell them.
PBMs operate in a competitive market and need to save money for their clients, including insurance companies and employers, but to achieve these savings, “they try to keep down the prices of brand-name drug manufacturers and they try to keep down the prices of retail pharmacies,” Hill said. adding that this practice has been going on for a decade and “has gotten us into an uncomfortable position.”
CVS, WALGREENS, RITE AID STORE CLOSURES: BRICK AND MORTAR DECLINE?
Given the lack of differentiation between CVS, Rite Aid and Walgreens, these companies were also “forced to accept the prices offered by payers… which has just led to a negative pricing cycle that has continued for over a year.” decades,” Hill continued.
At the same time, the pharmaceutical industry is witnessing continued growth and increased capacity in the pharmaceutical space, which Hill says “isn’t that unreasonable.”
Hill argued that “the industry appears to be growing rapidly and its location is faster than the growth of pharmacy needs.”
When combined with “the specific mistakes the company has made in terms of how they spend cash and how they spend cash and how they grow and build, this puts the company in the same position as CVS, Walgreens and Rite Aid,” he added.
Walgreens told FOX Business that its retail pharmacy business is core to its business strategy going forward, but “increasing regulatory and reimbursement pressures are weighing on our ability to cover costs associated with rent, staffing and supply needs.”
The company said it will do everything in its power to improve store performance, but when closures occur, the company “will work closely with community stakeholders to minimize customer disruption” and move most of its team members to other locations.
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Rite Aid, which is now out of bankruptcy proceedings, said its Chapter 11 filing was part of a restructuring to “significantly reduce the Company’s debt, increase its financial flexibility and enable it to execute important initiatives.” It says the process will involve ongoing optimization of the store footprint.
“With the support of our lenders, we expect to strengthen our financial foundation, advance our transformation initiatives and accelerate the execution of our turnaround strategy,” Rite Aid CEO Jeffrey Stein said in the company’s bankruptcy announcement in October 2023. “By doing so, , we will be better able to deliver the health products and services that customers and their families rely on – now and in the future.”
Rite Aid did not return FOX Business’ request for comment.
CVS told FOX Business that it had “closed the locations strategically – as announced three years ago – not as a reaction to industry pressure.” CVS said that in addition to closing 900 stores, they also opened 100 new stores during the same time.
Hill doesn’t think the pharmacy model is outdated. In fact, Hill said retail pharmacy locations will always be important for fast prescription turnover.
Heart | Security | Final | Change | Change % |
---|---|---|---|---|
CV | CVS HEALTH CORP. | 63.67 | -1.35 |
-2.08% |
WBA | WALGREENS SHOES ALLIANCE INC. | 10.66 | -0.41 |
-3.70% |
“The example I always use when talking to investors is that I have an 8-year-old daughter. If he gets an ear infection, I don’t wait for Amazon to show up with a prescription,” he said.
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Today, the consumer basket has changed. Previously, when consumers came in to fill a prescription, they could pick up other health and beauty items. Now, Hill says more people are buying the products from Amazon and other retailers.
There are about 60,000 retail pharmacies in the U.S., Hill said. The industry may decide that the number should be closer to 35,000 or 40,000.
“I think stores probably need to take a closer look at what they have in their inventory… is it profitable and what makes sense to carry,” he said.