The abundance of Walgreens and CVS Well being shops makes them handy for each time Shriya Raghavan, a analysis affiliate based mostly in Philadelphia, wants to select up requirements like gum, deodorant and cleaning soap.
However she mentioned she typically has to attend for workers to unlock cupboards or stand in prolonged strains to select up prescriptions as pharmacists juggle duties.
These are simply a few of the methods Walgreens and CVS are falling out of favor with shoppers, in a pattern that has hit their income and inventory costs and compelled them to rethink their methods. They’re signs of deeper points plaguing retail pharmacy chains, which pivoted from years of retailer expansions to shuttering lots of of areas throughout the U.S. to shore up income.
Shares of each CVS and Walgreens have tumbled within the final 10 years, however CVS has fared higher among the many two.
Among the many largest issues for the chains, reimbursement charges for pharmaceuticals have fallen. Inflation, softer client spending, theft, and competitors from Amazon and grocery shops are additionally making it tough for drugstores to show a revenue on the entrance of the shop, the place they promote all the things from pantry staples to make-up and cleansing provides.
There’s additionally widespread burnout amongst pharmacy workers, lots of whom complain about understaffing and growing workloads.
Lots of these points aren’t new. Whereas CVS and Walgreens acquired a brief enhance from Covid vaccinations and take a look at gross sales throughout the peak of the pandemic, they now face a harsh actuality: the retail pharmacy mannequin could also be damaged.
“As issues have began to normalize, we’re reverting again to the challenges that the retail pharmacy trade had confronted even earlier than Covid,” Jefferies analyst Brian Tanquilut advised CNBC. “I believe most of those pharmacies are realizing that essentially, their companies have probably not modified.”
The outside of a CVS pharmacy retailer is seen on August 07, 2024 in Austin, Texas.
Brandon Bell | Getty Photos
Falling retail pharmacy revenue margins solely add to the woes at each Walgreens and CVS.
Whereas Walgreens struggles with its push into main care, CVS’ backside line is getting battered by increased medical prices in its insurance coverage enterprise. CVS earlier this month slashed its full-year revenue outlook for the third consecutive quarter and introduced $2 billion in new value cuts over a number of years as these increased medical prices squeeze the insurance coverage trade.
It is not simply these two chains: Ceremony Help, as soon as a viable competitor, declared chapter final yr and is closing lots of of retailer areas because it restructures.
Wall Avenue hasn’t been pleased. Shares of Walgreens are down practically 60% this yr and 80% over the past decade. CVS’ inventory is down nearly 30% each for this yr and the final 10 years. In the meantime, Ceremony Help’s frequent inventory was delisted from the New York Inventory Change in October.
Nonetheless, retail pharmacy chains stay an vital fixture of the U.S. health-care system that tens of thousands and thousands of People depend on. They could simply must reinvent themselves.
“The retail pharmacy trade goes via a interval of soul-searching, attempting to grasp the perfect mannequin to achieve the patron,” mentioned GlobalData retail managing director Neil Saunders. “Shopper habits have modified, a few of the economics of working drugstores and pharmacies have modified and the retailers within the sector are actually having to reappraise how they do enterprise to keep up profitability and preserve a viable enterprise mannequin.”
Listed below are the primary elements difficult the pharmacy enterprise, and what CVS and Walgreens are doing to adapt.
Falling pharmacy reimbursement charges
A lot of the ache for retail pharmacies comes from decrease prescription drug reimbursement charges.
Pharmacies usually purchase their drugs from a distributor after which get reimbursed by pharmacy profit managers, or PBMs. The highly effective drug provide middlemen additionally negotiate reductions with producers on behalf of insurers and create lists of medicines lined by well being plans.
The three largest PBMs – CVS Well being’s Caremark, UnitedHealth Group‘s Optum Rx and Cigna‘s Specific Scripts – deal with nearly 80% of all prescriptions within the U.S.
Pharmacies have accused PBMs of setting decrease reimbursement charges, which, in some circumstances, can imply pharmacies receives a commission lower than the price of shopping for and dishing out a prescription. These middlemen are additionally accused of providing “take it or depart it” contracts when negotiating reimbursements with pharmacies, successfully forcing them to simply accept decrease charges to allow them to preserve entry to sufferers lined by PBMs.
“There is no leverage. There is no negotiating energy on the aspect of the retail pharmacies,” Tanquilut advised CNBC. “So we have seen a constant strain on margins on the pharmacy aspect over the past a number of years to the purpose the place that is an enormous problem.”
The working margin for Walgreens’ U.S. retail pharmacy unit was -5% final yr, down from 3.9% in 2019 and 4.4% in 2015. In the meantime, CVS’ working margin for its pharmacy and client wellness enterprise was 4.6% final yr, up from 3.3% in 2022 however down from 8.5% in 2019 and 9.9% in 2015.
CVS has a slight aggressive benefit over Walgreens because it has its personal PBM, and the margin strain from Caremark is probably going “not as extreme” as it’s for different PBMs, Tanquilut mentioned.
CVS in December additionally launched a brand new pharmacy reimbursement mannequin referred to as CostVantage, which is able to launch in the beginning of subsequent yr and use what the corporate calls a “clear” formulation to find out a drugs’s value. A CVS spokesperson mentioned it can present extra readability and predictability for shoppers.
However some analysts advised CNBC that it is nonetheless unclear how efficient that new mannequin will likely be.
In the meantime, Saunders mentioned extra shoppers are utilizing on-line pharmacy providers resembling PillPack, a subsidiary of Amazon Pharmacy, to get their prescription drugs. He famous that on-line pharmacy achievement stays “pretty small within the scheme of issues,” however mentioned it’s “undoubtedly rising and placing just a little little bit of strain on a few of the conventional pharmacy chains.”
Entrance-of-store woes
A Walgreens truck parks close to a CVS Pharmacy on March 10, 2023 in New York Metropolis.
Leonardo Munoz | Corbis Information | Getty Photos
E-commerce rivals, discounters and big-box retailers are a good larger menace to the retail aspect of Walgreens’ and CVS’ pharmacy companies.
As competitors mounts, the chains’ on-line retail presence has additionally lagged behind these of Amazon and different retailers like Walmart and Goal, in response to Leerink Companions analyst Michael Cherny.
“It wasn’t as possible that a person pre-Covid, and even the early days of Covid, would suppose at first of going to CVS.com or Walgreens.com for procuring,” Cherny mentioned. “[CVS and Walgreens] have been behind on e-commerce.”
Inflation can also be squeezing shoppers, who’ve develop into extra prudent with their purchases. A budget-conscious shopper is extra more likely to store at retailers together with Walmart, a greenback retailer or Costco, regardless of the comfort the retail pharmacies provide, Cherny famous.
Brittainy Lynn, a 38-year-old freelancer based mostly in Austin, Texas, mentioned it “looks like costs are actually excessive” at Walgreens and CVS in contrast with different shops.
“It isn’t my first alternative,” Lynn advised CNBC. “Walmart or Goal is usually the place I discover issues I would like for the most cost effective value. I do frequent Greenback Tree as effectively, however probably not for necessities.”
Walgreens and CVS have blamed weaker retail gross sales partly on shoppers watching their spending.
Earlier this month, CVS mentioned same-store gross sales on the entrance of the shop have been down roughly 4% throughout the second quarter from the identical interval a yr in the past, which displays a “normal softening of client demand.”
Walgreens in June mentioned same-store retail gross sales decreased 2.3% throughout the fiscal third quarter in contrast with the year-earlier interval. The corporate mentioned its U.S. retail pharmacy enterprise confronted “important challenges” in a “worse-than-expected client atmosphere.”
Walgreens and CVS have each elevated their concentrate on their private-label merchandise to lure in customers who’ve traded down from nationwide manufacturers to beat inflation.
In a press release, a Walgreens spokesperson mentioned the corporate is seeing “sturdy success amongst our personal model merchandise,” with model penetration “rising fairly properly.” They added that the corporate is increasing its number of merchandise, including 37 new gadgets alone within the second quarter. That “completely enhances client concentrate on worth,” the spokesperson mentioned.
Walgreens extra uncovered to retail pharmacy strain
Whereas the foremost chains face lots of the identical hurdles, Walgreens is probably going extra uncovered to the pressures on its retail pharmacy enterprise than CVS is, Evercore ISI analyst Elizabeth Anderson advised CNBC.
CVS operates a PBM and the nation’s third-largest well being insurer, Aetna, which might assist offset points on the retail pharmacy aspect.
Walgreens and VillageMD
Supply: Walgreens
CVS’ retail pharmacy unit was the second-biggest contributor to gross sales final yr, raking in $116.76 billion. The corporate’s well being providers section, which operates Caremark and primary-care supplier Oak Avenue Well being, booked practically $187 billion in gross sales.
In the meantime, Walgreens will get the overwhelming majority of its income from its U.S. retail pharmacies. That enterprise unit took in additional than $109 billion final yr, dwarfing the $21.83 billion from its worldwide section and practically $1.8 billion from its health-care unit.
Walgreens’ worldwide section operates greater than 3,000 retail shops overseas, together with areas of U.Ok.-based well being and sweetness retailer Boots. The corporate’s health-care unit presents main care, pressing care and post-acute care providers, in addition to a specialty pharmacy, amongst different providers.
At the same time as Walgreens tries to diversify its enterprise, the corporate has been “taking part in catch-up” with CVS within the health-care house, in response to Jeffries’ Tanquilut.
Retail giants and pharmacies have been pushing to ship medical care on to sufferers, which might assist them seize a bigger slice of the greater than $4 trillion U.S. health-care trade.
However a number of firms, together with Amazon, Walmart, CVS and Walgreens, are feeling the ache from bets on main care. That is as a result of constructing clinics requires a whole lot of capital, and the areas usually lose cash for a number of years earlier than changing into worthwhile, in response to Tanquilut.
In contrast to CVS, Walgreens might probably exit that market altogether. The corporate mentioned in a securities submitting final week it’s contemplating a sale of its primary-care supplier VillageMD.
Walgreens invested $1 billion in VillageMD in 2020, then one other $5.2 billion a yr later to develop into its majority proprietor. However Walgreens began closing clinic areas final yr. In March, the corporate recorded a hefty practically $6 billion cost associated to the decline in worth of its funding in VillageMD.
What’s the way forward for the retail pharmacy?
Retail pharmacies possible will not disappear quickly, particularly because the American inhabitants ages and extra folks want to select up prescriptions, Evercore’s Anderson mentioned.
However she mentioned they might not must “exist of their present type.” That would probably imply growing their on-line presence, now not promoting sure merchandise like greeting playing cards and shrinking retailer footprints.
“I believe there will be some experimentation with fashions there. It is extra of a query of what the brand new retail pharmacy mannequin will seem like,” Anderson advised CNBC.
Walgreens has opened roughly 100 smaller-format shops, which have fewer front-of-store gadgets and over-the-counter medicines and have the corporate’s branded merchandise, a spokesperson mentioned in a press release. Walgreens plans so as to add extra “mini drugstores” this yr.
Walgreens “mini-drugstores” being examined throughout the U.S.
Courtesy: Walgreens
The corporate can also be piloting a Chicago retailer location that focuses on “comfort and pace via digital pickup, pharmacy and grab-and-go options,” Walgreens mentioned on its web site. Most prescription or retail orders might be positioned and stuffed at a counter, which might deter theft.
One other location in Aubrey, Texas, strikes the pharmacy to the entrance of the shop in a departure from the normal mannequin.
The corporate’s web site mentioned it doesn’t plan to roll out extra pilot shops till “learnings about what works and what does not are higher understood.”
In the meantime, a CVS spokesperson mentioned the corporate is “innovating to satisfy our prospects’ and sufferers’ various wants.” The spokesperson pointed to the corporate’s private-label manufacturers, assortment of nationwide manufacturers, and loyalty program that gives reductions and advantages for sufferers.
The corporate has additionally opened Oak Avenue Well being primary-care facilities aspect by aspect with CVS pharmacies in Texas and Illinois, with plans to introduce round two dozen extra by the tip of the yr.
Shuttering shops to shore up income
Within the meantime, CVS and Walgreens are slicing prices.
Walgreens in June introduced plans to shutter a “important” variety of its 8,600 U.S. shops. The corporate’s CEO, Tim Wentworth, mentioned solely 75% of the chain’s areas have been worthwhile, and that a good portion of the opposite quarter might shutter by 2027.
In a press release, a Walgreens spokesperson mentioned, “We’ve got lately exhibited the flexibility to, and can proceed to make tough selections that profit our enterprise, as we establish alternatives that unlock worth, validate present pathways and lead [Walgreens] right into a profitable future.”
In 2021, CVS introduced it was shuttering 900 shops, or practically 10% of its U.S. retail areas, over a three-year interval. CVS executives earlier this month mentioned the corporate is on observe to satisfy that purpose by the tip of the yr, with 851 shops closed to this point.
In a press release, a CVS spokesperson mentioned the shop closure selections are based mostly on inhabitants shifts, client spending patterns and a given group’s retailer density, amongst different elements. Even after the closures, 85% of individuals within the U.S. will nonetheless dwell inside 10 miles of a CVS pharmacy, the spokesperson famous.
Amar Singh, senior director at retail consulting firm Kantar Group, mentioned shuttering underperforming areas might assist Walgreens and CVS right-size their enterprise and determine “the precise equation” for his or her shops that may win again customers and shore up income.
However retailer closures might make it tougher for a lot of People to get prescriptions, as pharmacy deserts develop into extra frequent in underserved communities throughout the U.S.
In addition they might do little to repair a few of the deeper points plaguing retail pharmacies, in response to Saunders. For instance, he mentioned addressing declining pharmacy reimbursement charges might require laws and lobbying, and “getting that performed is sort of potential.”
“In some methods, closing shops is a response to the issue. It is not the answer to the issue,” Saunders mentioned. “However long term, if different issues do not change, they’re going to most likely discover themselves in the identical place in 10 years time the place they’ve to shut extra shops.”
