The recent closures of CVS, Rite Aid, and Walgreens across the United States did not surprise industry experts, who expect more closures as the industry adjusts and rightsize.
“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.
In 2021, CVS announced plans to close 900 stores over three years, citing factors such as demographic changes, consumer purchasing patterns, local store density, access to pharmacy services, and future health needs. .
Two years later, Rite Aid filed for bankruptcy and immediately began a store optimization plan that included the immediate closure of 154 stores.
Walgreens' latest announcement this week was that it would close about 1,200 unprofitable stores over the next three years.
For more than a decade, the industry has realized that companies that manage prescription benefits (also known as pharmacy benefit managers, or PBMs) are merging, ultimately increasing their purchasing power in the prescription drug market, Hill said. said.
Hill explained that there is a power differential between people 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 customers, including insurance companies and employers, but to achieve these savings, “they squeeze branded drug manufacturers on price.” “They're trying to squeeze retail pharmacies on price,” Hill said. He added that this practice has been going on for 10 years and has “taken us to an uncomfortable place.”
Given the lack of differentiation between CVS, Rite Aid, and Walgreens, these companies are also “forced to accept the prices offered by payers…which leads to a continued negative pricing cycle.” “And it's been going on for over a year again for 10 years,” Hill continued.
At the same time, the industry was focused on continued growth and capacity building in the pharmacy sector, which Hill said “doesn't necessarily mean much.”
“This industry appears to be growing in store size and volume faster than the need for pharmacies is growing,” Hill argued.
“When you add in the company-specific mistakes that they've made in terms of how they spend their money, how they spend their cash, how they grow and build, you end up with companies in a position like CVS, Walgreens, and Rite Aid.” he added.
Getty Images
Walgreens told FOX Business that its retail pharmacy business is central to its future business strategy, but that “increasing regulatory and reimbursement pressures are impacting our ability to meet costs related to rent, staffing and supply needs.” “It's weighing on us,” he said.
The company says it will do everything it can to improve store performance, but if a closure occurs, it will “work with local stakeholders to minimize customer disruption” and relocate the majority of team members to other locations. He said he would relocate it.
Rite Aid, which is currently emerging from bankruptcy proceedings, said its Chapter 11 filing is a reorganization that will “significantly reduce our debt, increase our financial flexibility, and enable us to execute on important initiatives.” He said that it is part of the The process includes continuing to optimize store footprint, the company said.
At the time of the company's bankruptcy announcement in October 2023, Rite Aid CEO Jeffrey Stein said, “With the support of our lenders, we will continue to strengthen our financial position, advance our transformation efforts, and implement our turnaround strategy.'' We look forward to accelerating implementation.” We will be better able to deliver the health care products and services our customers and their families rely on, now and in the future. ”
Rite Aid did not respond to FOX Business' request for comment.
CVS told FOX Business that it was “not in response to industry pressure, but rather strategically closing stores as we announced three years ago.” CVS announced that while it was closing 900 stores, it opened 100 new stores during the same period.
Hill doesn't think the pharmacy model is outdated. In fact, Hill said a retail pharmacy's location is always important to getting prescriptions quickly.
“The example I always use when talking to investors is: I have an 8-year-old daughter. If she gets an ear infection, I won't wait for Amazon to show up with a prescription.” he said.
Today, consumers' shopping carts have changed. Previously, when consumers went to the store to fill a prescription, they could pick up other health and beauty items.
Now more people are buying those products from Amazon and other retailers, Hill said.
There are approximately 60,000 retail pharmacies in the United States, Hill said. The industry may decide it needs to be closer to 35,000 or 40,000.
““I think stores probably need to take a hard look at what they have in their inventory…what's profitable and makes sense to carry,” he said.
