Why Walgreens, CVS retail pharmacies are struggling

The abundance of Walgreens and CVS Well being shops makes them handy for every time Shriya Raghavan, a analysis affiliate primarily based in Philadelphia, wants to select up requirements like gum, deodorant and cleaning soap. 

However she mentioned she usually 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 customers, in a development that has hit their earnings 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 tons of of places throughout the U.S. to shore up earnings. 

Among the many largest issues for the chains, reimbursement charges for prescribed drugs have fallen. Inflation, softer client spending, theft, and competitors from Amazon and grocery shops are additionally making it troublesome for drugstores to show a revenue on the entrance of the shop, the place they promote every little thing from pantry staples to make-up and cleansing provides.

There’s additionally widespread burnout amongst pharmacy employees, lots of whom complain about understaffing and rising workloads.

Lots of these points aren’t new. Whereas CVS and Walgreens received a brief increase 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 things have started to normalize, we’re reverting back to the challenges that the retail pharmacy industry had faced even before Covid,” Jefferies analyst Brian Tanquilut instructed CNBC. “I think most of these pharmacies are realizing that fundamentally, their businesses have not really changed.” 

Falling retail pharmacy revenue margins solely add to the woes at each Walgreens and CVS. 

Whereas Walgreens struggles with its push into major 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 business. 

It is not simply these two chains: Ceremony Assist, as soon as a viable competitor, declared chapter final yr and is closing tons of of retailer places because it restructures.

Wall Road hasn’t been comfortable. Shares of Walgreens are down almost 60% this yr and 80% during the last decade. CVS’ inventory is down nearly 30% each for this yr and the final 10 years. In the meantime, Ceremony Assist’s widespread inventory was delisted from the New York Inventory Alternate in October. 

Nonetheless, retail pharmacy chains stay an necessary fixture of the U.S. health-care system that tens of tens of millions of People depend on. They could simply must reinvent themselves. 

“The retail pharmacy industry is going through a period of soul-searching, trying to understand the best model to reach the consumer,” mentioned GlobalData retail managing director Neil Saunders. “Consumer habits have changed, some of the economics of running drugstores and pharmacies have changed and the retailers in the sector are really having to reappraise how they do business to maintain profitability and maintain a viable business model.”

Listed below are the principle elements difficult the pharmacy enterprise, and what CVS and Walgreens are doing to adapt.

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 instances, can imply pharmacies receives a commission lower than the price of shopping for and shelling out a prescription. These middlemen are additionally accused of providing “take it or leave it” contracts when negotiating reimbursements with pharmacies, successfully forcing them to just accept decrease charges to allow them to preserve entry to sufferers lined by PBMs. 

“There’s no leverage. There’s no negotiating power on the side of the retail pharmacies,” Tanquilut instructed CNBC. “So we’ve seen a consistent pressure on margins on the pharmacy side over the last several years to the point where that’s a huge challenge.” 

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 severe” as it’s for different PBMs, Tanquilut mentioned.

CVS in December additionally launched a brand new pharmacy reimbursement mannequin known as CostVantage, which is able to launch in the beginning of subsequent yr and use what the corporate calls a “transparent” system to find out a drugs’s worth. A CVS spokesperson mentioned it would present extra readability and predictability for customers.

However some analysts instructed CNBC that it is nonetheless unclear how efficient that new mannequin might be.

In the meantime, Saunders mentioned extra customers are utilizing on-line pharmacy providers resembling PillPack, a subsidiary of Amazon Pharmacy, to get their prescription drugs. He famous that on-line pharmacy success stays “fairly small in the scheme of things,” however mentioned it’s “definitely growing and putting a little bit of pressure on some of the traditional pharmacy chains.”  

E-commerce rivals, discounters and big-box retailers are an excellent larger risk to the retail facet 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 keeping with Leerink Companions analyst Michael Cherny. 

“It wasn’t as likely that an individual pre-Covid, or even the early days of Covid, would think first and foremost of going to CVS.com or Walgreens.com for shopping,” Cherny mentioned. “[CVS and Walgreens] were behind on e-commerce.” 

Inflation can be squeezing customers, who’ve turn out to be extra prudent with their purchases. A budget-conscious shopper is extra prone 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 primarily based in Austin, Texas, mentioned it “seems like prices are really high” at Walgreens and CVS in contrast with different shops. 

“It is not my first choice,” Lynn instructed CNBC. “Walmart or Goal is generally where I find things I need for the cheapest price. I do frequent Greenback Tree as well, but not really for essentials.” 

Walgreens and CVS have blamed weaker retail gross sales partially on customers watching their spending.

Earlier this month, CVS mentioned same-store gross sales on the entrance of the shop had been down roughly 4% throughout the second quarter from the identical interval a yr in the past, which displays a “general softening of consumer 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 “significant challenges” in a “worse-than-expected consumer environment.” 

Walgreens and CVS have each elevated their give attention to their private-label merchandise to lure in buyers who’ve traded down from nationwide manufacturers to beat inflation. 

In a press release, a Walgreens spokesperson mentioned the corporate is seeing “strong success among our own brand products,” with model penetration “growing quite nicely.” They added that the corporate is increasing its number of merchandise, including 37 new gadgets alone within the second quarter. That “perfectly complements consumer focus on value,” the spokesperson mentioned.

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 instructed CNBC. 

CVS operates a PBM and the nation’s third-largest well being insurer, Aetna, which may assist offset points on the retail pharmacy facet. 

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 phase, which operates Caremark and primary-care supplier Oak Road Well being, booked almost $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 greater than $109 billion final yr, dwarfing the $21.83 billion from its worldwide phase and almost $1.8 billion from its health-care unit. 

Walgreens’ worldwide phase operates greater than 3,000 retail shops overseas, together with places of U.Ok.-based well being and wonder retailer Boots. The corporate’s health-care unit presents major 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 “playing catch-up” with CVS within the health-care area, in keeping with Jeffries’ Tanquilut. 

Retail giants and pharmacies have been pushing to ship medical care on to sufferers, which may assist them seize a bigger slice of the greater than $4 trillion U.S. health-care business. 

However a number of firms, together with Amazon, Walmart, CVS and Walgreens, are feeling the ache from bets on major care. That is as a result of constructing clinics requires numerous capital, and the places usually lose cash for a number of years earlier than turning into worthwhile, in keeping with Tanquilut. 

Not like CVS, Walgreens may doubtlessly 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 turn out to be its majority proprietor. However Walgreens began closing clinic places final yr. In March, the corporate recorded a hefty almost $6 billion cost associated to the decline in worth of its funding in VillageMD. 

Retail pharmacies probably 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 in their current form.” That might doubtlessly imply rising their on-line presence, now not promoting sure merchandise like greeting playing cards and shrinking retailer footprints.

“I think there’ll be some experimentation with models there. It’s more of a question of what the new retail pharmacy model will look like,” Anderson instructed 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.

The corporate can be piloting a Chicago retailer location that focuses on “convenience and speed through digital pickup, pharmacy and grab-and-go solutions,” Walgreens mentioned on its web site. Most prescription or retail orders might be positioned and stuffed at a counter, which may deter theft. 

One other location in Aubrey, Texas, strikes the pharmacy to the entrance of the shop in a departure from the standard mannequin.

The corporate’s web site mentioned it doesn’t plan to roll out extra pilot shops till “learnings about what works and what doesn’t are better understood.” 

In the meantime, a CVS spokesperson mentioned the corporate is “innovating to meet our customers’ and patients’ varying needs.” The spokesperson pointed to the corporate’s private-label manufacturers, assortment of nationwide manufacturers, and loyalty program that provides reductions and advantages for sufferers. 

The corporate has additionally opened Oak Road Well being primary-care facilities facet by facet with CVS pharmacies in Texas and Illinois, with plans to introduce round two dozen extra by the tip of the yr. 

Within the meantime, CVS and Walgreens are slicing prices. 

Walgreens in June introduced plans to shutter a “significant” variety of its 8,600 U.S. shops. The corporate’s CEO, Tim Wentworth, mentioned solely 75% of the chain’s places had been worthwhile, and that a good portion of the opposite quarter may shutter by 2027.

In a press release, a Walgreens spokesperson mentioned, “We have recently exhibited the ability to, and will continue to make difficult decisions that benefit our business, as we identify opportunities that unlock value, validate existing pathways and lead [Walgreens] into a successful future.”

In 2021, CVS introduced it was shuttering 900 shops, or almost 10% of its U.S. retail places, over a three-year interval. CVS executives earlier this month mentioned the corporate is on observe to satisfy that aim by the tip of the yr, with 851 shops closed thus far. 

In a press release, a CVS spokesperson mentioned the shop closure choices are primarily based on inhabitants shifts, client spending patterns and a given neighborhood’s retailer density, amongst different elements. Even after the closures, 85% of individuals within the U.S. will nonetheless stay inside 10 miles of a CVS pharmacy, the spokesperson famous.

Amar Singh, senior director at retail consulting firm Kantar Group, mentioned shuttering underperforming places may assist Walgreens and CVS right-size their enterprise and determine “the right equation” for his or her shops that can win again buyers and shore up earnings. 

However retailer closures may make it more durable for a lot of People to get prescriptions, as pharmacy deserts turn out to be extra widespread 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 keeping with Saunders. For instance, he mentioned addressing declining pharmacy reimbursement charges might require laws and lobbying, and “getting that done is almost possible.” 

“In some ways, closing stores is a reaction to the problem. It’s not the solution to the problem,” Saunders mentioned. “But longer term, if other things don’t change, they’ll probably find themselves in the same position in 10 years time where they have to close more stores.”