Walgreens is Closing Up Shop: With 200 Stores Closing Their Doors, What’s Next for the Drugstore Industry?

Table of Contents

  1. Introduction
  2. A brief history of Walgreens
  3. Factors causing Walgreens store closures
  4. The Walgreens story in the context of the wider drugstore industry
  5. How does the drugstore industry survive?
  6. Rough waters ahead

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On August 6, Walgreens announced that it would be closing 200 stores in the United States.

These 200 store closures are in addition to parent company Walgreens Boot Alliance’s plan – announced earlier this year – to close 200 stores in the United Kingdom.

In a statement shortly afterwards, Walgreens said that these store closures are part of “a transformational cost management program to accelerate the ongoing transformation of our business, enable investments in key areas and to become a more efficient enterprise.” Walgreens’ share price has dipped slightly since the announcement.

While this closure of 200 stores represents less than 3 percent of Walgreen’s 10,000 locations in the United States, it signals a larger trend for the drugstore and pharmacy industry.

Unfortunately, the news isn’t good. Rising expenses, squeezed operating margins, lower growth prospects and the increasing relevance of online shopping threaten to cause even more pain in the long-term. Ultimately, all actors within the drugstore and pharmacy industry should pay close attention to the latest Walgreens news and what it means for the drugstore industry as a whole.  

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A brief history of Walgreens

Before looking into the future, however, it’s important to study the past.

By looking at Walgreens’ history and how it was able to become one of the largest drugstores in the world, we can better diagnose how it became vulnerable to some of the challenges that it faces today.

Walgreens was founded by Charles R. Walgreen, Sr. in 1901. In the beginning, it was a neighborhood drugstore that measured only 50 feet by 20 feet. From the start, Walgreens was focused on delivering excellent customer service. Compared to its peers, Walgreen installed bright lights in his store to create a warm, cheerful ambiance. Aisles were widened and each customer was greeted by Walgreen himself or his colleague. Finally, Walgreen made it a priority to sell his merchandise for fair and reasonable prices.

From that initial store in 1901, Walgreen started to expand his company. Twelve years after opening his first store, the Walgreens company had four locations – all on the south side of Chicago. The company became an established fixture in Chicago’s retail scene and later expanded to over 500 stores throughout the country by the 1930s.

Upon Charles R. Walgreen, Sr.’s death, his son, Charles Walgreen Jr., took control of the company.  Throughout its history, Walgreens has been an innovator, pioneering noteworthy items, like the malted milkshake, and leveraging new marketing strategies, such as broadcast advertising.  

Walgreens survived during the Great Depression and the company experienced decades of steady growth. The heart of Walgreens and the source of most of its profits has been through its prescription department. By 1975, there were more than 1,500 pharmacists filling 30 million prescriptions in 633 stores across the country. While the pharmacy department continues to be a major source of revenue for the company, the current environment presents some concerning headwinds, which we will explain below.

As the company continued to grow, Walgreens executives took advantage of an opportunity in the mergers and acquisitions world. In 2014, the company merged with Alliance Boots, one of the world’s leading organizations in both pharmacy-led health and beauty products.

Now named the Walgreens Boots Alliance, the combined company is a global juggernaut that is headquartered in Chicago. According to the company, it is the largest retail pharmacy, health and daily living destination across the United States and Europe.

Factors causing Walgreens store closures

Walgreens has a long, storied company history. That said, what has led the company to its sheer size and scale today may be exactly what’s causing hundreds of store closures around the United States. While it’s difficult to pin the cause on one particular explanation, there are likely several factors at play here.

One of the most glaring culprits of these store closures is a long-term trend, namely changing consumer habits.

Since the rise of the internet, there have been increasingly more articles about the death of retail. You can even find articles showing dilapidated malls and other images of the retail apocalypse. Household name retailers with large footprints, like Toys “R” Us and Sears, have entered bankruptcy.

Smaller retailers have felt the pain as well in the past two years, as this graphic of firms entering bankruptcy reveals.

The internet has provided consumers with unprecedented choice and convenience. This convenience is extremely appealing to consumers of all shapes and sizes, but especially for millennials. All we need to do is look at the data.

In a recent survey of 1,002 Millennials, CouponFollow found that Millennials in 2019 make 60% of their purchases online. This is up from 47% in a similar survey conducted in 2017. If you flip these numbers around, you can see that Millennials made 53% of their purchases in-store in 2017, but now make only 40% of those purchases in a retail store.

Millennials are a digital-first generation, so this survey isn’t necessarily groundbreaking. That said, those in Generation X (people born between 1965 and 1979) are moving their shopping online at the quickest pace.

According to a recent FMI report, there’s an 11% increase year over year in the number of Gen Xers shopping online, which is a larger growth rate than any other demographic group. Gen Xers have a higher-than-average income and spending power, so this drastic move to online shopping creates more headwinds for brick-and-mortar retailers.

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All of this goes to show the challenge that retailers face – especially if they have a large brick-and-mortar footprint in the United States. For Walgreens specifically, this discussion doesn’t even include increasing numbers of brick-and-mortar competitors for personal care products, like Dollar General and Costco. Ultimately, drugstores like Walgreens are vulnerable to these persisting trends and will continue to be so for the foreseeable future.

A contributing factor to Walgreens’ store closures may be hiring inefficiencies. In 2018, the company started to cut bonuses for store managers (often by thousands of dollars). This April, Walgreens also announced that it would be cutting $500 million in costs every year by 2022. Most of these cuts are expected to impact workers and managers in Walgreens locations.

While the slashing of bonuses may not be welcome by store managers, there was better news for the hourly workforce. Walgreens announced an increase in its hourly workforce wages by $100 million annually. This is a surprising move given the financial status of the company. However, this shows that Walgreens is doing a balancing act in terms of employee budgeting.

Adjustments have been made for Walgreens to remain competitive in this tight labor market with the aim of becoming the retail employer of choice and reduce the high turnover rates that plague the retail industry. This move to award hourly workers higher pay is in keeping with other retail giants, like Amazon and Walmart.

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Another reason that Walgreens may be closing 200 stores is pressure from one gargantuan competitor: Amazon. Amazon has disrupted countless sectors throughout its young history and it isn’t stopping anytime soon. Same-day and next-day delivery make it easier for consumers to avoid that trip to the drugstore for a quick snack or personal care products.

In the recent poll of Millennial shoppers, 64% of respondents make half or more of their online purchases from Amazon. A staggering 97% use Amazon for at least part of their online shopping. When asked what they found so appealing about Amazon, 43% of respondents said the availability of online reviews and 41% focused on price.

Walgreens has also struggled in recent months because of pressures related to reimbursements for medication. Walgreens (and its competitors) are seeing an increasing number of Medicare patients. Having said this, pharmacies don’t make much money off of reimbursements for medications from Medicare.

With more Americans becoming eligible for Medicare, Walgreens will likely continue to face these pressures for the foreseeable future. The company also needs to behave more ethically in this area. It recently paid $269.2 million to settle multiple allegations overbilling Medicare, Medicaid and other federal programs.

The Walgreens story in the context of the wider drugstore industry

As stated above, Walgreens is facing some difficult challenges, both in the short-term and in the long-term. Other drugstores and pharmacies are facing intense headwinds, too.

Once again, Amazon is partly to blame. This is because Amazon has also started to expand its reach into the pharmacy business. In late June 2018, it bought PillPack, a well-known online pharmacy, for $753 million.

PillPack, among other things, directly delivers medications that consumers can get from drugstores like Walgreens. It also provides automatic refills for patients’ medication and 24-hour customer support.

Since the acquisition, Amazon has begun marketing PillPack’s medication delivery service to Amazon Prime members. For instance, it has created a webpage promoting the service and is emphasizing zero shipping costs and increased convenience.

Amazon is a ferocious competitor. With a large market share and a brilliant leader at the helm, it will continue to be so. Essentially, through its purchase of PillPack, it’s signaling that it’s ready to take market share from brick-and-mortar pharmacies like Walgreens. Because prescription sales are a key component of Walgreens and other drugstores’ earnings power, there may be even more pain (and store closures) ahead.

Along with Amazon and PillPack, drugstores and pharmacies, like Walgreens, are shifting to cost-cutting mode because they’re vulnerable to new healthcare legislation –particularly legislation affecting prescription drugs.

Prescription drug rebates are a pillar of the pharmacy benefit management (“PBM”) business model. Essentially, a PBM acts as a middleman between drugmakers and the end payer. Their stated goal is to improve health outcomes and reduce costs, but it sometimes doesn’t happen that way. Walgreens’ PBM, for instance, is Prime Therapeutics, LLC. Their new partnership is called AllianceRx Walgreens Prime.  

While the objective of PBMs is noble, PBMs are thought to play a role in high prescription drug prices for Americans. Because of this, lawmakers are looking to take steps to rein in PBMs.

One piece of legislation proposed earlier this year would overhaul the use of drug company rebates in government-run healthcare plans, like Medicare and Medicaid. Even though there hasn’t yet been overarching prescription drug legislation, this is a risk that may impact Walgreens’ earnings going forward – whether it affects PBMs or not. Whilst there has been significant gridlock in Washington, some type of prescription drug reform is likely on the horizon.

PillPack and the threat of prescription drug reform are certainly adding stress to drugstores and pharmacies. There are likely many more threats on the horizon. This is why Walgreens, CVS and other drugstores and pharmacies are being extremely aggressive in cutting costs. Because they see future growth opportunities slowing and competition increasing, these companies are doing their best to maintain their profit margins by trimming the fat. In other words, they are more comfortable paring back their growth ambitions in order to secure profits today.  

But there is only so much cutting that can be done. At some point, cost-cutting reaches diminishing returns. Walgreens, CVS and other large pharmacies are going to need to survive this downturn and find future growth opportunities.

How does the drugstore industry survive?

This naturally leads to the question of how drugstores and pharmacies can survive this apparent Armageddon.

Even in the midst of cost-cutting, drugstores are experimenting with different ways to generate future revenue. Walgreens, for instance, is trying out several different programs to provide increased value to customers. To do this, it’s leveraging partnerships with some of the most well-known startups in America today.

Walgreens announced a partnership with Verily, the life sciences unit of Alphabet, which would improve outcomes for patients with chronic conditions. To do this, Verily is deploying its proprietary technology to Walgreens pharmacies in order to address medication adherence, which imposes hundreds of billions of dollars of costs every year on the U.S. healthcare system. Ultimately, through this partnership, Walgreens can help generate better health outcomes for its customers.

Along with the Verily partnership, Walgreens has partnered with beauty company, Birchbox, to add a unique collection of products to its stores. Birchbox at Walgreens features a curated mix of the best independent beauty brands, some of which include Arrow, Fave4 and Love of Color.

While much of the focus for drugstores like Walgreens is on their prescription products, this partnership with Birchbox may add significant value to Walgreens’ non-pharmacy product offerings.

Walgreens and CVS are even willing to take non-traditional risks to bring customers in the door. For instance, both companies have announced that they are selling CBD products to customers. Walgreens representatives said that the company will sell CBD topical creams, patches and sprays in 1,500 stores in nine states. CVS plans on doing the same in seven states. For those consumers that are looking for alternative care products, pharmacies like Walgreens and CVS are happy to offer high-quality products. While this certainly won’t solve all of the current headwinds, this shows a willingness to offer “non-traditional” products to its customers.

Still, one of the larger issues that drugstores, like Walgreens, will have to address relates to hiring practices and technology. Since they oversee thousands of brick-and-mortar locations, major drugstores like Walgreens must employ hundreds of thousands of people (240,000 in fact). A good number of these employees are hourly workers. With the persistent troubles looming over retail, Walgreens, CVS and their competitors must seriously think about – and perhaps significantly change – their hiring strategies.

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Pharmacies are in a tricky situation because of more intense wage competition. As stated above, Walgreens raised its hourly wage rate, which puts even more cost pressures on large drugstores. Essentially, something will have to give. Large pharmacies will have to reduce wages, reduce their headcount, rely more heavily on technology or a combination of the above. These are not easy choices, but they will need to be made by those in the C-suite.

Finally, large pharmacies and drugstores have identified the risks of Amazon and are fighting back. In late 2018, Walgreens announced that it would be starting nationwide next-day prescription delivery. This is clearly a shot at Amazon and PillPack since Walgreens undoubtedly sees them as a threat and recognizes that patients don’t want to stand in line for their prescriptions.

While time will tell whether this service is profitable, it shows that pharmacies, like Walgreens, are willing to invest in new technological and logistical initiatives to better serve their customers.

Rough waters ahead

The drugstore industry has a long and notable history in the United States.

Companies, like Walgreens, not only work to improve their customers’ health, but they sell products that make life more enjoyable. Pharmacies and drugstores, like Walgreens, are some of the last remaining signs of the all-purpose general store that was so prevalent throughout America.

Nevertheless, times have changed. What used to be a high-profit, high-margin business is facing significant challenges. Rough waters are certainly ahead. Whether it’s changing consumer preferences, the retail juggernaut known as Amazon, potential prescription drug regulation or an expensive workforce, large pharmacies will need to respond quickly.

Walgreens is one company that recognizes these significant headwinds. In its last few earnings calls, company executives told investors that its execution is lacking and that it needs to trim costs for the foreseeable future. While this is a good start, hard work is undoubtedly ahead.

Walgreens and its peers have many tools at their disposal, from partnering with exciting new startups to leveraging new technology to cut operating costs. There may be even more effective tools that emerge in the future. Whichever tools they choose, they cannot forget about the principles that helped them rise up from humble beginnings – namely, stellar customer service, a robust product line and thoughtful management.  

In the end, the Walgreens store closures show that running a profitable business over many years is becoming more challenging. The key to surviving (and thriving) is to keep improving your application process and make the best use of technology in every aspect of your business.

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