The pharmaceutical giant Walgreens is set to close approximately 2,150 of its 8,600 US locations as part of a vast restructuring effort. This wave of closures, covering about 25% of its domestic stores, comes as the company grapples with many economic and competitive challenges that have pressure-tested its business model in recent years.
CEO Tim Wentworth, in a recent interview with the Wall Street Journal, attributed the closures primarily to unprofitability. Walgreens has faced significant hurdles, such as increased theft and the proximity of its stores, which cannibalize sales—additionally, the ongoing surge in shoplifting since the pandemic has spurred the need for operational streamlining.
Walgreens and its counterparts, CVS and Rite Aid, have been caught in the crosswinds of rapidly evolving market dynamics, with fierce competition from online retailers—most notably Amazon—exacerbating their woes. The traditional pharmacy chains have also been hit hard by falling reimbursement rates for prescription drugs, a trend driven by the negotiating leverage of pharmacy benefit managers (PBMs), which have squeezed margins across the industry.
The announcement also extends from a longer-term strategy originally set out by Walgreens in 2021, when the company acquired a controlling $5.2 billion stake in VillageMD, a primary care network. Unfortunately, this acquisition's anticipated synergies and profitability have not materialized as expected, compelling Walgreens to continually reevaluate its footprint and operational strategy.
Another significant factor contributing to the closures is the persistent issue of price-consciousness among consumers, exacerbated by prolonged periods of inflation that have strained household budgets. Wentworth noted that customers have become increasingly selective and sensitive to prices, diminishing the volume and profitability of in-store purchases.
Reflecting this turmoil, Walgreens' share price has experienced considerable volatility, hitting a low not seen since the 1970s. This financial instability, staffing shortages, and diminished front-end sales profits have created an urgent impetus for restructuring.
Historically, Walgreens has had a prominent presence across the U.S., with the highest concentration of its stores in Florida. Yet, with 2,000 stores already shuttered over the past decade, the announcement marks the most comprehensive closure plan in recent corporate memory.
While the move to close 25% of its stores might help Walgreens' financial performance and streamline operations, it could also adversely affect communities reliant on these local pharmacies, especially in underserved and low-income neighborhoods.
