Pharmacy giant Walgreens announced this week that it would be closing roughly 1,200 of its stores in the next three years, a move it says will help to improve its earnings while also increasing cash flow.
On Tuesday, the Walgreens Boots Alliance revealed the details of its downsizing plan. During the current fiscal year, which started on September 1, 500 stores will be targeted for closure, the company announced.
This announcement comes only a few months after CEO Tim Wentworth revealed that roughly one-quarter of the 8,600 stores the company has in the U.S. are underperforming.
Walgreens didn’t reveal which stores it plans to close. However, the company did say they will prioritize any locations that are underperforming or that are located at a place where the lease on the building is expiring.
Only the company’s U.S. stores will be affected by this downsizing.
The Walgreens Boots Alliance additionally owns a pharmacy chain called Boots in the U.K.
On Tuesday, Wentworth revealed to analysts that roughly 6,000 locations of Walgreens are profitable. Nearly 600 of the company’s stores are located in California, which ranks second to Florida in terms of the number of locations for the company.
The planned closures that were announced this week do include 300 that were approved already under a cost-cutting plan that was previously announced.
This issue isn’t relegated to just Walgreens. Other large pharmacy chains such as CVS and Rite Aid have reconsidered their physical footprints in recent years, shutting down many stores as the industry as a whole has faced many challenges.
Rite Aid filed Chapter 11 bankruptcy last year, and has closed more than 200 stores since then as well.
These pharmacy stores are facing intense competition from retail giants such as Walmart and Amazon. In addition, consumers have stopped spending as much money in general, and theft has increased significantly recently. All of this, according to analysts, has put a big dent in profits.
These chains have also experienced much tighter margins for their pharmaceutical business because the reimbursement rates that they’re receiving from drugs they sell to consumers have been decreasing.
Reports have suggested that a main reason for this is because the companies are dependent on intermediaries known as pharmacy benefit managers. These PBMs exert significant control over how much the pharmacies are reimbursed for the drugs they sell.
Caremark and OptumRX are two of the largest PBMs, and they’re owned by insurance companies that have been trying to cut costs by decreasing reimbursement rates. This has significantly affected the bottom lines of pharmacies.
John Ransom, a healthcare analyst for Raymond James, added that chain pharmacies also are operating in what’s become an overcrowded environment. There was a binge on real estate in the 1990s, he said, which resulted in communities having more pharmacies than they really need.
Two months ago, Samantha Stansberry, the external communications manager for Walgreens, said:
“Like most retailers, we have been facing a challenging operating environment. These factors have resulted in a growing number of store closures across the country as we invest in our other locations to deliver a consistent customer experience.”
