Why Pharmacy Chains Like Walgreens and CVS Are Closing – NBC New York

In its fiscal third-quarter earnings report released in late June, pharmacy chain Walgreens announced plans to close a “significant” number of its 8,600 U.S. locations.

Chief executive Tim Wentworth said only 75% of the chain’s branches were profitable, with the remaining quarter facing closure by 2027.

It was another sign of a weakening retail pharmacy market following a series of pharmacy closures at CVS through the end of this year and Rite Aid’s bankruptcy filing in October.

“Chemistry chains used to be the heart of communities,” says GlobalData’s retail managing director, Neil Saunders. “It was the place you went to for prescriptions, but it was also the place you went to for general merchandise. And that’s really changed dramatically over the last 20 years.”

Macroeconomic issues such as a deteriorating consumer sentiment and pressure on pharmacy margins have been cited as reasons for the closures, but Walgreens is also grappling with its own challenges.

Retail sales — or front-of-store — continue to decline quarter over quarter, with the latest year-over-year decline coming in at 4% in the fiscal third quarter.

“The front of the store … where they have general merchandise, cosmetics, it’s not that good,” Saunders said. “The brands they have are not very interesting. The prices are often much higher than other places.”

Walgreens relies heavily on back-of-store pharmacy revenue to make up for weakness in retail, an arena that is itself struggling with shrinking margins. While it accounts for nearly 60% of Walgreens’ total sales, pharmacy revenue has largely fallen victim to declining reimbursement rates and the growing importance of pharmacy benefit managers, or PBMs.

“Reimbursement for pharmacy benefit managers has been declining for years, so every year they start out with a headwind on reimbursement,” said Raymond James CEO John Ransom. “CVS has estimated it at about a billion dollars a year, and CVS and Walgreens have similar-sized pharmacies.”

Watch the video above to learn more about the reasons behind the closure of thousands of pharmacy locations across the United States.