Why Walgreens, CVS retail pharmacies are struggling

The abundance of Walgreens and CVS Health stores makes them convenient for each time Shriya Raghavan, a research associate based in Philadelphia, needs to select up necessities like gum, deodorant and soap. 

But she said she often has to attend for workers to unlock cabinets or stand in lengthy lines to select up prescriptions as pharmacists juggle tasks.

Those are only a number of the ways Walgreens and CVS are falling out of favor with consumers, in a trend that has hit their profits and stock prices and compelled them to reconsider their strategies. They’re symptoms of deeper issues plaguing retail pharmacy chains, which pivoted from years of store expansions to shuttering a whole bunch of locations across the U.S. to shore up profits. 

Amongst the most important problems for the chains, reimbursement rates for pharmaceuticals have fallen. Inflation, softer consumer spending, theft, and competition from Amazon and grocery stores are also making it difficult for drugstores to show a profit on the front of the shop, where they sell the whole lot from pantry staples to makeup and cleansing supplies.

There’s also widespread burnout amongst pharmacy staff, a lot of whom complain about understaffing and increasing workloads.

Lots of those issues aren’t latest. While CVS and Walgreens got a brief boost from Covid vaccinations and test sales throughout the peak of the pandemic, they now face a harsh reality: the retail pharmacy model could also be broken. 

“As things have began to normalize, we’re reverting back to the challenges that the retail pharmacy industry had faced even before Covid,” Jefferies analyst Brian Tanquilut told CNBC. “I feel most of those pharmacies are realizing that fundamentally, their businesses have probably not modified.” 

Falling retail pharmacy profit margins only add to the woes at each Walgreens and CVS. 

While Walgreens struggles with its push into primary care, CVS’ bottom line is getting battered by higher medical costs in its insurance business. CVS earlier this month slashed its full-year profit outlook for the third consecutive quarter and announced $2 billion in latest cost cuts over several years as those higher medical costs squeeze the insurance industry. 

It is not just those two chains: Rite Aid, once a viable competitor, declared bankruptcy last yr and is closing a whole bunch of store locations because it restructures.

Wall Street hasn’t been completely satisfied. Shares of Walgreens are down nearly 60% this yr and 80% over the past decade. CVS’ stock is down almost 30% each for this yr and the last 10 years. Meanwhile, Rite Aid’s common stock was delisted from the Latest York Stock Exchange in October. 

Still, retail pharmacy chains remain a very important fixture of the U.S. health-care system that tens of thousands and thousands of Americans depend on. They might just have to reinvent themselves. 

“The retail pharmacy industry goes through a period of soul-searching, trying to grasp one of the best model to succeed in the patron,” said GlobalData retail managing director Neil Saunders. “Consumer habits have modified, a number of the economics of running drugstores and pharmacies have modified and the retailers within the sector are really having to reappraise how they do business to keep up profitability and maintain a viable business model.”

Listed below are the fundamental aspects difficult the pharmacy business, and what CVS and Walgreens are doing to adapt.

Much of the pain for retail pharmacies comes from lower prescription drug reimbursement rates. 

Pharmacies typically buy their medications from a distributor after which get reimbursed by pharmacy profit managers, or PBMs. The powerful drug supply middlemen also negotiate discounts with manufacturers on behalf of insurers and create lists of medicines covered by health plans.

The three largest PBMs – CVS Health’s Caremark, UnitedHealth Group‘s Optum Rx and Cigna‘s Express Scripts – handle almost 80% of all prescriptions within the U.S.

Pharmacies have accused PBMs of setting lower reimbursement rates, which, in some cases, can mean pharmacies receives a commission lower than the associated fee of shopping for and allotting a prescription. Those middlemen are also accused of offering “take it or leave it” contracts when negotiating reimbursements with pharmacies, effectively forcing them to just accept lower rates in order that they can maintain access to patients covered by PBMs. 

“There is not any leverage. There is not any negotiating power on the side of the retail pharmacies,” Tanquilut told CNBC. “So we have seen a consistent pressure on margins on the pharmacy side over the past several years to the purpose where that is an enormous challenge.” 

The operating margin for Walgreens’ U.S. retail pharmacy unit was -5% last yr, down from 3.9% in 2019 and 4.4% in 2015. Meanwhile, CVS’ operating margin for its pharmacy and consumer wellness business was 4.6% last yr, up from 3.3% in 2022 but down from 8.5% in 2019 and 9.9% in 2015.

CVS has a slight competitive advantage over Walgreens because it has its own PBM, and the margin pressure from Caremark is probably going “not as severe” because it is for other PBMs, Tanquilut said.

CVS in December also introduced a latest pharmacy reimbursement model called CostVantage, which can launch initially of next yr and use what the corporate calls a “transparent” formula to find out a drugs’s price. A CVS spokesperson said it’ll provide more clarity and predictability for consumers.

But some analysts told CNBC that it’s still unclear how effective that latest model can be.

Meanwhile, Saunders said more consumers are using online pharmacy services similar to PillPack, a subsidiary of Amazon Pharmacy, to get their prescription medications. He noted that online pharmacy success stays “fairly small within the scheme of things,” but said it’s “definitely growing and putting just a little little bit of pressure on a number of the traditional pharmacy chains.”  

E-commerce rivals, discounters and big-box retailers are a good greater threat to the retail side of Walgreens’ and CVS’ pharmacy businesses. 

As competition mounts, the chains’ online retail presence has also lagged behind those of Amazon and other retailers like Walmart and Goal, based on Leerink Partners analyst Michael Cherny. 

“It wasn’t as likely that a person pre-Covid, and even the early days of Covid, would think at the start of going to CVS.com or Walgreens.com for shopping,” Cherny said. “[CVS and Walgreens] were behind on e-commerce.” 

Inflation can also be squeezing consumers, who’ve grow to be more prudent with their purchases. A budget-conscious shopper is more more likely to shop at retailers including Walmart, a dollar store or Costco, despite the convenience the retail pharmacies offer, Cherny noted.

Brittainy Lynn, a 38-year-old freelancer based in Austin, Texas, said it “looks like prices are really high” at Walgreens and CVS compared with other stores. 

“It will not be my first selection,” Lynn told CNBC. “Walmart or Goal is usually where I find things I would like for the most cost effective price. I do frequent Dollar Tree as well, but probably not for essentials.” 

CVS’ retail pharmacy unit was the second-biggest contributor to sales last yr, raking in $116.76 billion. The corporate’s health services segment, which operates Caremark and primary-care provider Oak Street Health, booked nearly $187 billion in sales. 

Meanwhile, Walgreens gets the overwhelming majority of its revenue from its U.S. retail pharmacies. That business unit took in greater than $109 billion last yr, dwarfing the $21.83 billion from its international segment and nearly $1.8 billion from its health-care unit. 

Walgreens’ international segment operates greater than 3,000 retail stores abroad, including locations of U.K.-based health and wonder retailer Boots. The corporate’s health-care unit offers primary care, urgent care and post-acute care services, in addition to a specialty pharmacy, amongst other services. 

At the same time as Walgreens tries to diversify its business, the corporate has been “playing catch-up” with CVS within the health-care space, based on Jeffries’ Tanquilut. 

Retail giants and pharmacies have been pushing to deliver medical care on to patients, which could help them capture a bigger slice of the greater than $4 trillion U.S. health-care industry. 

But several firms, including Amazon, Walmart, CVS and Walgreens, are feeling the pain from bets on primary care. That is because constructing clinics requires loads of capital, and the locations typically lose money for several years before becoming profitable, based on Tanquilut. 

Unlike CVS, Walgreens could potentially exit that market altogether. The corporate said in a securities filing last week it’s considering a sale of its primary-care provider VillageMD.

Walgreens invested $1 billion in VillageMD in 2020, then one other $5.2 billion a yr later to grow to be its majority owner. But Walgreens began closing clinic locations last yr. In March, the corporate recorded a hefty nearly $6 billion charge related to the decline in value of its investment in VillageMD. 

Walgreens has opened roughly 100 smaller-format stores, which have fewer front-of-store items and over-the-counter medicines and have the corporate’s branded products, a spokesperson said in a press release. Walgreens plans so as to add more “mini drugstores” this yr.

The corporate can also be piloting a Chicago store location that focuses on “convenience and speed through digital pickup, pharmacy and grab-and-go solutions,” Walgreens said on its website. Most prescription or retail orders may be placed and filled at a counter, which could deter theft. 

One other location in Aubrey, Texas, moves the pharmacy to the front of the shop in a departure from the normal model.

The corporate’s website said it doesn’t plan to roll out additional pilot stores until “learnings about what works and what doesn’t are higher understood.” 

Meanwhile, a CVS spokesperson said the corporate is “innovating to fulfill our customers’ and patients’ various needs.” The spokesperson pointed to the corporate’s private-label brands, assortment of national brands, and loyalty program that provides discounts and advantages for patients. 

The corporate has also opened Oak Street Health primary-care centers side by side with CVS pharmacies in Texas and Illinois, with plans to introduce around two dozen more by the top of the yr.