Walgreens and CVS Health, once consumer favorites for quick access to essentials, are now facing challenges that are affecting their profits and market performance. Customers like Shriya Raghavan have voiced frustrations over long waits and understaffed stores, which reflect the deeper problems affecting the retail pharmacy industry.
These challenges include declining pharmacy margins, competition from online retailers like Amazon, and changing consumer habits. These issues have led both companies to rethink their strategies, including store closures and other cost-saving measures.
The difficulties facing Walgreens and CVS are not new, but they have been exacerbated by recent market conditions. Lower reimbursement rates for prescription drugs, inflation, and weaker consumer spending are making it harder for these pharmacies to maintain profitability, especially in their front-of-store operations, which sell items like toiletries and groceries.
Despite a temporary boost from COVID-19 vaccinations and testing during the pandemic, the retail pharmacy model is struggling to remain viable as consumer habits shift and competition intensifies.
One of the key pressures on Walgreens and CVS comes from pharmacy benefit managers (PBMs), which control reimbursement rates for prescription drugs. Pharmacies often have little negotiating power and are forced to accept lower rates, further squeezing their profit margins.
While CVS, with its own PBM, Caremark, is somewhat insulated from this issue, Walgreens has been more heavily impacted, with declining margins in its U.S. retail pharmacy unit.
Retail competition is another major challenge. Online retailers like Amazon and big-box stores like Walmart are drawing consumers away from traditional pharmacies.
Additionally, inflation has made consumers more price-conscious, leading them to seek cheaper alternatives at discount retailers. This trend has contributed to declining retail sales at both Walgreens and CVS, further compounding their financial woes.
To cope with these challenges, Walgreens and CVS have both increased their focus on private-label products, which offer higher margins and can attract cost-conscious shoppers.
Walgreens, in particular, is heavily reliant on its U.S. retail pharmacies for revenue, while CVS has a more diversified business model that includes a health insurance division. Despite efforts to diversify, Walgreens is still playing catch-up to CVS in areas like healthcare services and primary care.
Walgreens and CVS are also experimenting with new store formats to adapt to changing market conditions. Walgreens has opened smaller stores that focus on convenience and quick service, while CVS is integrating primary care centers into its stores through partnerships with Oak Street Health.
Both companies are testing various models to determine how they can better serve consumers and maintain profitability in a rapidly evolving retail landscape.
Store closures are another strategy both Walgreens and CVS are using to shore up profits. Walgreens plans to close a significant number of its locations, while CVS is in the process of shutting down 900 stores over a three-year period.
These closures are part of broader cost-cutting measures, but they raise concerns about the potential for “pharmacy deserts” in underserved areas, limiting access to medications for many Americans.
While store closures may help Walgreens and CVS streamline operations, experts warn that these efforts alone won’t solve the deeper issues facing the retail pharmacy industry.
Addressing the root causes of declining profitability, such as reimbursement rates and competition from online retailers, may require legislative action and continued innovation. Without fundamental changes, both companies may face similar challenges in the years ahead.
