Retail pharmacies like Walgreens Boots Alliance Inc. (WBA) and CVS Health Inc. (CVS) are finding themselves in a difficult position. While they have always been known for their widespread accessibility, customer complaints are mounting, highlighting a decline in convenience and overall satisfaction. Long waits for assistance and prescription pickups have become a common frustration, mirroring the broader challenges faced by these retail pharmacy chains. These operational issues are a symptom of deeper financial struggles, leading to strategic shifts across the industry.
The traditional business model for retail pharmacies is under immense pressure. Declining prescription drug reimbursement rates, rampant inflation, changing consumer behavior, and the aggressive competition from e-commerce giants like Amazon.com (AMZN) have all eroded profit margins. Additionally, these chains are grappling with staff burnout caused by understaffing and increasing workloads. While both companies enjoyed temporary gains from vaccine and test sales during the COVID-19 pandemic, the post-pandemic reality has exposed fundamental flaws in their models. CVS, for instance, is facing mounting losses in its insurance business, leading to a third consecutive downgrade in profit outlook and the announcement of $2 billion in planned cost cuts. Meanwhile, Walgreens has struggled with its foray into primary care, resulting in substantial write-downs.
The broader retail pharmacy market is also facing challenges. Rite Aid declared bankruptcy last year, and its stock was delisted from the New York Stock Exchange in October. A key factor contributing to the squeezed profit margins is the role of Pharmacy Benefit Managers (PBMs). These powerful intermediaries negotiate reimbursement rates, often leaving retail pharmacies with slim or even negative returns. While CVS operates its own PBM, Caremark, providing it with some financial buffer, Walgreens remains more vulnerable to these pressures. In response, CVS has introduced a new transparent pricing model for medications, though analysts remain skeptical about its effectiveness.
Retail pharmacies are also losing ground to e-commerce platforms and big-box retailers. Despite their efforts to adapt, such as increasing private-label products, they continue to struggle with lower front-of-store sales. Walgreens and CVS have experienced declining sales, partly driven by inflation-conscious consumers opting for cheaper alternatives like Walmart Inc. (WMT) and Costco Wholesale Corporation (COST).
Although these chains remain crucial to the U.S. healthcare system, they may need to drastically rethink their business models. This could involve downsizing stores, expanding online offerings, or even exiting certain markets. As one Jefferies analyst told CNBC, “As things have started to normalize, we’re reverting back to the challenges that the retail pharmacy industry had faced even before Covid. I think most of these pharmacies are realizing that fundamentally, their businesses have not really changed.” Evercore ISI analysts echo this sentiment, acknowledging the essential nature of pharmacies while emphasizing that their future likely won’t resemble their past. The retail pharmacy landscape is undergoing a significant transformation, and the industry is being forced to adapt to stay afloat in an increasingly competitive and demanding environment.
