With Hundreds Of Closures Coming, Drugstores Can't Find The Cure For What Ails Them

In just the last two years, the country’s three largest pharmacy chains have announced plans to close some 1,500 locations nationwide, a response to increased competition and dampened demand that have bitten into their budgets.

This contraction comes as the retail category overall continues to improve slowly after years of bankruptcies and buyouts. Drugstores including Walgreens, CVS and Rite Aid can’t seem to seize on the broader retail reset as consumers find more convenient ways to get their medications and get pickier about the retailers they frequent.

More closures could be coming, especially in the wake of the September Chapter 11 bankruptcy filing of Rite Aid, the smallest of the three large chains. Rite Aid said in the filing it could close as many as 500 stores.

“Sales are down, occupancy costs are up,” Datex Property Solutions CEO Mark Sigal said of the drugstore landscape in general. “So just from a pure dollar inflow-outflow, drugstores are seeing those pressures.”

Drugstore sales averaged $301 per SF for the first 10 months of 2023, according to Datex, which tracks retail sales. That is a drop of nearly 22% compared to the same period in 2022 and one of the few retail categories to see such a decline. Overall, retail sales per SF ticked up by 0.6%.  

At the same time, the cost of occupying a drugstore space is up 7% over the same period, Sigal said, the result of higher rents, labor challenges and inflationary pressures.

Meanwhile, overall retail availability in the U.S. hit an all-time low of 4.8% in Q3, according to CBRE data.

Drug retail remains one of the most exposed to potential default. As of mid-November, the default risk for drug retail over the next year is 10.5%, up from 8.6% the month before, and compared to overall retail risk, which is just 2.8%, according to S&P Global data.

CBRE’s Brandon Isner, head of retail research for the Americas, said labor challenges and oversaturation of the market are contributing to that risk.

Much of the difficulty drugstores have is that their front-end goods —  the high-margin things people buy when they come in to pick up prescriptions — are available just about everywhere, including in physical stores and online.

“People ask all the time, is brick-and-mortar dead? No, like quite the opposite, it's strong,” Sigal said. “But undifferentiated retail is dead. Also, a lot of the secondary drivers bringing people into drugstores, like photo processing and whatnot, those things have gone away. And what I mean by that is, if your brand, your service, your offering is not truly differentiated, you're ripe for getting Amazon-ed."

The attitude among major drugstore operators used to be that opening more stores in more locations meant they were going to win bigger market shares, Cushman & Wakefield Executive Vice Chairman for Retail Services Joanne Podell said.

But in the face of waning demand, those locations just don’t have the foot traffic or consumer spending they need to keep the lights on.

“It just isn't there,” Podell said. “If two or three stores come to a certain trading area, one or two of them is going fail. There's just not that much need for so many of them.”

Another pressure on drugstores is that while prescription medications have long been a source of increasing revenue, a changing medication marketplace is working against that. Online pharmacies, led by Amazon, are forecast to grow nearly 20% per year worldwide over the next decade.

“I get these emails all the time,” Podell said. “‘Why don't you just sign up for 90 days and you don't have to go into the drugstore anymore?’”

These challenges are shown in the financial performance of all three of the biggest pharmacy chains.

Walgreens Boots Alliance announced plans to cut $1B in 2024, including closing as many as 60 stores, in its most recent earnings call. The company turned in a net loss in its fourth fiscal quarter 2023 of $180M, and as of Oct. 11 is under the direction of a new CEO.

Retail sales for the company decreased 4.3% and comparable retail sales decreased 3.3% compared with the same quarter a year ago. Among other things, there was a 1.6% impact from lower sales of Covid-19 test kits, the company reported.

“When faced with the difficult decision to close a location, several factors are taken into account, including our existing footprint of stores, dynamics of the local market, and changes in the buying habits of our patients and customers, among other reasons,” a Walgreens spokesperson told Bisnow by email.

For its part, CVS in 2021 announced its intent to close 900 stores by the end of 2024. With a smaller footprint and a digital strategy, the chain plans to experiment with store formats, like its “Health Hubs,” which offer a wider variety of medical supplies and services. 

CVS reported net income of $3.6B during the third quarter of this year, a turnaround from the same quarter in 2022 when the company reported a loss of $3.9B. Same-store sales were down 2.2% compared with a year ago, however, which the company attributed to declines in cough, cold and flu and Covid-19 test kits.

Rite Aid, in the midst of bankruptcy reorganization, didn't respond to a query about its planned closures. In addition to the 500 announced locations, more could be on the way, if certain bondholders get their way, The Wall Street Journal reported.

The company is not only bogged down by about $3.3B in debt, it is also beset by lawsuits in federal and state courts over its alleged involvement in the opioid crisis.

Late last year, CVS and Walgreens agreed to pay more than $10B to settle a number of lawsuits about their alleged roles in the crisis, which will represent long-term drags on their returns, as the payments will be stretched out over several years. 

Despite the challenges ahead, Podell said, she doesn't believe current conditions pose an existential risk for the largest chains. Demand might be down, but it isn't going away, and markets with growing populations will still offer opportunities for new locations.

“If these retailers are careful in terms of identifying locations, understanding the demographics and driving patterns, I think there's always room for growth,” Podell said. "They just have to be careful.”

CORRECTION: NOV. 22, 1 P.M. ET: An earlier version of this story misattributed S&P Global data regarding retail default risk to CBRE's Brandon Isner. The story has been corrected.