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July 10, 2024
What Does Walgreens’ Road Back to Health Look Like?
Walgreens recently revealed plans to close as much as 25% of its U.S. store base, with Tim Wentworth, CEO since October 2023, admitting the current pharmacy model is “not sustainable.”
“The challenges in our operating environment require we approach the market differently,” said Wentworth, formerly CEO of Express Scripts, the largest pharmacy benefit manager (PBM) in the U.S., on the chain’s third-quarter call with analysts. “For example, we are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly.”
He added, “We are also working with our suppliers and partnering directly with pharma companies to build out specialty pharmacy, clinical trials, and other services which Walgreens is uniquely positioned to facilitate given our physical footprint and the trust we’ve already established with patients.”
Per CNBC, Walgreens’ shares closed more than 20% lower after the retailer reported that its fiscal third-quarter earnings fell short of expectations and reduced its expectations for the current and following year amid continued struggles.
On the call, Wentworth said that U.S. retail pharmacy consumers have become “increasingly selective and price sensitive.” Targeted promotion and price decisions to drive traffic, as well as higher levels of shrink, impacted margins in the latest quarter.
Branded mix impacts and increased regulatory and reimbursement pressures have also negatively impacted pharmacy margins. Prescriptions, a major revenue driver for retail pharmacies, are growing but continue to trail below pre-pandemic growth levels.
To improve profitability, Walgreens plans to close up to a quarter of its roughly 8,700 U.S. stores over the next three years as 75% of those stores contribute about 100% of the U.S. retail pharmacy segment adjusted operating income.
In addition to store closures, Walgreens will be reevaluating assortments, working with “fewer partners who are helping us win.” In the latest quarter, Walgreens removed eight national brands and redeployed those SKUs toward owned brands and preferred partners within health and wellness categories. Wentworth said, “We are sharpening our focus as a destination for areas we are uniquely positioned to lead, such as health and beauty and women’s health.”
Online, Walgreens continues to deliver approximately 80% of same-day delivery orders within one hour. The retailer also has plans to “meaningfully build” its loyalty program.
In the pharmacy area, conversations are taking place with payers and PBMs to improve reimbursements. Mary Langowski, Walgreens’ president of U.S. Healthcare, said on the analyst call, “Put simply, the playbook is a bit dated and does not account for nor does it adequately or fairly pay for the role and value that we think the pharmacist is bringing and delivering services. We also don’t think it accounts adequately for the complexity that we now face in the system, and it certainly doesn’t facilitate putting pharmacotherapy and behavioral interventions at the center of chronic disease management in this country.”
Walgreens has also partnered with 17 pharmacy school deans to form the Walgreens Deans Advisory Council to make Walgreens “the practice-setting destination of choice for pharmacy talent” in the face of a significant shortage in pharmacists in the country, according to Wentworth.
Wentworth cautioned that it will take “quarters, not months” for the retail segment’s profits to stabilize. He told analysts, “The retail pharmacy experience will be more important to the healthcare industry in the years ahead, but it will evolve. With widespread demand for convenient healthcare solutions, including chronic diseases, and nationwide labor shortages, the pharmacy and pharmacists have never been more important.”
Discussion Questions
How do you think Walgreens and the U.S. retail pharmacy model need to evolve to ensure consistent profitability?
Of the steps Walgreens is taking, which do you think will be particularly beneficial?
Poll
Loading …BrainTrust
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
Melissa Minkow
Director, Retail Strategy, CI&T
Brad Halverson
Principal, Clearbrand CX
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If you want to understand how badly Walgreens has performed, look at its market cap. Back in 2015, Walgreens was valued at $100.8 billion. Today it is valued at $10.5 billion. That’s an absolutely astonishing 90% or $90.3 billion decline in value. Consider this too: Walgreens is now worth less than the $10.7 billion it cost it to buy Boots – a company it still owns.
Such a precipitous drop isn’t a function of economic challenges or of consumers cutting back. It’s a function of deep neglect and numerous mistakes over many years: poor hiring, overpaying for acquisitions, dabbling in healthcare without fixing the core of the business, botched IT projects, abysmal retail execution, no real innovation, neglecting store staff and resourcing, not adapting to changing consumer habits, and so the list goes on.
Walgreens can fix these things, but to do so it needs to have a clear plan and be prepared to make investments. Closing stores may stop some bleeding, but it is not the answer to remedying any of the fundamental issues with the business.
I don’t know about over paying for acquisitions…the larger issue has been ineffective management of M&A and other strategic initiatives since the merger with Alliance Boots…not to mention that merger itself was misguided and never paid dividends (and has since been mostly unwound except for a small wholesale piece and Boots). The now abandoned equity tie up with Amerisource/Cencora, shifting from partnerships to acquisitions in primary care…all these efforts to diversify their revenue stream were arguably the right thing to do because the dynamics of retail drug had shifted as online first killed the front-end and is now threatening the pharmacy. Compound that with the reduced reimbursement rates and an overly complex, opaque pharma supply chain which is being further complicated by IRA/Medicare negotiations (see drug channels piece on how IRA may actually increase the cost of Medicare drugs)….you can’t blame WBA for looking for a way out of the slow death of retail drug (and WBA’s larger store frontend footprint makes them even more vulnerable), but you can blame them for mismanaging the process, notably under leadership of Stefano Pessina.
Agreed, Walgreens has to contend with increasing players like Amazon getting into the pharmacy business, it’s bread and butter, and a lack of traffic drivers elsewhere in the store. Its other selection isn’t unique and there are other retailers who sell it for less. Convenient add ons to a pharmacy purchase aren’t enough to survive on anymore and they have not innovated enough to keep customers coming.
Yes. What is Walgreen’s going to do to differentiate itself from the competitors whether it is Walmart, CVS, or Amazon? It is more of a “me too retailer” right now-only with higher pricing. Reviewing assortment is something you should already be doing including adding private label where it makes sense to add it to the stores. Tailor to the demographic in the neighborhoods in which they operate. Be more involved in the communities they serve. Be relevant and authentic they were in the yesteryears.
I’m far from an expert on the underlying economics of the pharmacy industry, but after reading this withering investigation of the pharmacy benefits manager PBM sector in the NY Times, I have suspicions that Walgreens fortunes have been subject to more than just weak management of its retail business.
Fascinating that Mr. Wentworth, their present CEO, came from the PBM business. One hopes he arrived with useful insights.
The central question before this troubled company is: Where do we make money in this business? Are Walgreens stores health service purveyors who also sell stuff? Or are they a chain of convenience stores that happen to fill prescriptions out back?
There is too much dissonance, I think, between the merchandising in the front of the store and the health mission behind the pharmacy counter. The packaged food, candy and beverage assortments in particular are out of step with wellness. In stores I have visited, the personal care merchandising is uninspiring, to say the least.
What about redefining the role of the pharmacists and techs as counselors who can come out from behind the counter to advise customers about making product choices for better self care?
Some pharmacy retailers have done a decent job of stepping out a bit to differentiate themselves, especially with a focus on expanded assortments and convenience. But the consistency has not been there, and they seem to struggle figuring out if they want to be a pharmacy-centric convenience store, or a C-store centric pharmacy. In addition, they’ve generally been challenged to manage their workforce and maintain positive consumer experience. With online options growing, physical pharmacies will need to step up on numerous fronts to stay relevant in the foreseeable future.
Gee I wonder which stores they’re going to be? A few stories – and a few pearl clutchings about retail deserts – back I singled out Walgreens for the (seemingly) large number of stores it operated in inner city neighborhoods; I felt then, and still do, that it was a quiet form of philathrophy infinitely superior to taking out an ad in the NYT about how much you value inclusion, or sponsoring some “month”. But how can a troubled company – and once you’re saddled with that title it can become self-fulfilling – keep open stores that make no money (apparently literally)? I don’t often hope that I’m spectacularly wrong, but this is one time I hope I am.
The slow decline has already begun. In my fading blue-collar hometown, Walgreens has boarded up the front of several of the stores with plywood in the less desirable parts of town, but has a sign over the back of the stores that says Prescriptions Only. It screams “decrepit and dying.”
Throughout its history, Walgreens has been committed to excellence in many forms and ways. For more than four decades, I have been a Walgreens vendor partner, working with national brands as well as private labels and pharmaceutical products.
It has been my pleasure to work directly with the Walgreens family throughout my career, and to have had partnerships with management at every level. Both Walgreens and I made money from my brands and partnerships.
Nevertheless, the Walgreens family is long gone (although I remain friends with family members) and the executive branch looks at the company from a very different perspective today. In my current role, I work with a wide range of clients and brands, and dealing with Walgreens is no easy task.
Having a strong Walgreens, with a strong ACV, is essential to the success of our industry. We all benefit from a strong Walgreens.
To regain its footing, Walgreens needs to do more than reduce the number of stores.
Labor shortages, including those of pharmacists and pharmacy technicians, may be addressed by reducing store openings. Even so, Walgreens’ pharmacy personnel are undergoing a high rate of turnover. People who are still employed face a great deal of stress as a result of the labor shortage.
Walgreens must improve its digital platforms, apps, web sites, and all technology.
There is a danger that Walgreens is too reliant on generating revenue from how much it charges its suppliers for doing business with it.
The company needs to make more money from “selling” than from “buying”. Furthermore, Walgreens appears to charge higher prices for prescription drugs than most other pharmacies.
One potential reason for the high rate of turnover among Walgreens’ pharmacy personnel could be the stressful work environment caused by the labor shortage. The shortage may lead to increased workloads and pressure on the existing staff, resulting in burnout and job dissatisfaction. Additionally, if employees feel undervalued or unsupported, they may be more likely to seek opportunities elsewhere.
Charging higher prices for prescription drugs can have a negative impact on Walgreens’ reputation and customer loyalty. It may drive customers to seek more affordable alternatives at other pharmacies and online retailers. Additionally, it can contribute to the rising cost of healthcare and put a financial burden on patients who rely on prescription medications.
Walgreens needs to focus on its strengths and leverage them in order to stay competitive. It should also strive to innovate and create new opportunities for growth. Finally, Walgreens should embrace collaboration and use it to drive future success. – Db
Complacency may best describe Walgreens in recent years. Cutting poor performing stores is a beginning. Now, the challenge is to develop a sustainable point of difference in a market which continues to churn. Focus & investment are critical. This return to profitability will take time.
Walgreens, CVS and others feel like candidates for a thoughtful, strategic review of their business model. Who is the target customer segment now, and into the future? what products and services are they are likely to need? How do they want to be served? What is the store footprint needed to serve that business opportunity? How can the store operating model be improved?
It just doesn’t feel like anyone in this segment as taken the time to ask themselves this question. I have yet to find/visit a busy Walgreens or CVS location in recent years. Pharmacy hours are inconvenient. Stores are dirty, out-of-store and poorly merchandised. There’s such an opportunity for improvement to serve a customer base that needs these products and services in a convenient location. Please…think it through!
I really think Walgreens needs to re-focus on offering and assortment. It used to be positioned as the store that had pretty much anything you’d need. The assortment now feels so narrow that I struggle to check anything off my list when I’m there. In order to stay in the “convenience store” category, you have to be convenient, and assortment is a major piece of that.
When pharmacies decided to become convenience stores, they lost their focus on their main reason for being.
The Opaque Industry Secretly Inflating Prices for Prescription Drugs. Pharmacy benefit managers are driving up drug costs for millions of people, employers, and the government. (https://www.nytimes.com/2024/06/21/business/prescription-drug-costs-pbm.html)
Who is the largest PBM with a 30% plus share of the market? CVS Caremark! This makes it very difficult for Walgreens to compete with CVS.
You can have every Pharmacy School Dean in the world on your advisory board and you will still have the same issue-too many stores combined with the pharmacy by mail threat along with Amazon pounding away at purchasing decisions that happen in the aisles of these stores.
The model of a store in every attractive geographical location is not bankrupt-yet. While not as cataclysmic as, say the collapse of Department stores, the main logical path here is to do what they are already doing-close some stores.
It is an unmitigated disaster. And because Pessina and his crew are and were such arrogant pieces of garbage, it is pure pleasure to watch.
Nothing they do makes sense. They announce they are essentially getting out of healthcare and then bring onto their board yet another medical doctor. They are clueless. Is he going to tell them to stop selling cigarettes, Doritos, and Mountain Dew?
All of the PBM blaming in the world is not going to solve this. If there is PBM reform it will be to the benefit of the insurance companies and plan sponsors which hire them. CVS has its own struggles, but it has strategic options across the healthcare vertical. Amazon will eventually grab a lot of market share from both, but that will damage Walgreens much more. OBMs did not kill Walgreens, their utterly insane reactions to and relationships with business counter parties did.
I don’t know much about Boots but it seems to be doing well. And I am pretty confident freed from Walgreens would do even better — what wouldn’t improve once out of the shackles of crappy, aging stores that are little better (and often in terms of what people want worse) than dollar stores..
Wentworth will slap some lipstick on the Walgreens pig and sell it. Some health plan/PBM combo will buy it — essentially as scrap at this point — and integrate it into some sort of more comprehensive offering.
Others have pointed out, the Walgreens go-to-market plan needs a do over. Rite-Aid, CVS, others are locked into similar competitive pressures and a changing healthcare landscape. To thrive, the pharmacy retail industry needs new customers, new revenue streams and new profits. Where does this go?
In Washington State, 130 year old beloved independent chain Bartell Drug stores sold their 41 locations to Rite-Aid in 2020. Bartells was known as friendly, with long-time employees, exclusive and local brands, beer taps with growlers, and quality cosmetic lines. They were much more diversified and differentiated than competitors. But they’ve since lost their mojo under parent Rite-Aid’s self-inflicted issues.
And so, are we headed toward dramatically different offerings and services? A market C-store with fresh foods, custom coffee drinks and energy refreshers – plus a side of meds and healthcare supplies? We can point to Buc-ees redefining the gas station business. Telehealth and clinics are shifting our exceptions of medical services. New directions are in order.