Is there a prescription for the big-three drug chains?

Pharmacist walkouts at Walgreens and CVS. A potential bankruptcy filing by Rite Aid. Executive exits at Walgreens and the entrance of a new CEO. Corporate downsizing at CVS. And store closings by all three.

What’s going on at the big-three U.S. drug chains?

In a word, change.

Recent years have seen Walgreens, CVS Health and Rite Aid getting squeezed in both the front end and the pharmacy amid flux in the retail and healthcare arenas.

The front-end challenge

The front of the store has remained problematic saleswise for the drug chains (as well as retail pharmacy operators overall). They’ve encountered escalating competition from mass merchants, warehouse clubs, supermarkets, dollar stores, convenience stores and online retailers serving up lower prices (often significantly lower) for health and beauty aids, groceries, snacks, beverages, general merchandise and nonfood items.

Widespread availability of fast delivery service also has dulled the convenience edge long held by drug stores in terms of proximity, i.e. about 90% of Americans residing within five miles of a community pharmacy.

Walgreens, CVS and Rite Aid have all tried to boost their front ends with more engaging and convenient store formats, enhanced beauty departments with higher-end cosmetics, concierge-style service staff, expanded food offerings that include healthier and fresh items, OTC health care departments geared more toward self-service (so you don’t need to ask the pharmacist which cold medicine to choose) and stronger rewards programs. But the success of those efforts has varied.

Related:Rite Aid gets delisting warning from NYSE

Pharmacy care evolves into broader health care

Meanwhile, more dramatic changes have taken place in the pharmacy—the engine of the drug store, accounting for over 70% of sales—as changing economics in the prescription drug industry have pressured retail pharmacy profitability.

Rising drug prices, shrinking profits on generic drugs (now about nine out of every 10 prescriptions), the need for scale to lower drug procurement costs and booming growth in expensive specialty pharmaceuticals (which can require added services and special handling) have fueled consolidation among drug chains, drug distributors and pharmaceutical manufacturers. Cuts in Medicare and Medicaid reimbursements and increasing costs like direct and indirect remuneration (DIR) fees have trimmed margins as well.

The COVID-19 pandemic also pushed pharmacy retailers to quickly expand their healthcare capabilities and personnel, driven by the need to provide more vaccinations and diagnostic testing. As a result, the demands placed on pharmacists and pharmacy technicians have become bigger than ever before.

Related:CIO Hsiao Wang marks latest Walgreens Boots Alliance C-suite exit

Too big, apparently. On Monday, published reports said Walgreens pharmacists walked off the job in Arizona, Massachusetts, Oregon and Washington, forcing those stores to suspend Rx operations. The action involves over 500 of Walgreens’ roughly 9,000 drug stores, one organizer told CNN. Thousands of Walgreens pharmacy staff are participating in the walk-off, slated to run through Wednesday, The Washington Post reported.

The Walgreens pharmacy staff told media they were inspired by a couple of rounds of walkouts by CVS pharmacists in Kansas City in late September. According to organizers and CVS, the pharmacy work stoppages impacted anywhere from 10 to 22 stores.

Why the walkouts? Burnout, essentially.

Protesting pharmacy professionals from both drug chains said in published reports that they are understaffed, face backlogs of hundreds of prescriptions, are pushed to hit vaccination targets and provide more health services like COVID testing, must manage high call volumes and in-store questions from patients, and deal with insurers on matters like coverage, approvals, co-pays and reimbursements. That workload and insufficient support jeopardizes the accurate filling of scripts, they emphasized.

Related:CVS Health to eliminate 5K corporate jobs

I can’t say I’d disagree with that picture, based on the wait time and what I’ve seen in my most recent pharmacy visits. J.D. Power’s 2023 U.S. Pharmacy Study, which gauges pharmacy customer satisfaction, had chain drug stores with the lowest average score at 659 out of 1,000, compared with 704 for supermarkets, 702 for mass merchants and 684 for mail order. CVS (651) and Walgreens (643) both scored below the segment average, while Rite Aid (680) scored just above it. Younger generations of shoppers also have shown an affinity for one-stop shopping and turned to pharmacies at mass retailers (Walmart, Costco) and supermarkets (Kroger).

Pharmacy staff in walkouts at Walgreens stores said they lack enough staff to handle the flood of patients for scripts and other health services, according to published reports. / Photo: Shutterstock

Company matters

The big-three drug chains also have grappled with their own issues. Walgreens Boots Alliance (WBA), the largest U.S. retail pharmacy operator, has seen the departure of global CFO James Kehoe, CEO Rosalind Brewer and CIO Hsiao Wang since late July. 

Late Tuesday, WBA named former Express Scripts CEO Tim Wentworth as its new chief executive, effective Oct. 23. Wentworth will focus on "right-sizing the business," WBA said in a statement, while also working to improve execution and profitability. Wentworth, the company noted, brings with him "deep healthcare experience."

"I believe WBA is well-positioned to deliver more personalized, coordinated care and achieve better outcomes at a lower cost," Wentworth said. "I fully recognize the challenges that health plans, healthcare providers, pharmacies and retailers are confronting today and am confident that WBA and its customer- and patient-focused teams can seize the opportunities of a dynamic marketplace and be the partner of choice."

WBA had recently noted difficulties in improving profitability at its U.S. Healthcare business, which led the company to “rightsize” its cost structure by raising its cost management program target and initiating plans to shut another 150 U.S. stores by the close of fiscal 2024 next August. Also, an organizational restructuring led to the elimination of over 500 roles, or roughly 10% of WBA’s corporate and U.S. support office workforce. In August 2019, the retailer had unveiled plans to close 200 drug stores, or about 3% of its U.S. footprint.

Around the same time, chief rival CVS Health had announced a program to shut about 900 CVS Pharmacy drugstores over the next three years. And at the end of 2021, Rite Aid said it would close 63 drug stores under a re-evaluation of its brick-and-mortar retail base.

Rite Aid may be poised to close a lot more locations. Published reports said the company is preparing to file for Chapter 11 bankruptcy protection amid a barrage of opioid lawsuits, along with a high debt load and lackluster performance. The Chapter 11 plan reportedly would entail Rite Aid closing 400 to 500 stores and possibly divesting its remaining locations and operations or turning them over to creditors, as well as auctioning its Elixir pharmacy services unit and other assets. Last week, Rite Also also received a delisting warning from the NYSE.

A bankruptcy filing by Rite Aid likely would surprise few industry observers. The company has far trailed CVS and Walgreens in growth since the 2000s in the wake of an accounting scandal and a faulty integration of the 1,850-store Brooks-Eckerd acquisition in 2007.

Rite Aid—led by a new team under John Standley, new store formats and a new rewards program—saw a return to profitability in the ensuing years until pair of failed mega-mergers. In August 2018, pressure from Rite Aid shareholders forced the company to nix a $24 billion merger deal with Albertsons Cos. The aborted merger with Albertsons came after the Federal Trade Commission in June 2017 derailed a $17 billion agreement by WBA to acquire Rite Aid. To gain FTC approval, the companies downsized their deal to the sale of 1,932 Rite Aid stores to Walgreens. The transaction cut Rite Aid’s drugstore base by more than 40% and hampered its ability to compete with much bigger rivals CVS and Walgreens. Rite Aid has since seen its sales fall from around $32 billion to roughly $24 billion.

CVS has experienced some hiccups as well amid its transformation into a healthcare company. In early August, CVS confirmed reports that it planned to eliminate 5,000 non-customer-facing positions and take a nearly $500 million restructuring charge related to the job reduction. The move is part of cost-cutting efforts following two big health care acquisitions: Medicare primary care provider Oak Street Health and value-based health care payment platform Signify Health. In a conference call on Q1 results, CVS Health CEO Karen Lynch said the company is on track to shut 300 stores in 2023 and a cumulative total of 900 stores by 2024.

Suffice it to say, the top three U.S. drug chains look to be in a period of transition.

UPDATE: This column has been updated with news of the hiring of Tim Wentworth as the new CEO of Walgreens Boots Alliance.