In 2024, retail drugstores took a hard look at their operating models

Traditional drugstores have been operating under increasing pressure for years, and in 2024 both CVS Health Corp. and Walgreens Boots Alliance ramped up their efforts to stop the bleeding.

The two companies began to dramatically rethink their strategies, as their previous efforts to expand into auxiliary businesses and to build out ever-increasing retail footprints have come under fire. Perhaps most significantly, new leadership at both companies signaled renewed efforts to reverse the struggles of the segment.

Tim Wentworth, a veteran of health-industry giants Cigna and Express Scripts, was named CEO of Walgreens in October 2023, and this year unveiled a new strategic plan that calls for the closing of 1,200 unprofitable stores during the next three years, including 500 in 2025. He’s also considering the potential divestment of the company’s VillageMD clinic subsidiary, which it had already been scaling back to focus on its core retail pharmacy operations.

CVS, meanwhile, named David Joyner president and CEO in October of this year, as the company’s longtime leader Karen Lynch agreed to step down amid eroding profitability in the company’s retail and health insurance divisions. At the same time, CVS unveiled the results of a strategic review calling for an additional 270 store closures in 2025, following the closure of 900 stores during the past three years.

Related:Report: ‘Unprecedented’ pharmacy closures are leaving many without access

The moves followed CVS’s announcement that it would trim 2,900 employees from its corporate staff and cut $2 billion in costs in the next few years.

“We recognize the importance of retail pharmacy in the communities we serve and will continue to be thoughtful and deliberate as we execute on our footprint optimization efforts,” Joyner said in CVS’s recent third-quarter earnings call with analysts, his first at the helm of the diversified health care conglomerate.

During the call, Joyner, who previously had been president of the CVS Caremark division, pinned much of the blame for the company’s struggles during the past year on unexpectedly high costs experienced in the company’s Medicaid insurance business. He also began a management shakeup that included elevating Prem Shah to group president and tapping UnitedHealthcare veteran Steve Nelson to run Aetna, the company’s health insurance division.

Walgreens also has been rolling out a series of management changes throughout the year, including most recently the resignment of VillageMD CEO and co-founder Tim Barry—a move that comes as Walgreens is considering selling its stake in the health clinics business.

Related:Amazon to open 20 new pharmacies in 2025

“I think the bottom line is that their almost 100-year-old business model fell apart,” said Dave Marcotte, senior VP of global retail at consulting firm Kantar, referring to the chain drugstore industry overall.

While the companies sought to expand into new sources of revenues and drive efficiencies by tacking on new healthcare businesses, “at the end of the day, it was still the same [retail] business model,” Marcotte said.

That model — in which drugstores have sought to be convenient destinations for a wide assortment of everyday health, beauty care, and food products, in addition to being a reliable source for prescriptions — is expensive to operate, said Elizabeth Anderson, senior managing director at investment banking firm Evercore

Eliminating money-losing stores should shore up the companies’ profitability overall, she said.

“I think some of what we saw this year was sort of a culmination of trends that have been continuing for the last decade or so,” said Anderson.

Pharmacy profit squeeze

Pressure on prescription profitability from pharmacy benefit management companies — which include CVS’s own PBM, Caremark — has also contributed significantly to the struggles of retail pharmacy. That has led CVS to begin testing a new “cost-plus” payment model, CostVantage, in which the retail will price each prescription based its cost to purchase the drug, plus a set markup and a fee for pharmacy services to fill the prescription.

Related:Canada’s Pharmaprix will launch more care clinics in stores

In CVS’s recent earnings call, Joyner said CVS was making progress in transitioning to its new pricing model and had reached agreements covering more than half the prescription drugs it offers. He said the company expects “full commercial contract implementation” in January 2025.

Although the full impact of the pricing initiative has yet be seen, Anderson said it “should help to stabilize the pharmacy” going forward.

Pressures on the front end

Despite the pressures on pharmacy margins, top-line prescription sales have remained strong, Anderson noted, while sales in the front end have lagged.

In the third quarter, for example, CVS reported that same-store pharmacy sales increased by nearly 20% compared with a year ago, with prescription volumes up about 9%. Same-store sales in front-of-store categories were down about 1%, following declines of 2% and 4% in the first and second quarters, respectively.

Walgreens, meanwhile, reported that U.S. retail comp-store sales declined 1.7% in the fourth fiscal quarter, despite comparable pharmacy sales growth of 11.7%.

As a result of the front-line, both CVS and Walgreens are seeking to become more competitive in the front end with expanded private label assortments. Walgreens said it had increased its private label penetration by almost a full penetration point in the past year for example, to 17.1%.

“We expect that we can further expand with a meaningful margin advantage over national brands,” said Wentworth, adding that Walgreens at the same time is seeking to deepen its relationship with a reduced roster of national suppliers in order to create more efficiencies.

In May, CVS launched a new private label consumables brand called Well Market, featuring 40 better-for-you snack, beverage, and grocery products with on-trend flavors profiles. Plans call for expanding the line and folding the existing Gold Emblem and Big Chill brands under the Well Market umbrella.

Anderson said she is said she is cautiously optimistic about the new CEOs at both Walgreens and CVS and the steps they are taking to right their respective ships.

“In situations where you have problems like these companies have, it can be good to have a fresh set of eyes,” she said. “I think both of these people are experienced, industry veterans who have a good perspective on the world.

“I don't want to say that they are easy problems to fix,” she added. “If they had been easy problems to fix, someone over the last 10 years would have fixed them.”