Walgreens is closing stores; CVS is announcing layoffs. Here’s why : NPR

Not too long after Tim Wentworth became CEO of Walgreens, he revealed a stunning figure: Roughly a quarter of the pharmacy chain’s stores do not make money.

On Tuesday, he said 1,200 of those stores will close over three years. That’s two weeks after rival CVS announced layoffs of 2,900 corporate staff. Both chains are on a multi-billion-dollar cost-saving spree – closing hundreds of locations, cutting thousands of jobs and, really, reconsidering their role in Americans’ lives.

The slow simmer of mistakes and misfortunes have come to a boil for the biggest U.S. drugstore chains. They’ve accumulated too many stores at a time of changing shopper habits. They’re saddled with numerous government fines and a particularly ailing relationship with insurers.

The problem of stores

CVS and Walgreens have some notable differences. Walgreens, which also owns the British drugstore Boots, is more singularly focused on its pharmacy business. CVS has expanded further into health care through mergers with insurer Aetna and Caremark, a pharmacy benefit manager that helps insurers negotiate prescription drug coverage and costs. Yet the two companies have made similar missteps.

The simplest part of the problem is scale. CVS and Walgreens grew massive nationwide footprints of more than 9,000 and 8,000 stores, respectively. They gobbled up mom-and-pop shops and signed long-term leases for prime locations on street corners.

Now, shoppers regularly complain about stores being chronically understaffed, and products locked up to prevent theft. The shelves of snacks, makeup, greeting cards and cleaning products were meant to boost profits. But sales have sagged for years — a result of a losing battle with Amazon, Walmart, Costco, grocery and dollar stores.

CVS and Walgreens “probably do have too many stores because they over-expanded, but the bigger problem is that the stores that they have are not very good,” said Neil Saunders, retail analyst at the firm GlobalData.

The chains have failed to add new incentives for shoppers, beyond printing photos or dropping off shopping returns, says Anshuman Jaiswal, a longtime consultant to retailers and pharmacies. And neither chain has built a meaningful online presence designed to give customers what they need.

“If you go to CVS.com or Walgreens.com, if you are placing an order for cough syrup, why don’t I sell chicken broth as a product recommendation immediately?” Jaiswal says. “It’s about reimagining the business model.”

The problem of prescriptions

Given the retail struggles, pharmacies could perhaps simply ditch the convenience store and focus on selling medicine — except CVS and Walgreens say it’s harder and harder to make a profit from this part of their business.

Years ago, a big shift in the power balance between pharmacies and health insurers revealed the limits of drugstores’ leverage.

“Historically, there was a view that there was a lot of customer loyalty to their specific retail pharmacy … and that patients, or consumers, would be all up in arms if they were forced to move their prescriptions,” says Brian Tanquilut, health care services analyst at the investment bank Jefferies.

Walgreens tested this theory about a decade ago when it got into a public fight with Express Scripts, a pharmacy benefit manager that worked with major health insurers.

Walgreens and Express Scripts played a game of chicken over how much Walgreens should earn from prescriptions – and Walgreens lost. For a time, it got kicked out of insurance networks used by millions of people, who simply went elsewhere to get their medicine at the lower in-network prices.

“What that did was to prove that patient loyalty is not to the retail pharmacy, but it actually is whatever my insurance is willing to pay,” Tanquilut says. “And that opened the door for the payers to keep pushing pricing down on retail pharmacy chains.”

Hoping reinvention is the cure

These days, CVS and Walgreens are facing tough competition from pharmacies that don’t depend as much on profits from prescriptions because they’re part of retail giants, including Walmart and Costco. The drugstore chains also have spent millions of dollars on government fines over allegations of unsafe staffing levels, overbilling government insurance programs and contributing to the opioid epidemic.

Over the years, CVS and Walgreens attempted to reframe themselves as health care hubs, expanding primary-care clinics. But these operations cost time and money.

On Tuesday, Walgreens CEO Wentworth said his chain is “reorienting to its legacy strength as a retail pharmacy-led company.” CVS is reportedly weighing a breakup to undo its mergers with Aetna and Caremark.

Both companies are also proposing new structures for how they want to be paid for filling prescriptions, hoping this is the big shot in the arm they need.

“I’m very confident that over a two- to three-year period we will have reset the framework for reimbursement discussions,” Wentworth told investors on Tuesday. “We are in the early stages of a turnaround that will take time.”