Walgreens: The Impact of Mass Closures and Incentive Strategies

Headline announcements about Walgreens closing 1,200 stores in the coming years have sparked concerns across the United States, with store managers left wondering if their locations will be next. The Illinois-based Walgreens Boots Alliance disclosed plans for a “significant multiyear footprint optimization program,” necessitated by a staggering $3 billion loss, contributing to a multi-decade low in the company’s stock price. The report pointed to weak margins, ongoing profitability issues, and a burdensome debt load as substantial roadblocks for the company. Despite holding a legacy as one of America’s most trusted brands and a retail presence since 1901, the impending closures of approximately 500 stores in 2025 mark only the beginning of a troubling trend. This crisis isn’t limited to Walgreens; Rite Aid has also filed for bankruptcy in October 2023, raising broader questions about the pharmacy sector’s health and its implications for communities that rely on these services.

The current economic landscape plays a pivotal role in Walgreens’ challenges. The pharmacy chain has expanded its offerings beyond just medication, featuring personal care items, snacks, and convenience goods. Unlike larger retail rivals like Walmart and Costco, which can compete on price due to economies of scale, Walgreens has traditionally relied on a customer base willing to pay a premium for local convenience. However, the rise of same-day delivery and online shopping has diminished this advantage. Inflation has made consumers more price-sensitive, leading them to favor online retailers even while waiting for prescriptions. For Walgreens, in-store sales are crucial for cross-subsidization, a common business practice where profits from higher-margin products subsidize lower-margin sales. The current environment, characterized by soaring operational costs and the necessity of in-person sales, puts Walgreens in a precarious position.

Additionally, the compensation landscape for pharmacists has worsened significantly, driven by the growing influence of Pharmacy Benefit Managers (PBMs). Originally set up in the 1960s to streamline prescription-drug claim processing, PBMs have expanded their role to dictate which drugs receive coverage and reimbursement. These changes often favor higher-priced medications, generating large rebates for PBMs, thereby skewing the healthcare market away from patient interests and driving costs higher. The combination of diminished pharmacist enrollment and increased pressures on the pharmacy profession has compounded the difficulties wrought by the changing reimbursement environment. Unlike CVS, which successfully snagged a PBM through its acquisition of Caremark in 2007 and has benefitted from PBM rebates, Walgreens struggles without a similar adaptive strategy amid a highly dynamic market.

Further complicating the pharmacy landscape is the introduction of Medicare prescription coverage. The signing of the Medicare Prescription Drug, Improvement, and Modernization Act in 2003 and subsequent establishment of Medicare Part D shifted a significant number of prescriptions into systems involving PBMs. As a result, drug manufacturers found themselves catering to PBMs rather than representing patient needs. Walgreens has struggled to find its footing in this altered landscape, whereas competitors have adapted. The impending closures of its stores may not only exacerbate existing difficulties for the chain but also amplify the problem of pharmacy deserts, defined as areas where residents find it difficult to access pharmaceutical care.

Although most Americans live within a few miles of a pharmacy, the rise in pharmacy deserts could have dire consequences, particularly for those in urgent need of medications. While online fulfillment options exist, they lack the human touch necessary for patient care, such as personal consultations, medication counseling, and on-site health services. With an increasingly aging population, the simultaneous closing of pharmacies and rising demand for medications could further complicate an already fragile healthcare environment. Areas that heavily depend on Walgreens or Rite Aid now face uncertainty, though some hope remains—the entry of alternative retail options, like Dollar General, has created pathways to mitigate these challenges by converting vacant pharmacy spaces into stores offering essential goods and health products.

Amidst this turmoil, the long-term outlook for failing pharmacies remains complex and requires detailed assessment. Walgreens’ predicament is not merely an isolated issue; it reflects broader systemic problems in the pharmacy market, including the implications of dwindling drug reimbursement rates, workforce shortages, and rising inflation. These factors have damaged profitability, ultimately leading to store closures that can seriously affect community access to essential services. Nevertheless, the evolution of telehealth, direct-to-consumer prescriptions, and innovations from emerging companies signals a new phase that may address gaps created by the closure of traditional pharmacies. Creative solutions and market responses to ongoing issues could offer a path to revitalize access to healthcare resources while providing an adaptive framework for pharmacies and alternative retailers alike.

Ultimately, the ongoing pressures facing Walgreens epitomize the broader segments of the pharmacy sector grappling with both market challenges and regulatory limitations. As the firm works to realign its resources and respond to changing consumer behaviors, the closures it undertakes serve both as a response to immediate pressures and a strategic repositioning amid economic turbulence. Agile companies that can quickly adapt to shifts within the market stand a better chance of thriving in the current climate, whereas bureaucratic intervention historically fails to seize nuanced market dynamics. The continued evolution of healthcare delivery methods necessitates prioritizing creative solutions over governmental involvement, allowing for an entrepreneurial approach to managing costs and driving innovations that can reinvigorate access and affordability in the pharmacy space. In the face of adversity, there’s no doubt that ingenuity and adaptability will remain crucial components in reshaping the future of pharmacy services on which many communities rely.