CVS and Walgreens Face Challenges in Retail Pharmacy

The retail pharmacy model is facing significant challenges, and CVS and Walgreens are grappling with a number of issues that are putting pressure on their profits and stock prices.

• Decreasing prescription drug reimbursement rates from pharmacy benefit managers (PBMs).
• Increased competition from Amazon and other retailers.
• Softening consumer spending due to inflation.
• Burnout among pharmacy staff due to understaffing and increasing workloads.

Lower Reimbursement Rates from PBMs

One of the biggest issues facing CVS and Walgreens is lower reimbursement rates for prescription drugs. PBMs, such as CVS Health's Caremark, UnitedHealth Group's Optum Rx, and Cigna's Express Scripts, negotiate discounts with drug manufacturers on behalf of insurers. These PBMs are accused of setting lower reimbursement rates for pharmacies, which can mean that pharmacies are paid less than the cost of buying and dispensing a prescription.

• The operating margin for Walgreens' U.S. retail pharmacy unit was -5% last year, down from 3.9% in 2019 and 4.4% in 2015.
• CVS' operating margin for its pharmacy and consumer wellness business was 4.6% last year, up from 3.3% in 2022 but down from 8.5% in 2019 and 9.9% in 2015.

Front-of-Store Woes: Competition and Consumer Spending

CVS and Walgreens are also facing challenges with their front-of-store businesses, where they sell a variety of items from groceries to cosmetics. This part of the business has been impacted by increased competition from online retailers such as Amazon, as well as discounters and big-box retailers such as Walmart and Target.

• Inflation is squeezing consumers, who are becoming more price-conscious and shopping at retailers like Walmart, dollar stores, or Costco.
• CVS and Walgreens have been lagging behind in their online retail presence compared to Amazon and other retailers.
• Both chains are increasing their focus on private-label products to attract price-sensitive shoppers.

CVS' Health Care Focus

CVS has a slight advantage over Walgreens in that it owns its own PBM, Caremark. This could help CVS offset the pressure from lower reimbursement rates that are affecting other pharmacies. CVS is also expanding its health care offerings, such as its primary-care provider, Oak Street Health.

• CVS's health services segment, which operates Caremark and Oak Street Health, booked nearly $187 billion in sales last year, compared to its retail pharmacy unit, which generated $116.76 billion in sales.
• CVS introduced a new pharmacy reimbursement model called CostVantage, which will use a "transparent" formula to determine a medication's price and provide more clarity for consumers.

Walgreens' Struggles with Primary Care

Walgreens is more heavily reliant on its retail pharmacy business for revenue than CVS. The company has been trying to diversify its business by expanding into primary care, but this has been a challenging endeavor. Walgreens has invested in VillageMD, a primary-care provider, but has also been closing clinic locations and is considering selling its stake in the company.

• Walgreens' U.S. retail pharmacy business generated more than $109 billion in revenue last year, compared to $21.83 billion from its international segment and nearly $1.8 billion from its health-care unit.

Adapting to the Changing Landscape

CVS and Walgreens are adapting to the changing retail pharmacy landscape by taking steps to improve profitability, such as shuttering underperforming locations and focusing on private-label products. Both chains are also investing in technology to improve the customer experience and efficiency.

• Walgreens has opened roughly 100 smaller-format stores with fewer front-of-store items and over-the-counter medicines.
• CVS is opening Oak Street Health primary-care centers alongside CVS pharmacies.
• Both chains are working to improve their online presence and make it easier for consumers to order prescriptions and other items online.

The Future of the Retail Pharmacy

While retail pharmacies will likely remain an important part of the U.S. health care system, they will need to adapt to survive in a competitive and evolving market. This could mean increasing their online presence, reducing their reliance on traditional front-of-store sales, and expanding their health care offerings.

• CVS and Walgreens may need to close more stores in the future to right-size their businesses and improve profitability.
• Addressing the issue of lower reimbursement rates will likely require legislative action and lobbying efforts.