In June 2024, pharmacy chain Walgreens made a shocking
announcement. They plan to close a significant number of stores. At this point, only 75% of stores bring in what is
effectively their revenues and profits. The iconic chain is rapidly reducing its footprint,
with approximately 2150 locations on the chopping block by 2027. This is just the latest effort by the struggling
company to right a ship that has seen a rotating door of CEOs, stagnating profits, and its share price fall
more than 55% between January and July 2024. In the Q3 report, CEO Tim Wentworth cited two reasons:
pressure on the consumer and challenging trends in the pharmacy space. They don't have infinite time to stabilize this before
it's too late. But Walgreens' problems are just the latest sign of
trouble for the entire industry. Cvs has been closing stores all along. Rite aid is filing for bankruptcy. So what is happening to American pharmacy chains?

How did Walgreens go from record highs to a bottoming stock price in just under a decade? And what does all of this mean for you? In order to better understand the headwinds facing chain pharmacies, we have to separate the store into two parts. First, there's front of store or retail. You know, your over-the-counter cough medicine, paper towels, makeup, candy bars, that kind of stuff. Then there's back of store or pharmacy. We'll get to that later. First, let's start where everyone starts walking in the front door. Walgreens of today looks very much the same as the Walgreens of yesterday. It hasn't really evolved and adapted. When it comes to retail. Walgreens is in the midst of a downward slide, seeing a 4% year over year decline in Q3, a continuation of a rough few years for its retail segment. The front of store offer, where the general merchandise is the beauty products, isn't that

good. It often doesn't look very good. The brands that they have aren't very interesting. The prices are often much higher than other
destinations, and a lot of people will think, well, yes, I'm here, but why bother paying over the odds. Every couple of years, I hear, here's our new plan for
the front end, and it's always some new gimmick. And then that doesn't work. And then they don't talk
about it anymore. As inflation squeezes customers, chain pharmacies are
struggling to compete with cheaper alternatives like dollar stores and big box retailers who offer larger
selections and have their own in-house pharmacies. Particularly our consumer is definitely pressed both
from a, you know, the ongoing inflation that we've seen, albeit at somewhat
moderating, as well as the amount of money that they just have as we move forward. Now Walgreens realizes this is an issue and recently
announced plans to lower cost on 1400 front of store

items. But it might be too little, too late. Because it's not just the economy that's changed, but
the way we shop. Anybody with a pulse would know what's happening with
front end, which is, you know, they're in a pincer movement with Amazon and Walmart getting better and
better. They have better price points. Um, the delivery options are getting, you know,
quicker and quicker. Another frequent pain point for retailers shrinkage or
loss of merchandise, often due to damage or theft. In an interview with The Wall Street
Journal, CEO Tim Wentworth cited high theft locations as a factor in determining which stores would be
closing. Store experience has deteriorated with employee
cutbacks and with shoplifting in some locations, as you know, locking the Gillette razors
behind the case. The problem is anti-theft measures aren't popular, as
locking necessities behind glass cases doesn't just deter thieves, but it drives away paying customers.

Locking things away behind cabinets is the biggest advertisement for Amazon that you could possibly make, because it just says to the customer, this is a really hard place to shop. And that's just the headwinds up front. 8 million vaccines this year at the back of the store already. That's a health care business, right? That's not just putting pills in bottles. When it comes to back of house operations. Pharmacy and health services are Walgreens largest source of income. In Q3 2024, pharmacy sales made up 76% of Walgreens U.S. retail pharmacy revenue and 60% of the company's revenue as a whole. But that's been a declining business for Walgreens, largely thanks to telehealth services and lower reimbursement rates for pharmacy benefit managers or PBMs. Pbm is a company that acts as an intermediary between your insurance and the pharmacy. Pbm started with the idea of being a claims processor.

So when you bring a prescription to the pharmacy, the pharmacy can build a PBM. The role of PBMs has since expanded beyond just facilitating reimbursements. They also negotiate drug prices with manufacturers, determine which drugs are covered, set copays, set prior authorization criteria, and decide which pharmacies a patient can go to. And I think where the traditional PBM pricing model fell apart, and where there's so much concern is that the entity is being paid to manage drug costs, but typically benefit when drug prices increase, and it creates a misaligned incentive. The issue for pharmacies is PBMs have been shrinking the reimbursement rates and pushing patients towards generic brands over name brand, a move that helps the PBMs but makes it harder for pharmacies to make money. The FDA now estimates 91% of prescriptions written in the US are for generic brands. Historically, pharmacies made more money on generic, less money on brands.

Is that with the growth, particularly of the GLP1 for diabetes, the brand volume has increased. And where pharmacies weren't making as much money on brands, as you increase that volume, it creates more and more pressure. Reimbursement pressure on the pharmacies. Currently, the three largest PBMs in the US are CVS Caremark, Cigna's Express Scripts, and UnitedHealth's Optum RX. These three companies alone manage almost 80% of all US prescriptions. And yes, you heard that right. CVS owns its own PBM, Caremark, which is owned by CVS, and CVS stores. Caremark can set whatever rate it wants with itself, and it's just left pocket, right pocket. Whereas with Walgreens, they're just a straight-up price taker. However, the growth of PBMs has attracted federal attention, which is potentially good news for pharmacies as the Federal Trade Commission recently announced it plans to sue the nation's three largest

PBMs, accusing them of illegally driving up drug
prices. So, I think anytime we can shine a light on that, put
pressure on that to make sure that everyone knows what they're paying for and why they're paying
for it. And so, at the end of the day, people can afford the
medications that they need. And that's another thing, what's happening to all the
people who need these pharmacies? What happens to communities who rely on these
pharmacies once they're gone? Pharmacy closure can be detrimental, especially in
areas where access is already an issue. Creating something called pharmacy desert, or a place
with a low geographic access to pharmacies. The definition of this depends on several things: the
density of the area and the resources of a neighborhood, including the median income of a
neighborhood and how many, you know, the vehicle ownership of that neighborhood. According to the National Institutes of Health,
approximately 15.8 million Americans live in a pharmacy

desert. An NIH survey of census tracks identified over
4600 pharmacy deserts in the US, with the majority being in urban areas. There are neighborhoods in the South Side of Chicago
that do not have any pharmacies in, like the downtown area. You might have a CVS next to a Walgreens next to
a Rite Aid. Those neighborhoods are wealthier, they're whiter, and
they're just more resource than the neighborhoods that don't have pharmacy. So it's not even on average,
there's just inequities in the distribution of pharmacy deserts. Pharmacy closures predominantly affect low income urban
areas where the majority of people are on Medicare or Medicaid plans with lower reimbursement rates compared
to private insurers. If that is really a rightsizing, they would be closing
in the neighborhoods that have the most pharmacies, not the neighborhoods, the counties, including rural areas
that have fewer pharmacies on average. Both CVS and Walgreens acknowledged pharmacy deserts
are an issue and claim to be taking that into account.

when closing stores. Walgreens CEO told investors, We are the only thing standing between those places and being pharmacy deserts, and our goal is not simply to be the last one to leave. Our goal is actually to find new ways to work together. CVS CEO Karen Lynch also commented on this topic earlier this year, We are also committed to making sure that there's not pharmacy deserts, so we won't close stores where people need access to medication. If it's a footprint. The argument that doesn't make sense, because we know we do have evidence of like where they're closing and it's not in the neighborhoods that have the most pharmacies. Of course, pharmacies aren't just for picking up prescriptions. Chain pharmacies offer health clinics, Covid testing, vaccines. And it's not just the customers who are impacted. The pharmacist and nearby pharmacy staff who now have to shoulder the burden of displaced customers all at a

time where pharmacists are already staging walkouts
and ringing alarm bells over insufficient staffing and corporate mandates. The problem is, the average American has almost no say
on if a pharmacy stays open or closed in their area, meaning the solution largely falls on legislation to
fix. Regulating PBMs and potentially increasing
reimbursement rates for pharmacies that are serving the most marginalized. Neighborhoods. So the FTC lawsuit we mentioned earlier
could actually lessen the impact of closures, and there's already been movement on the state level. States obviously have a role. They can also regulate PBMs. They can also ensure that, for example, their Medicaid
programs provide higher reimbursement rates for certain pharmacies. In a statement to CNBC, Walgreens stressed we share a
deep commitment to offering equitable access to healthcare in the communities we serve. Our priority is to ensure a smooth transition for our
customers and team members during that time. While painful for communities from a business
standpoint, closing low performing locations is the

solution to a lot of the issues these companies face. And we know it works because someone already did it. 11.3% same store sales increase at the front of the
store for the pharmacy. I mean, that's that's pretty impressive. What drives gains like that? Part of it was that they just had greater volumes at
the pharmacies. And I remember CVS has been closing stores all along. They expect to close up to 900 by the end of this
year, from where they were a couple of years ago. Other attempts to cut costs include Walgreens pulling
out of its primary care endeavor, VillageMD and Walgreens Q3 investor call. CEO Tim Wentworth gave investors ideas of where
Walgreens is shifting its focus next. Health and beauty and women's health. It certainly hasn't taken advantage of very strong
areas of growth in the US, like premium beauty. It's allowed Ulta and Sephora and others to really eat
up market share in that

arena. Unless pharmacies also means better pricing power when
it comes to negotiating with PBMs. One light at the end of the tunnel is on the pharmacy
reimbursement. Caremark. I mean, they have said, look, we recognize
that what's going on in US or the drug retail market is not sustainable. So Walgreens could get a new contract
from Caremark in 2025. Now, on the consumer level, there's been an unlikely
trend emerging out of these pharmacy closures, a resurgence of independent pharmacies. It's true that independents close. They close at a much higher rate, but it's actually a
question of turnover. So they're more likely to open in rural areas. They're more likely to open in neighborhoods of color
and low-income neighborhoods because that's where chains aren't. In New York City, less than 1% of the population now
lives in a pharmacy desert, a city where as of 2023, only 15% of pharmacies were chains, meaning the
mom-and-pop

businesses that were run out by the chain pharmacies
could be the solution when those same chains leave. It definitely creates a business opportunity for an
entrepreneur to come in and start their independent pharmacy and service that area that needs it.

Why Walgreens And CVS Are Shutting Down Thousands Of Stores

Welcome to the official YouTube channel for CNBC. From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more.

For real-time news updates from around the world, visit: http://www.cnbc.com

For CNBC's primetime TV lineup, visit http://tv.cnbc.com

For CNBC's International YouTube channel, visit: http://www.youtube.com/cnbcinternational