Why your local pharmacy may be closing

Walgreens is closing a "significant" number of US stores. CEO Tim Wentworth said the industry is "largely overbuilt."

• Walgreens plans to close a "significant" number of underperforming US stores.
• The move highlights recent and longer-term challenges facing the company and its competitors.
• CEO Tim Wentworth said the industry is "largely overbuilt" given how the past decade has unfolded.

Thursday's news that Walgreens will close a "significant" number of underperforming stores threw a spotlight on struggles facing the retail pharmacy industry.

Walgreens CEO Tim Wentworth told investors on Thursday that 25% of the company's roughly 8,600 US locations contribute nothing to its adjusted operating income and that a large portion of those stores will be shuttered over the next three years.

"Customers evolved, demographics and preferences have shifted, and we need to reposition and operate our stores accordingly," Wentworth said.

While Walgreens' earnings indicate significant company-specific challenges, they also highlight recent and longer-term challenges facing its competitors as well.

Rite Aid has closed more than 500 locations since filing for bankruptcy in October, and CVS is in the final year of a three-year plan to close roughly 900 stores. Walgreens CFO Manmohan Mahajan noted on the earnings call that Walgreens has closed some 2,000 locations over the past decade.

In short, regardless of which national pharmacy brand you pick, there's a fair chance the location in your neighborhood could close, if it hasn't already.

Walgreens execs pointed to several contributing factors driving this trend.

For starters, retail pharmacies make money in two key ways: by dispensing prescription medication and ancillary medical services, and by selling an assortment of merchandise in their "front of house" retail stores. Both of these revenue sources are under pressure.

For Walgreens, execs said the prescription business is getting squeezed by contracts they negotiated with insurers last year that are "not sustainable," plus more patients are using home-delivery companies.

In the "front of house," Walgreens is facing pricing pressures and rising rates of shrink, which includes losses due to shoplifting.

"Walgreens does itself no favors in this environment by having a lackluster proposition and broadly uncompetitive prices compared to mass merchants," GlobalData retail analyst Neil Saunders said in a note.

But even if things were going well for Walgreens, Wentworth suggested there would likely still be quite a few closures.

"This industry has been reducing its capacity over the last several years, and that is not a bad thing," he said. "I think most of us knew — when I was in the PBM [pharmacy benefit management] business — I knew that retail pharmacy was largely overbuilt for where the future was going to be."