Behind the Numbers: Walgreens’ Identity Crisis — What’s Next for the Pharmacy Giant?
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Hey gang, it's Monday, March 24th. Rajiv, Zach and listeners, welcome to the Behind the Numbers show, an e-marketer video podcast made possible by Trax. I'm Marcus. Today we'll be discussing Walgreens. For the conversation, I'm joined by two people, both senior analysts. One of them covers digital health, based in New Jersey. It's Rajiv Leventhal. Hey Marcus, how you doing? Good to be here. Hello sir, good to see you. And the other covers retail for us. Living in the Chicago area, it's Zach Stambo.

Hey guys. Hello. Today's fact. So I did the most walkable cities recently and Paul Verner started talking about bikes for some reason because he's a nightmare. But then I got curious. I was like, well, what are the most bikeable cities in the world? So I found an article from Wired and they have it in here. So the research was done. Let's see. So the

There's a lot of ingredients that kind of go into ranking the most bikeable cities in the world. Share of trips taken by bike, reducing car speed limits to make it safer for bikes, car bicycle bridges, better bike signage, protected cycling lanes, bike parking, et cetera, et cetera. So it's not just how much do people get on a bike per day or how many people do that. It's a bunch of things. Number one in the world. Any guesses, gents? Amsterdam. Amsterdam.

Number two, Amsterdam falls to second. I think in terms of the number of trips taken by bike, it might be first. It's hard to get clear data on the number of trips taken across different cities. But in terms of all of the things that go into it, because two thirds of trips to work or school are by bike. Ours are very bikeable. But in terms of all the other elements, infrastructure, etc., it's second. It's close to it, though, geographically.

Copenhagen? Yes! There we go, yeah! Well played. Nice job. Yeah, Copenhagen in Denmark. Nine out of ten people own a bike and there are five times as many bikes as cars on the street according to the Cycling Embassy of Denmark. Copenhagen, number one. Amsterdam, number two. Utrecht in the Netherlands, number three.

Then it goes Antwerp, Strasbourg, Bordeaux, Oslo, Paris, Vienna and Helsinki round out the top 10. And this is in the world. They just all happen to be in Europe. New York made the top 20 back in 2011. So it's been a while. God knows how, but never again. Yeah, not even close. I think Vancouver, Montreal, 18th in 2019. So that's the highest in terms of North America rankings.

Vancouver right behind that. I'll play Canada. Anyway, today's real topic, Walgreens identity crisis. So Walgreens Boots Alliance says it has agreed to be acquired by private equity firm Sycamore Partners as the struggling retailer looks to turn itself around after years of losing money, notice the Associated Press. Its shares are down 45%.

in the last 12 months. Rajiv, you were noting that that makes it the worst performing stock in the S&P 500 in 2024. If you look at the last five years, the stock's down 76%.

which might be a surprise to learn because Walgreens stores are everywhere. So it seems like they're doing okay. Walgreens started back in 1901 when Charles R. Walgreens Sr. purchases a Chicago drugstore where he worked as a pharmacist to start the Walgreens chain. A Reuters article notes, within 25 years, they had 100 stores. And the year after that, 1927, they went public. By 2015, they were valued at $100 billion. That number now sits closer to just

10 down 90% over 90% since its peak in 2015. Walgreens net loss in fiscal 2024 was nearly $9 billion. That's a loss of 180% year on year increase. So things are not going well. We're going to figure out why.

Rajiv, I'll start with you. Blame pie. Make a pie chart of reasons, three max, why Walgreens went from pharmacy behemoth to distressed retailer, as Reuters puts it. I'm assigning 60% blame to Walgreens' failed investments in retail health.

30% blame goes to declining front of store sales. And then 10% I'm assigning to just the pharmacy only business. So 60, 30, 10. Okay. So I'll start with the 60% because obviously the biggest one. I feel like the average...

consumer and maybe even the average listener of this podcast might not be too familiar with all of the health care delivery and primary care type investments and acquisitions Walgreens has made over the last several years. But it's contributing.

attributed to its downfall, I think more than any other single element. So shortly after COVID Walgreens and other retail pharmacies too, but Walgreens kind of got this impression that they could be a medical care service destination for, for patients. And I think a big part of that was because they were a, a,

a go-to location for COVID related medical services, right? Like a lot of people got tests and vaccinated COVID vaccines at Walgreens Pharmacy. So people started to become a little bit more comfortable with the idea of, well, if I'm getting a COVID test and a COVID vaccine, maybe I could go, maybe I'm good with going to like a retail pharmacy location for other non-emergent type medical care, right? So

What Walgreens did right after that was invest about $6 billion into a primary care company called VillageMD. Right. And its plan for VillageMD was to open a bunch of primary care clinics around the country, right? But-

co-locate a lot of them either in Walgreens stores or adjacent to Walgreens pharmacy stores. Well, it did not work out. VillageMD badly struggled to attract patients and recruit doctors to work for them.

And the investment just ended up being a disaster last year, just to give you some numbers. Last year, Walgreens, which was the majority owner of Village MD, but not the whole owner, they recorded a six plus billion dollar loss.

to VillageMD investment. Walgreens' healthcare services segment lost, recorded a $14 billion loss last year, much of that related to VillageMD. And I think it's the biggest reason why Walgreens kind of was forced to sell itself to a private equity firm because it invested so much money into the retail healthcare industry

medical care concept that it just could not execute on. So I'm giving that one 60%. So is this a referendum on retail clinics? Because could you quickly define a retail clinic for our listeners? I think so, yeah. So, you know, in CVS, like Minute Clinics and Walgreens has had similar type of initiatives. They've been around for years. And the idea is to kind of like stick them in the back of a drugstore and just provide really like

low acuity type care for patients, whether that's someone coming in for a cough or wanting to get a throat culture, something like that. Some of these locations hire nurse practitioners, some hire actually physicians. Yeah, are numbers suggesting that retail

clinic patients are going in the wrong direction. So they had doubled from 44 million to 84 million 2017 to 2023. Obviously, it was the pandemic in there, which we've just been talking about, giving people more of an incentive to go get the vaccinations and then, oh, I'm here, I can do other things. But since then, they've been on a staircase downwards, falling to 73 million next year, we believe. That would be 10 million less than its peak last year.

And when you consider all the closures that are expected and will probably ramp up with the sale, I think those numbers are going to go down even more. Because you mentioned at the top, Marcus, that Walgreens still does have all these stores everywhere, but they're on track to close about 15% of them. And I think after this sale goes through, assuming it does,

Sycamore Partners, the private equity company, is probably going to close even more and probably accelerate the timeline. What do we know about PE firms? They kind of want to chop down what's unprofitable. And Walgreens CEO last year said that about 25% of its drugstores in the US are not turning a profit. Yeah. Yeah.

Yeah, they've been closing stores for a while already, right? 1,000 stores they've closed in recent years. You mentioned that 14% of their stores, they're planning to close still. That's about over 1,000, I think 1,200 of their 8,500 US locations. So it's a lot of closures. When you look at the industry as a whole, though, I saw a study from USC and UC Berkeley. They were saying about one third of US stores

retail pharmacies have closed since 2010. Independent ones twice as likely to close as chains. But between 2019 and 2021, the number of drugstores declined in 41 of 50 states. So this has been an industry-wide thing that Walgreens obviously is a massive part of.

Definitely. I think that's a good segue into the rest of the blame pie. So I'm giving 30% to decline in front of store sales. And I'm sure Zach is more well-versed in this than I am. But so what we do know is that people have...

uh, started to turn to, to online channels for like their everyday household items for snacks, for greeting cards, the things that, uh, companies like CVS and Walgreens were, uh, used to selling and successfully selling for so long. So, uh, people are, you know, cost conscious consumers are going to find the best deal and they're going to online merchants like Amazon and those declining front of source sales, I think. And, and, um, you know, uh,

Reduced foot traffic, I think, is certainly affecting retail pharmacy, all retail pharmacy chains, but Walgreens for sure. So, Zach, what's going on there? Because there's this kind of age old line about 90% of Americans live within 10 miles of a Walmart store. Last year, nearly 80% of Americans lived within five miles of a Walgreens owned pharmacy. You think that would be a good thing for sales? So Walgreens are very convenient, but.

At this moment in time, when people are feeling super pressed and cost conscious, they're pulling back on discretionary spend. And so they're not going to Walgreens because you don't go to Walgreens for a deal. You go because it's convenient. And so they're just deciding to go online to Amazon or go to Walmart or go someplace where you can get stuff for cheaper. Mm hmm.

The other part of this as well is people complain about everything being locked up when you go to some of these pharmacies. And I found some research. I was thinking, OK, how big of a deal is that statistically? There's some research from Joe Badano, CEO of anti-theft tech company IndyMe. Secured cases can cause sales to drop 15 to 25 percent.

So a very big deal, it would seem. Also, it makes it so it's not convenient, right? So Walgreens' whole value proposition is that it's convenient, that everybody is so close to a Walgreens. I looked on the map and I have six Walgreens stores within three miles of my house.

So they're very convenient. But if the stuff is locked up and I have to wait for somebody to open up the case that I can buy body wash or deodorant or whatever it is, then it isn't convenient. I could just as easily pull out my phone and buy it online. Yeah.

Yeah, they're looking for convenience. And they're also looking for it not to be too expensive is obviously a very inflationary driven climate at the moment. And you mentioned people going online, people buying from big box retailers instead. And so yeah, the prices as well, I think have been turned people off somewhat. So Rajiv, sorry, 10% left. What do we have?

- Okay, so that's just the pharmacy business. And I'm kind of separating pharmacy from retail pharmacy here. So like retail is front of store pharmacy, right? Is just behind the pharmacy counter. 10% for the pharmacy behind the counter, separate from retail front of store. So for years, pharmacy benefit managers, which are the middlemen in between drug manufacturers and pharmacies, they negotiate the deals that pharmacies get for when they dispense medication to a patient.

And pharmacies get paid when they do that. So they've been lowering the reimbursement rates to pharmacies such as Walgreens, but independent pharmacies even more, but bigger chains too, including Walgreens. And that's made it difficult for Walgreens to turn a profit on certain medications. Some are...

They'll even acknowledge this. They're like too expensive to stock because they don't get reimbursed enough for dispensing it. So that's been a little bit of a headwind for sure, but to me not quite as much as what's going on in the front of the store and what's going on with their healthcare delivery investments and acquisitions. Yeah. Yeah, so there they're getting paid.

less by pharmacy benefit managers payers every year to dispense the same amount, same same prescription. So I have a very similar pie, but I used much bigger buckets.

So 50% is just the business model itself. So the pharmacy benefit manager is being a prime example of, I think the lower reimbursement rates is one of the reasons that Walgreens has looked for growth elsewhere via these acquisitions. So that's the big piece. And you've seen their gross margins just go straight down to the right. COVID was a brief reprieve.

But then once we went back to normal, it went straight back down, down into the right. And so the business model is just not working. And it goes back to what you were saying just a few moments ago, where the drugstore pharmacy business model overall is really under pressure. I think it's 3,000 plus pharmacies have closed since 2019, which is just a clear indication that

what the old ways of operating no longer work. So I think that's half. The other half is are just store related challenges. So one big piece of that is they're just overstored. Like I said, I have six stores within three miles of my house. That's way too many. It just doesn't make any sense. Some of them are

you can explain this is why this one's here and this is why this one's there. But by and large, you just have way too many stores to operate. Yeah. And some people might be thinking, oh, how much does it matter? Because people, I'm sure, buy a lot of this online anyway. Not so much the case. M3, MI, Kantar Media, Healthcare Research Data, where US adults

purchased their prescription medications is from last year 88% said in-store pharmacy compared to 34% who said online pharmacy so having a pharmacy nearby is important

And yeah, it's interesting. Like you could select obviously multiple answers that don't equal 100. But the fact that 34% have tried an online pharmacy in the last year, whether that's Amazon, whether it's CVS online or Walgreens online, I think is pretty significant. So that's a large number. And I think a growing one in terms of the people who are at least kind of familiar with and are trying out an online pharmacy for their medications. Yeah. Please, please.

up I totally agree I think

Especially for those medications that are recurring prescriptions. Once you go online, you're almost never going to go back. It's the one-offs where, yeah, you want to go somewhere close where you can just pick it up on your way home or whatnot. But those recurring prescriptions are obviously shifting online, and I think that's only going to accelerate. Yeah. The one caveat could... I agree. The one caveat is like...

I think there is still a large cohort of people who like to talk to the pharmacist. You know, they walk into the pharmacy of the question and this doesn't, by the way, always have to apply to prescription medications when we'll get into, we'll get into what the future could look like. But it,

over-the-counter medications too right you ever walk into a pharmacy and you have some symptoms but you're not exactly sure what medication to take you ask the pharmacist hey what do you recommend these are my symptoms so yeah a little trickier to conduct some of those conversations through digital channels yeah you've got i feel like more and more people probably doing that especially as they become disillusioned with the health care system overall and trying to get an appointment with a primary care physician and yeah i'm sure that's happening

even more so now than it ever has done. Zach, you said there are a few install challenges. Yeah, so the other piece is just the customer experience. So one is locked up inventory. Another is just staffing.

So if you have to, if there's a long line to talk to the pharmacist, you're not going to be able to talk to the pharmacist. And so there's no value in going to the store. And so if it's a frustrating experience, people are just going to go elsewhere. Yeah. So let's have a look at what's next. We talked about the overall industry struggling and it's true. CVS health,

shares down 43% last year, but they've spiked this year. They're up like 50%. So it's been quite the rebound for them. But then Rite Aid, they obviously filed for Chapter 11 recently as well. So not a lot of folks in this space doing phenomenally well. What's next for Walgreens, Rajiv, in your opinion? Where do they go from here?

So I think Walgreens is pharmacy business. Again, pharmacy only, not pharmacy plus retail is going to be just fine. People always will need their medications. Now, they might not always need to go into a Walgreens store to fill them, but they will always need their medications. The prescription drug market is a massive market in the U.S.,

CVS and Walgreens are one and two respectively in prescription drug sales, right? Walgreens generated over $100 billion in prescription drug sales last year. Okay. So there's a lot of money to be made.

The model just has to change. The retail plus pharmacy model, as we know it, which relies heavily on consumer customer traffic in the front of the store, that needs to be tweaked or modified or overhauled. Pick the word you want. But I think that as consumers do turn to online channels, fewer need to go to Walgreens to get their household items and snacks. Right.

I think that we're going to see kind of a changing store format. And we actually saw this just last week. CVS said that it's piloting a new concept where they're only going to sell medications, which is prescription medications behind the pharmacy and over the counter medications. And they're not going to sell any snacks. They're not going to sell any of the front of the store items. And so you

what, what this means is, is much smaller stores, right? It's, it requires much less real estate to only have, uh, medications and, you know, health and wellness type products. Right. So I think that could end up being a, uh, efficiency driver for, uh,

retail pharmacies in the future. Walgreens is, has quietly been testing something similar over the last couple of years. And they said last year that they were going to expand the number of these smaller format stores that are really designed around medications and healthcare products instead of the front store items. I just think that's a, a clear indicator that they know, uh, they can't compete, uh,

in the world of convenience or retail convenience brick and mortar like they used to. And these are much smaller stores. These are less than 5,000 square feet. So that's less than half the size of the typical store.

Right, right. And I think it's, and whether this model specifically takes off or it's a mix of this and something else, we'll see like moving a lot of their services online. I think that's got to be a big part of it, improving the online experience for customers. But I think it's like a, this is an acknowledgement of what we've been saying a little bit that medications are the steadier business compared with

you know, the front of the store. Yeah, it's 80% of the company sales last year from the pharmacy department. So that makes a lot of sense. Small store formats, Zach, is that where Walgreens goes from here or somewhere else? Well, I think it's, there's going to be a lot of experimentation. So I think that's one path. I could see them experimenting with like beauty and those sorts of personal care stuff, because that has been a pretty solid area. Yeah.

I also just think like what's ahead is probably like this company is, does not look like this company, like it's going to be broken up into pieces, right? It's a private equity, a private equity company is going to do what a private equity company is going to do. Yeah. Yeah. They say that they, well, there's some talk that they want to go private, obviously help takes a lot, a lot of the pressure off from shareholders and they can focus on what's

what they want to focus on without a bunch of the voices in the room there are the kind of three parts to it we've been kind of talking about all all episode you've got the kind of u.s pharmacy chain uh you've got the the u.s health care services part that's the um the specialty pharmacy business uh shields health solutions and then village md their primary care provider they bought them or invested in that ready was talking about and then home care company care centrics and that's the

The second part, those pieces. And then the third part is their international piece, UK-based health and beauty retailer Boots, which is huge in the country, the biggest one by far. So they've got those three pieces that they could play with slash break up.

I think they're going to hold on to the farm, the U S pharmacy business. They've, they've made some comments that indicate like they've got to right size this business segment and figure out as we've discussed, like experiment with, with a couple of, you know, different concepts or formats or tests that, that some will work. Some might not work, but the retail pharmacy business, I'd be very surprised if they didn't hold onto that. Whereas like village MD and the healthcare services side, uh,

That's a distressed asset that I think is just going to be sold off. As I mentioned, they're losing billions on that. I think that's where the private equity company will come in and get rid of it. The knock-on effect from that, which I was reading one of your articles about,

patient care could get a lot worse, right? Jenny, uh, uh, Guadalmas, uh, persistent professor at the university of California, Berkeley school of public health said, quote, our findings suggest that closures, um, of pharmacies may widen health disparities in access to prescription and other essential pharmacy services, such as vaccinations and pharmacists,

prescribed regimens including contraceptives medications for HIV prevention and treatments for opioid use disorder close quote this has to have a knock on effect if you get rid of a lot of pharmacies some people have a lot in their area others don't and so this could have a significant effect on the health of society you know

Yeah, and that's why I think the big question is where are these closures occurring? But if you look at what CVS did with these, again, only a few for right now, but they're opening a few of these smaller format stores that are focused on medications. They specifically said they're going to focus on areas where there isn't as great pharmacy access, right? So and specifically in areas where, you know, they've done the research and they see that people are actually going to

to Walmart or online for everyday household items, front of store items, but there isn't as much of access to pharmacies. And that's where some of these smaller format medication focused stores could open up and could hopefully prevent the issue that you bring up. Yeah.

You had cited, you were saying there's some studies that have found patient care, patient safety suffers when private equity companies acquire hospitals, nursing homes, medical centers, et cetera. So it's not a good sign. The deal from Sycamore Partners, the acquisition of Walgreens, expected to close in Q4 if everything runs according to plan for them. That's all we've got time for for this episode. Thank you so much to my guests for hanging out with me today. Thank you first to Rajiv.

Thanks, Marcus. Have a good time. Yes, sir. Thank you to Zach. Yeah, thanks for having me. Yes, indeed. And thank you to the whole editing crew, Victoria, John Lance and Danny. Stuart runs the team and Sophie does our social media. Thanks to everyone for listening in to the Behind the Numbers show, a new marketed video podcast made possible by Trax. Wednesday, you can hang out with Sarah Lebo as she goes through March's most interesting retailers of the month list.