Experts: Operational challenges the leading cause of drug store closures
The shrinking footprint of the major drug store chains is having a major impact on both shoppers and the real estate market.
With Walgreens, Rite Aid and CVS all closing stores in urban, suburban and rural areas alike, consumers are put in a difficult situation. A recent report from Health Affairs found that more than 29% of the nearly 89,000 retail pharmacies in the U.S. that operated between 2010 and 2020 had closed by 2021.
At the recent ICSC show in New York, Meghann Martindale, principal and director of market intelligence for retail at Avison Young, stated that the drug store sector’s store challenges are an operational challenge, not one of real estate costs.
“Part of the closures is that the store model has just changed so much: it’s the most unique retail category in our industry,” she said. “You have the ‘front of house’ which is going through all the other disruption and innovation that other retail categories are… ‘back of house’ and prescriptions are subject to federal and drug regulation. You can look at a pharmacy location, and that store may not be profitable simply because of the pharmacy side.”
[READ MORE: Walgreens reportedly in talks to sell itself to Sycamore Partners]
Reasons for closures also vary by location, with some chains closing due to lack of sales or theft and safety concerns, and others ‘rightsizing’ their store count.
“In more densely populated areas, pharmacies are making those [rightsizing] decisions,” said Ian Schroeder, senior VP at CBRE. “If it’s a more rural area and there are no other stores in the market, they’re closing a store because it’s just not profitable for various reasons. In some markets like San Francisco, they close because of safety issues and theft, and [retailers] decide to pull out of the market completely.”
Real estate experts added that these operations are affecting all chains in the drug store sector, not just those that are closing many locations. And challenges for drug store retailers aren’t just limited to pharmacy profit margins, either.
Lower-cost retailers like discount chains are impacting where consumers shop for basic needs such as personal care products, home items, snacks and more, with higher prices at drug stores driving them away from making a stop, especially when those chains often have pharmacies themselves.
“You have pharmacies within Walmart, within Target, you have small-format tests that are taking place with a lot of these large chains,” said Ethan Chernofsky, senior VP of marketing at Placer.ai.
Looking ahead, Chernofsky added that store openings could come in new markets that people have moved to, even as the closures continue.
“The innovation cycle that’s going to take place within the sector is going to be clunky,” he said. “You have this complicated retail question, this complicated pharmacy question, and then you have what most of what retail is going through anyways, which is ‘how do I optimize my retail footprint so I have the right locations in the right areas?’ There are a lot of closures, but there’s also going to be openings and movement into new markets.”
