Medtail has seen problems of late. Walmart, Rite Aid, and Walgreens have all scaled back their efforts, which never took firm root, providing a return. Now Walgreens is showing increased turbulence.
In the company’s most recent earnings call, Walgreens Chief Executive Officer Tim Wentworth had some grim news.
“Currently, 75% of our U.S. stores contribute roughly 100% of segment AOI,” he said. “For the remaining 25% of the stores in our network which are not currently contributing to our long-term strategy, changes are imminent. To start, we are finalizing a multifactor store footprint optimization program which we expect will include the closure of a significant portion of these underperforming stores over the next three years. Plans to finalize this number are in motion, and we will update you in due course.”
“For the remaining portion of this cohort, we are taking action to return them to profitability and deliver an improved customer experience,” he continued. “We will contemplate additional closures if performance does not improve, which includes external factors, such as reimbursement rates. While it is not an easy decision to close the store, we will work to minimize customer disruptions.”
Reimbursement rates have become a major factor for Walgreens and other pharmacy chains. “Additionally, the script market is growing but continues to trail below pre-pandemic growth levels,” Wentworth said. “These headwinds have affected our performance and are materially weighing on our ability to serve patients profitably. We are at a point where the current pharmacy model is not sustainable, and the challenges in our operating environment require we approach the market differently. For example, we are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly.”
As CNN reported, other parts of the stores that are supposed to support the drug business are also feeling heat. “The front end of drug stores, where they sell snacks and household staples, have become less profitable, as shoppers buy more of these items online from Amazon and at big-box chains such as Walmart and Costco,” they wrote. “Both have grown in recent years. Dollar General’s growth has also hurt drug store chains in rural areas.”
But on the net lease investor side, Jonathan Hipp, principal of U.S. capital markets and head of the U.S. net lease group for Avison Young, says that property owners are likely protected by the quality of the real estate.
Retail demand makes the availability of good locations “extremely tight,” he tells GlobeSt.com. “Developers like these kinds of locations. They’re very easy to redevelop because they’re typically larger parcels with good ingress and egress.” Plus, many have drive-through locations, a plus in retail development.
“Sometimes, these parcels are large enough to develop a small strip mall and diversify with multiple tenants,” he adds. Another possibility is a QSR on the side with the drive-through and another type of business taking the second half. “There’s just not a ton of hard corner sites available today. They’re rare.”