Behind the Numbers: Walgreens’ Identity Crisis — What’s Next for the Pharmacy Giant?

Podcast: Behind the Numbers: An EMARKETER Podcast
Host: Marcus
Guests: Rajiv Leventhal (Senior Analyst, Digital Health), Zach Stambor (Senior Analyst, Retail)
Release Date: March 24, 2025

Introduction

In the March 24, 2025 episode of EMARKETER’s "Behind the Numbers" podcast, host Marcus delves into the tumultuous journey of Walgreens Boots Alliance. Joined by senior analysts Rajiv Leventhal and Zach Stambor, the discussion navigates through Walgreens' declining performance, strategic missteps, and the broader challenges facing the retail pharmacy industry.

Walgreens' Performance and Background

Marcus opens the conversation by highlighting Walgreens' stark financial decline. “Walgreens’ shares are down 45% in the last 12 months,” he notes. Rajiv corroborates this by stating, “the stock's down 76% over the last five years,” emphasizing the severity of the downturn since its peak valuation of $100 billion in 2015 (02:55).

Despite its pervasive presence across the United States, Walgreens has struggled to maintain profitability, culminating in a nearly $9 billion net loss in fiscal 2024 (04:45). This decline has positioned Walgreens as the worst-performing stock in the S&P 500 for 2024, prompting its acquisition by private equity firm Sycamore Partners (04:15).

Reasons Behind the Decline

1. Failed Investments in Retail Health (60%)

Rajiv attributes the lion’s share of Walgreens’ troubles to its unsuccessful foray into retail health services. “I’m assigning 60% blame to Walgreens' failed investments in retail health,” he explains (05:08). Walgreens ventured into healthcare delivery by investing approximately $6 billion into Village MD, aiming to integrate primary care clinics within its stores. However, the initiative faltered due to poor patient recruitment and challenges in attracting qualified medical personnel. The resulting $6 billion loss from Village MD significantly impacted Walgreens' financial health, ultimately leading to its acquisition by Sycamore Partners (06:43).

2. Declining Front Store Sales (30%)

The second major factor is the downturn in front store sales. Marcus highlights a significant decline in foot traffic, with consumers shifting their purchasing habits online. “People have started to turn to online channels for their everyday household items,” he observes (10:28). Zach adds that convenience-driven shopping has been undermined by higher costs and the competitive pricing of online retailers like Amazon and big-box stores such as Walmart. “When people are feeling super pressed and cost-conscious, they’re pulling back on discretionary spend,” Zach notes (11:35).

Additionally, Marcus points out the impact of locked-up inventory on consumer convenience. “Secure cases can cause sales to drop 15 to 25%,” referencing research from Joe Bidano of Indy Me (12:05). The inconvenience of accessing products discourages in-store purchases, further driving consumers online.

3. Challenges in the Pharmacy-Only Business (10%)

The final segment of the blame pie focuses on the pharmacy operations. Rajiv explains, “Pharmacy benefit managers have been lowering the reimbursement rates to pharmacies,” which has squeezed Walgreens' profit margins (13:25). This reduction in reimbursements makes certain medications financially unviable to stock, impacting overall profitability. Zach echoes this sentiment, emphasizing that the traditional pharmacy business model is under immense pressure, leading to store closures and decreased margins (14:41).

Industry-Wide Challenges

The issues Walgreens faces are not isolated. Marcus cites a study by USC and UC Berkeley indicating that about one-third of U.S. retail pharmacies have closed since 2010, with independent pharmacies being twice as likely to shut down as chains (10:28). The broader industry trend includes a decline in the number of drugstores across 41 of 50 states between 2019 and 2021, signaling systemic challenges in the retail pharmacy sector (09:39).

Future Outlook for Walgreens

1. Shift to Smaller Store Formats

Looking ahead, both analysts agree that Walgreens is pivoting towards smaller, pharmacy-centric store formats. Rajiv mentions, “Walgreens is expanding the number of smaller format stores that are really designed around medications and healthcare products instead of the front store items,” indicating a strategic shift to focus on core competencies (21:37). These smaller stores, typically less than 1,000 square feet, aim to enhance efficiency by minimizing real estate costs and concentrating on prescription and health-related products.

Zach adds that this move may involve experimenting with different store concepts, such as integrating beauty and personal care, to diversify revenue streams without overextending (22:20).

2. Impact on Patient Care and Health Access

A significant concern raised during the discussion pertains to the potential impact of store closures on healthcare access. Marcus cites Jenny Guadamas, assistant professor at UC Berkeley, highlighting that “closures of pharmacies may widen health disparities in access to prescription and other essential pharmacy services” (24:30). This underscores the societal implications of Walgreens' restructuring, particularly in underserved areas where pharmacies are critical for medications and health consultations.

Rajiv responds by noting that Walgreens is mindful of these disparities and is strategically placing smaller, medication-focused stores in areas with limited pharmacy access to mitigate negative health outcomes (25:52).

3. Private Equity’s Role and Strategic Direction

With Sycamore Partners poised to acquire Walgreens, the analysts discuss the typical private equity approach of streamlining operations and divesting distressed assets. Rajiv predicts that while the core U.S. pharmacy business will remain intact, non-profitable segments like Village MD and Shields Health Solutions will likely be sold off (23:43). Zach concurs, emphasizing that private equity will target Walgreens' less profitable divisions to stabilize the company (22:52).

Conclusion

As Walgreens navigates its identity crisis, the shift towards smaller, pharmacy-focused stores represents a strategic attempt to salvage its foundational business amidst a challenging retail environment. The acquisition by Sycamore Partners may provide the necessary restructuring to stabilize operations, albeit with potential implications for healthcare access in vulnerable communities.

Marcus wraps up the episode by thanking Rajiv and Zach for their insightful analysis, highlighting the ongoing transformation within Walgreens and the retail pharmacy industry at large. The discussion underscores the importance of adapting to evolving consumer behaviors and the critical role pharmacies play in the broader healthcare ecosystem.

Notable Quotes:

• Rajiv Leventhal (05:08): “I’m assigning 60% blame to Walgreens' failed investments in retail health.”

• Zach Stambor (11:35): “When people are feeling super pressed and cost-conscious, they’re pulling back on discretionary spend.”

• Marcus (12:05): “Secure cases can cause sales to drop 15 to 25%.”

• Jenny Guadamas (24:30): “Closures of pharmacies may widen health disparities in access to prescription and other essential pharmacy services.”

Stay informed and ahead with EMARKETER’s "Behind the Numbers" podcast, available Monday through Friday on all major podcast platforms.