What’s up with drugstores?

Summary

Marketplace Podcast Summary: “What’s up with Drugstores?”

Release Date: October 15, 2024
Host: Kai Ryssdal

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1. Challenges in the Drugstore Sector

The episode opens with Kai Ryssdal highlighting significant struggles within the drugstore industry despite a robust economy. Major players like Walgreens, Rite Aid, and CVS are facing closures and restructuring.

Walgreens announced plans to close 1,200 stores over the next three years, representing approximately 14% of its national footprint. This decision follows Rite Aid’s Chapter 11 filing and CVS’s own store closures. Kai introduces Matt Levin, who delves deeper into the issue.

Matt Levin notes, “Most of the retail pharmacy stores that I walk into seem to have been malnourished. Stores are a little dingy. Shelves are a little old. The stock feels old. The format feels old” (02:10). George Hill, a healthcare equity analyst at Deutsche Bank, explains that outdated store atmospheres have negatively impacted sales. A significant factor is the pressure from pharmacy benefit managers (PBMs), which dominate 90% of prescription negotiations in the U.S. Earlier this year, the Federal Trade Commission sued the top three PBMs for anti-competitive behavior, further squeezing retail pharmacies on prescription prices.

Paige Meyer, an investment analyst with CFRA, criticizes Walgreens and CVS for their failed expansions into primary care, stating, “they failed just because the consumer is not used to that being their direct care provider” (03:30). Additionally, Professor Dima Kato from USC School of Pharmacy warns that store closures disproportionately affect Black and Latinx neighborhoods, low-income areas, and communities reliant on Medicare or Medicaid, potentially disrupting access to essential medications for vulnerable populations (04:04).

2. Retail Businesses Preparing for the Holiday Season

Shifting focus to the broader retail landscape, Kai discusses how various retailers are gearing up for the holiday rush despite challenges in specific sectors.

Dylan Demery, owner of She's Fly in Fort Collins, Colorado, shares, “We're super excited because it's our busiest year yet and we've been more successful than we've ever been” (04:34). Similarly, Ashley Morgan, owner of Unglued in Fargo, North Dakota, emphasizes the critical nature of the holiday season for sustaining her business year-round: “The holiday season we look forward to for all the reasons, but it also is what keeps our shop sustainable” (13:46).

Philip Rollins, owner of Offbeat in Jackson, Mississippi, reflects on the current mood, stating, “The holiday season is kind of an afterthought right now. Just trying to, you know, make it day by day” (25:27). These insights illustrate the varying strategies and sentiments among small retailers as they navigate the upcoming peak shopping period.

3. Understanding the Inventory to Sales Ratio

A significant portion of the episode is dedicated to explaining the inventory to sales ratio, an economic indicator that measures how efficiently businesses turn inventory into sales.

Justin Ho, a reporter for Marketplace, introduces the concept by quoting Pat Whlan from Sahadi Fine Foods: “The basic idea behind the inventory to sales ratio is that it gives us a sense of how fast inventories are turning over” (06:47). Jason Miller, a professor at Michigan State University, adds that different sectors have varying benchmarks for this ratio. For example, grocery stores may turn inventory monthly due to perishability, whereas clothing stores might only turn inventory every two to two and a half months (07:46).

Nicole de Horatius from the University of Chicago explains that high inventory to sales ratios can signal potential slowdowns, as seen in the machinery sector: “We're at actually one of the highest inventories to sales levels that we've really been at in the last 30 years” (09:10). This buildup indicates that wholesalers are overstocked, likely leading to discounts and reduced future orders from manufacturers.

The discussion concludes with strategies businesses employ to manage this ratio, such as increasing supplier proximity to reduce lead times and enhancing surge capacity to respond to fluctuating demand (10:00).

4. Boeing’s Struggles and Industry Impact

Kai Ryssdal transitions to the aerospace industry, focusing on Boeing’s ongoing difficulties. The company plans to raise billions through new bonds and stock sales following the announcement of laying off 17,000 employees and dealing with a prolonged strike by the International Association of Machinists and Aerospace Workers.

Marcel Zondag, from Western Michigan University, attributes Boeing’s decline to the merger with McDonnell Douglas in the 1990s, leading to complacency and declining quality: “It's a dangerous combination of complacency, worsening quality and now declining market share” (11:07). Tolga Turgoot, an aeronautics professor, echoes this sentiment, emphasizing that while layoffs aim to stem losses, restoring confidence among workers and customers is crucial for Boeing’s recovery.

Ryan Ewing, founder of Airline Geeks, remains optimistic, asserting, “it's too big to go under” (12:02), citing Boeing’s significant contracts, including with the U.S. government, which provide a buffer against potential failure.

5. Foster Care Insurance Crisis in California

A poignant segment addresses the insurance challenges faced by foster family agencies in California. Adriana Muncia, a long-term foster parent, shares her experience caring for 150 children over two decades. However, the withdrawal of a major insurer due to rising legal costs threatens the sustainability of these agencies.

Pamela Davis, CEO of the Insurance Alliance of California, explains that a recent $25 million jury award for foster parent liabilities precipitated the insurer’s exit (17:38). Debbie Manners of Sycamores, a mental health and foster services agency, describes the devastating impact: “it's very hard. It's very painful” (18:18). With approximately 9,000 children dependent on foster families, the loss of insurance forces agencies to either secure costlier coverage or shut down, disrupting essential support systems for vulnerable youths.

6. Electric Vehicle Production and Sales Trends

The episode also examines the electric vehicle (EV) market, contrasting carmakers’ cautious production strategies with robust sales growth.

Despite automakers scaling back EV production targets and focusing more on hybrids, Kelley Blue Book reports an 11% increase in U.S. EV sales in the third quarter, reaching record highs in both volume and market share. Jessica Caldwell from Edmunds attributes the initial overproduction to unmet consumer demand, resulting in dealerships marking down EVs to clear excess inventory: “They failed just because the consumer is not used to that being their direct care provider” (22:21).

Stephanie Valdez of Cox Automotive highlights government incentives and dealership discounts as key drivers of current sales, though Jessica Caldwell warns that these incentives may not be sustainable long-term (23:01). Stephanie Brinley from S&P Global Mobility points out that while EV infrastructure and vehicle range are improving, consumer hesitancy remains a barrier to sustained growth: “consumer anxiety on those fronts is tough to crack” (24:00).

Conclusion

Kai wraps up the episode by summarizing the interconnectedness of these economic issues, from struggling drugstores and retail businesses to broader economic indicators and industry-specific challenges. The comprehensive analysis provided by Marketplace offers listeners a nuanced understanding of current business dynamics and their implications for the economy.

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Notable Quotes:

• Matt Levin: "Most of the retail pharmacy stores that I walk into seem to have been malnourished. Stores are a little dingy. Shelves are a little old. The stock feels old. The format feels old." (02:10)

• Paige Meyer: “They failed just because the consumer is not used to that being their direct care provider.” (03:30)

• Professor Dima Kato: “That can result in vulnerable patients not taking their medications on time or at all.” (04:04)

• Pat Whlan: "You can always have full inventory and extra inventory, but it's going to cost." (06:47)

• Marcel Zondag: “It's a dangerous combination of complacency, worsening quality and now declining market share.” (11:07)

• Ryan Ewing: “It's too big to go under.” (12:02)

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This summary encapsulates the key discussions and insights from the Marketplace episode, providing a comprehensive overview for those who haven't listened to the full podcast.

Transcript

[Matt Levin]

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[Kai Rysdal]

RET mail in all its forms From American Public Media, this is Marketplace in Los Angeles. I'm Kai Rysdal. It is Tuesday today, the 15th of October. Good as always to have you along, everybody. For as strong as this economy is, yes, prices are higher, but inflation is down and unemployment is low. For all of that, there are some business models right now that are just tough. Big box retail has seen better days. Anybody remember Bed, Bath and Beyond? Commercial real estate generally, office real estate in particular. They also come to mind another that's been struggling to find its footing but has kind of maneuvered under the radar drugstores. Walgreens said today it's planning on closing 1200 stores over the next three years. That's about 14% of its national footprint. And it comes on the heels of Rite aid filing Chapter 11 late last year and CVS planning to shut down a good chunk of its brick and mortar locations, too. So why Marketplace's Matt Levin gets us going.

[Matt Levin]

Let's be honest. When's the last time you went into a drugstore and thought, this place is awesome? I want to spend more time here? Most of the retail pharmacy stores that I walk into seem to have been malnourished. Stores are a little dingy. Shelves are a little old. The stock feels old. The format feels old. George Hill is a healthcare equity analyst at Deutsche Bank. Now the whole DMV branch, where you can pick up your arthritis medication vibe, has hurt sales. But Hill says a major reason drugstores don't have the capital to upgrade their facilities. Pharmacy benefit managers the powerful health insurance middlemen that negotiate drug prices with pharmacies. Pharmacy benefit managers squeeze the retail pharmacies on the price that they pay for prescriptions. Three companies pay for almost 90% of all prescriptions in the United States. Earlier this year, the Federal Trade Commission sued the three big pharmacy benefit managers for anti competitive behavior. But retail pharmacies also have their own ambitions to blame. Walgreens and CVS spent billions expanding into the primary care business with less than stellar results. Paige Meyer is an investment analyst with cfra. I think they failed just because the consumer is not used to that being their direct care provider. Walgreens has not said which store locations it plans to close. Professor Dima Kato at the USC School of Pharmacy says based on her research of past pharmacy closure patterns, when they do close, they're more likely to close in black and Latinx neighborhoods, low income neighborhoods and neighborhoods where a larger share of the population is covered by Medicare or Medicaid. Cato says that can result in vulnerable patients not taking their medications on time or at all. I'm Matt Levin for Marketplace Pharmacy.

[Kai Rysdal]

Retail is struggling to keep up. As Matt just pointed out, other kinds of retail are in a different place. Shops big and small are gearing up for their busiest shopping season of the year. We'll get a snapshot of retail later this week with the retail September sales report, but we thought we'd bring you our version of that data early via some of our regulars to see how they're planning ahead for the holiday rush. Our first installment comes to us from Dylan Demery. She's at She's Fly, that's a fly fishing shop in Fort Collins, Colorado.

[Matt Levin]

We are just now finishing fly fishing season. It has been super busy. We've been going since March. We've sold out all of our retreats and our lessons this year. And now we're shifting focus into getting ready for holiday season and getting our inventory updated for November, making sure we have some good options for people. We want to focus on some warm weather clothes. Also looking at some different bundles. We're doing a shoes fly beginners bundle. That will be basically all you need to get started fly fishing. So really the next two weeks we're slammed switching into now the holiday mode and you know, gearing down. I actually have to unload all of my gear from from all of these fishing trips that we've been on and get that all stored and then switch over to inventory for the store. So it's been really busy. But we're super excited because it's our busiest year yet and we've we've been most successful than we've ever been.

[Kai Rysdal]

And that is the way you want it to be. Dylan Demery at She's Fly in Fort Collins, Colorado Wall street today, nothing fly at all. Tech stocks led the way down. We will have the details when yes, when we do the number Every month the Census Bureau an underappreciated source of economic data, by the way. But every month the Census Bureau puts out a report tallying up the value of all of the stuff that businesses have in their inventories. The next one comes out on Thursday, and every month they release includes another figure, too. It's called the inventory to sales ratio. How the inventories that businesses are holding onto compares to how much product businesses are selling. As Marketplace's Justin Ho reports, that ratio can tell us a lot about how the economy's doing and where it might be headed.

[Matt Levin]

The basic idea behind the inventory to sales ratio is that it gives us a sense of how fast inventories are turning over. At the end of the day, you're trying to minimize your inventory and maximize your sales, and you're trying to do that as best you can. That's Pat Whlan. He handles imports for Sahadi Fine Foods, a grocery store and food importer based in Brooklyn. Whelan says it's not like he keeps his company's inventory to sales ratio handy on his desk at all times. But he says he always has a sense of what it is, because if it gets too high, there are consequences. You can always have full inventory and extra inventory, but it's going to cost. And that buffer, if you overdo it, hurts your profit. That's because inventory costs money. You have to buy it often with borrowed money. At today's elevated interest rates. You also have to pay to store it and make sure it doesn't go bad. We have that issue in the deli all the time. Because you think about it, you're producing stuff in the deli that's got to go that day or the next day. You overdo that. It doesn't even go anywhere.

[Kai Rysdal]

It goes right in the trash.

[Matt Levin]

Different sectors of the economy can have different inventory to sales ratios, says Jason Miller, a professor of supply chain management at Michigan State University. So your grocery store may be turning inventory more than once a month, which they need to because items are perishable, versus A clothing store may only turn their inventory every two months or even every two and a half months, Miller says. A lot of sectors have pretty stable inventory to sales ratios, but some have seen big spikes in recent years. Miller says that can be a sign that those sectors will slow down in the near future. Take machinery, for instance, which includes construction, farm and industrial machines. We're at actually one of the highest inventories to sales levels that we've really been at in the last 30 years, Miller says. That means machinery wholesalers have been buying too much and selling too little, so they'll probably try to reduce their inventory levels. That's not a good sign if you're a machinery manufacturer, because if demand is not only weaker, but companies are also drawing down inventory, that means their orders to you are going to be even less. If a sector of the economy has a high inventory to sales ratio, that's also a sign that businesses in it might start offering discounts. Nicole de Horatius, a professor of operations management at the University of Chicago, says that can ripple through supply chains. For instance, if wholesalers offer markdowns on a product, then retailers might decide to load up on it. Then they turn around and they're having difficulty selling this to their own consumers, and then we would face markdowns in order to move the inventory along the way. A lot of sectors that struggled with high inventory levels during the pandemic used discounts to reduce their inventories, including clothing, furniture and electronics. As a result, if you look at the ratios now, they're relatively stable and mostly for a variety of industries, mostly back to normal. De Horatio says companies are still going to ensure that they have access to inventory in case sales spike, like they did earlier in the pandemic. For instance, say a furniture company might contract with additional factories to add surge capacity. Or I might work with suppliers that are closer to me so I have a shorter lead time, so that if there was a disruption and they needed to ramp up production, that it could get to me faster. Dehoratius says those are strategies that will help companies meet customer demand while keeping their inventory to sales ratios as low as possible. I'm Justin how for Marketplace.

[Kai Rysdal]

I mentioned this yesterday that Boeing's been making headlines again, and not the good kind. The company said today it's going to raise billions of dollars over the next three years by selling new bonds and new shares of stock. In case you missed it, at the end of last week, Boeing announced It's laying off 17,000 people, about 10% of its workforce. Oh, and that strike by the International association of Machinists and Aerospace Workers. It is in month two. Now Marketplace's Kaylee Wells explains how Boeing found itself in something of a spiral.

[Matt Levin]

Boeing Spiral started before the strike, before the pandemic, before faulty planes and fatal crashes. Marcel Zondag leads the supply chain management program at Western Michigan University. He says it began back in the 90s. The downfall of Boeing was driven by the merger of McDonnell Douglas. That was when Boeing bought out its last big rival in the U.S. after that, Zondag says Boeing started building airframes made out of okay bits and pieces. And putting a number of mediocre things together doesn't create a great thing. It's a dangerous combination of complacency, worsening quality and now declining market share, says Tolga Turgoot, who teaches aeronautics at Florida Tech. He says those problems took a long time to hurt the company, thanks to its reputation.

[Kai Rysdal]

That momentum, it's like a strong wind.

[Matt Levin]

Coming from the past carries you forward, but that wind starts weakening, weakening over time. The multiple rounds of layoffs are part of an effort to fix the past five straight years of losses, Turgot says. But job cuts alone won't solve the problem. Now they're in a spiral. I think to get out of it, first you have to stop the bleeding, but you have to restore confidence simultaneously, the confidence of striking workers and airline customers that have been canceling orders. But Ryan Ewing, founder of the industry site Airline Geeks, isn't worried about Boeing folding. He says it's too big to go under. You know, I mean, one of their largest clients, right, is the US Government. So I think it's pretty impossible for them to fail. Although Boeing is getting smaller in 2019, after decades of making more planes than any other manufacturer, it ceded that number one spot to its European rival, Airbus. I'm Kaylee Wells for Marketplace.

[Kai Rysdal]

We are, yes, only halfway through October, but people, the holidays, they are right around the corner and retailers know it. Our next check in is with Ashley Morgan, the owner of Unglued in Fargo, North Dakota.

[Matt Levin]

We started just sometime in September talking a little bit more about holidays. We have a full time retail shop manager and so she my sister in law who's been with us for a long time has been meeting with makers to talk about what products to bring in, what we're going to turn over back to them to make space in a new way that we've never done. So we have a lot more new products coming in. We do quite a bit of our ordering kind of on the fly. We're being more organized about it this year, but we don't have a ton of cash flow. So we have to be pretty mindful about how much we have on hand that's not out for sale. So the holiday season we look forward to for all the reasons, but it also is what keeps our shop sustainable. So the fourth quarter and those really last five weeks of it are what keeps us open all year round. And so we get excited to know that that is just the push and then it's going to be super dead in January. So let's give it our all right now.

[Kai Rysdal]

Ashley Morkin, the owner of Unglued in Fargo, North Dakota.

[Matt Levin]

Coming up, the holiday season is kind of an afterthought right now. Just trying to, you know, make it day by day.

[Kai Rysdal]

One step at a time, people. One step at a time. First though, let's do the numbers. Dow industrial is down 324 points today, 3/4 of 1%, 42,740. The Nasdaq subtracted 187 points 1% 18,315. The S&P 500 down 44 points, 3/4 of 1%, 58 and 15. That slide in the NASDAQ had a lot to do with investors selling off some of their holdings and chip makers Nvidia subtracted 4, 7, 10%. Today. Intel counted down about 3 and a third percent. Applied Materials deleted 10 and 7 tenths of 1%. Those 1200 Walgreens store closings that Matt Levin was telling us about at the top of the program. Wall street approves. Thank you very much. Walgreens Boot alliance stepped up 15 and 3. Rival CVS slid 3 and 2/3%. Bonds up yield on the 10 year T note down 4.03%. You're listening to Marketplace.

[Matt Levin]

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[Kai Rysdal]

Member NYSE SIPC this is Marketplace. I'm Kai Rysdal. It can be prudent and sometimes even required to have insurance coverage for whatever the case is at hand. The basics we know, right? Cars, house health. Also, in a lot of foster care systems, the organizations that work with foster families are required to have liability insurance. In California, as of this month, a major insurer for foster agencies is no longer providing coverage, which means those agencies that recruit and monitor foster parents can't. From LAIST here in Los Angeles, LEU has the story.

[Matt Levin]

Adriana Muncia made a promise she would help kids after her daughter recovered from leukemia almost three decades ago. She didn't know exactly how, but years later I looked at a magazine, a Penny Saver that came here to the house and it just, it said, you know, like, if you want to help kids, you know, they're in foster care. And I was like, huh, let me, let me call and see what this is all about. She made the call, got certified, and began fostering kids in her Southern California home. She thought she'd maybe foster for a couple of years, but that was more than two decades ago. So this house originally was only three bedroom house and now we have six years. She's cared for 150 children over the years, including five who are with her long term, like from 8 years old to 21. They come here for Christmas and birthdates and yeah, they call me mom. They're my kids. She's been able to provide all this care because of a close working relationship with a foster family agency. These organizations contract with counties to recruit, certify and support foster parents. But recently, Muncia was worried the organization she fosters through would have to close. That's because the insurer that provides liability coverage to 90% of the market for foster agencies in the state is pulling out, citing a rise in legal costs. Pamela Davis is president and CEO of the nonprofits Insurance alliance of California. So that became unsustainable. Davis says they've been seeing similar increases in other states, but California stood out. Last year, a jury decided to award $25 million to three kids in northern California who are sexually abused by their foster father. The foster family has to pay some of the damages, but the agency is responsible for about 60% of those costs. It's kind of a match that lit this whole pile of kidney. Without insurance, foster family agencies have to find new coverage or transfer families to another agency that's insured. Debbie Manners had Sycamores, a mental health agency that also runs foster family Services. That agency's insurance is expiring in November, and they're scrambling to find a new insurer. So far, they haven't had any luck. We're still looking, but it was clear to us that we wouldn't find a company that would insure us if we didn't close. So we made the very, very painful, difficult decision to do that, to close the foster family services portion of the agency. Sycamores is now in the process of transferring families to other agencies into the county. They're devastated. We have some families we've had since 1998. It's just very hard. It's very painful. And the stakes are high. There are around 9,000 children under the care of foster families who work with these kinds of agencies in California. And in many cases, counties have limited capacity to take on the work coordinating with and supporting foster families. For foster parent Adriana Moncia, she's appreciated the support her agency's given to her over the years. She can call social workers around the clock if she needs any help. She's currently caring for two boys, one who's been with her family for the last six years. You know, it's already hard enough for them to be a part of their families, so it's like try to give them, you know, the comfort that they need when they're going through those hard times. She was relieved when she found out the agency she works with was able to secure another insurer, but the cost is about 30% higher, and that's just for the next year. In Los Angeles, I'm Ellie Yu for Marketplace.

[Kai Rysdal]

Here's a dispatch from the Marketplace desk of Cognitive Economic Dissonance. Carmakers, as you've perhaps heard, have said they're going to walk back some of their electric vehicle production targets. They've delayed and even canceled some new models and changed their focus from fully electric to building more hybrids. Actually, though, sales of EVs are growing at a pretty good clip, up 11% domestically in the third quarter. That's the latest count from Kelley Blue Book. Record highs for both volume and market share and globally. And this is from the market intelligence firm Row Motion. EV sales were up by a third last month, thanks mostly to China Marketplaces. Savannah Marr has more on that.

[Matt Levin]

A few years ago, the US Auto industry set aggressive production goals for electric vehicles. Automakers were a bit overenthusiastic about them. But Jessica Caldwell, head of Insights with Edmunds, says consumer demand didn't quite pan out. That means dealerships are now somewhat overstocked with EVs, Ann says Stephanie Valdez, streety with Cox Automotive. They're marking them down. Incentives are definitely helping to fuel sales. Those include government tax credits and steeper dealership discounts than you find on gas cars. Plus, shoppers are finding more electric options on the lot. If you need a full size SUV like the EV9 supports that or a Rivian, or you want a smaller, more compact vehicle, whether it's a Mach E or the Prologue. But those deals and expanding inventory won't last forever, says Jessica Caldwell with Edmunds. So if we have this conversation in a year or two years, that may not be the case because automakers have scaled back production American automakers anyway. While China races to dominate the market with help from generous subsidies from its government and Europe tries to catch up, US Consumers still have cold feet, says Stephanie Brinley with S and P Global Mobility. You really have to get these people that are kind of interested but not sure and super practical to make a leap. Brinley says EV infrastructure here has improved, vehicle range is expanding. But consumer anxiety on those fronts is tough to crack, especially since the other half of the conversation tends to be it's going to be better in a little bit, which is enough to keep a lot of people in their gas cars. I'm Savannah Marr for Marketplace.

[Kai Rysdal]

Last up on our round of retail check ins ahead of the holidays is Philip Rollins. He's the owner of Offbeat, that's a record and comic shop in downtown Jackson, Mississippi.

[Matt Levin]

The holiday season is kind of an afterthought right now. Just trying to, you know, make it day by day at this point. But we do plan on participating on RSD Black Friday like we do every year and I asked my customers about turning in like looking at the list of exclusive records that come out and we'll place our order for it. Normally Black Friday tends to be pretty decent. It's not as big as the record store day, but it's it tends to do pretty well because we have a big sale on our pre loved vinyl. The holidays will be pretty big, but we're going to decorate. We're going to have a festival here downtown called Capital City Lights and we're just going to continue to build community with our with the anime community and with the record community. So we're going to do the best we can and with what we have and continue to support the people that support us.

[Kai Rysdal]

Philip Rollins, Offbeat is his store. Jackson, Mississippi is the place. This final note on the way out today, things you didn't know you Taylor Swift edition just in time for the holiday shopping season. Available only at Target starting November 29th for a mere $40. A 256 page book about her eras. Tour 500 pictures, personal reflections Shop early People shop often. Our Digital and On Demand team includes Kerry Barber, Jordan Manji, Dylan Mietenen, Janet Wynn, Olga Oxman, Ellen Rolfes, Virginia K. Smith and Tony Wagner. Francesca Levy is the Executive Director of Digital and On Demand and I'm Kai Rysdal. We will see you tomorrow.

[Matt Levin]

Everybody.

[Kai Rysdal]

This is apm. You turn to Marketplace for up to the minute news for stories that show you the connections between global events and your personal economy. And you're not alone. Marketplace is the most widely consumed business and economic news program in the country. We're proud to make fact based journalism freely accessible and Marketplace investors make it all possible. Your year end donation today will make a real difference in our nonprofit newsroom and in the lives of millions of Marketplace listeners every single day. So please contribute what you can [e-mail] donate.