CVS and Walgreens’ recent announcements they will close multiple stores across the U.S. underline an intensifying challenge for pharmacy-first retailers. Unlike typical retail outlets, big-box pharmacies serve as essential healthcare hubs (primary care, immunizations, medications), particularly in areas with limited healthcare options. Closures risk straining access to critical services such as prescriptions, vaccinations, and health consultations, widening health inequities in underserved communities. While part of a broader retail contraction, this trend underscores pharmacies’ unique role in U.S. healthcare. It raises pressing questions about the sustainability of physical pharmacy locations in an increasingly digital marketplace.
Pharmacies are going to need to get out of their own way to overcome a slew of generational challenges
A confluence of structural and competitive dynamics has driven challenges across big-box pharmacies. The emergence of digital pharmacy models and the encroachment of e-commerce giants have increasingly diverted consumer demand toward convenient home-delivery options. Simultaneously, regulatory pressures on pharmaceutical pricing, alongside escalating labor costs and compliance expenses, have substantially compressed traditional profit margins.
Retail pharmacies are grappling with thin margins, further exacerbated by supply chain disruptions, a shift in consumer behavior favoring online purchasing for non-essential items, staffing shortages, and poor experiences in front of and behind the counter. Considering these mounting challenges, pharmacies are faced with the formidable task of rationalizing their physical footprint in an industry rapidly transitioning toward digital delivery solutions.
Challenges at CVS and Walgreens form a roadmap of what not to do
Not long ago, CVS and Walgreens opened stores fast and furiously. Between 2005 and 2022, CVS doubled its footprint from some 5,000 stores to close to 10,000 locations. Walgreens took a similar path in the same time frame, doubling in size to approximately 9,000 stores. However, that growth is rapidly slowing down for several reasons (see Exhibit 1).
Exhibit 1: Big-box pharmacies have plenty to learn from big-box retailers
Source: HFS Research, 2024
Data-backed models are crucial to drive success for resilient retailers
US big-box retailers of all types are struggling. To survive, many are reinventing themselves and changing their operating models. Several successful retail makeovers can help CVS and Walgreens rethink and reshape their operations:
- Best Buy’s shift to a service-centric, omnichannel model: By blending online fulfillment with in-store consultations, it achieved a 37.2% increase in comparable sales in Q1 2021, exceeding pre-pandemic levels. The company optimized operations by transitioning 62% of e-commerce shipments to automated distribution centers by Q3 2023, freeing store employees for customer engagement. Additionally, Best Buy trained more than 30,000 employees to assist customers with AI-enabled devices, positioning itself to capture demand in emerging tech markets. These changes underscore Best Buy’s effective adaptation, utilizing its stores as service-driven assets to boost customer satisfaction and operational efficiency.
- Target’s small-format stores: These smaller sites prioritize localized merchandise and streamlined layouts, creating a high-revenue-per-square-foot model in urban and suburban areas. With average sales exceeding $600 per square foot in these small-format stores, Target has achieved better revenue efficiency than its larger stores. This model shows how CVS and Walgreens could benefit from smaller, more targeted stores focused on health essentials and prescriptions, reducing the need for extensive floor space.
- Dollar General’s rural dominance: By aggressively expanding into rural communities with smaller stores, Dollar General caters to underserved markets, prioritizing essential items and affordable pricing. Dollar General’s sales growth—about 8% year over year in rural markets—proves the financial viability of a lean, essentials-focused store model. CVS and Walgreens could adapt this concept by focusing pharmacy-first stores on healthcare services and using analytics to stock location-specific essentials.
CVS and Walgreens must adopt a pharmacy-first model to recapture their mojo and serve their communities
Pharmacy-first retailers need a model that maximizes healthcare delivery while reducing reliance on traditional retail to stay relevant and meet evolving healthcare needs. Here’s a structured model they can adopt:
- Shift to pharmacy-centric, smaller store formats
- Objective: Reduce operating costs and increase revenue per square foot.
- Implementation: Launch smaller, pharmacy-focused stores in urban and rural markets, offering core health services, prescriptions, and over-the-counter essentials. This would mirror Target’s successful small-format store model tailored toward healthcare.
- Expected impact: A more compact store format could reduce real estate and labor costs by 25-30%, improving profit margins at each location and enabling companies to strategically place more stores in underserved areas.
- Enhance the omnichannel experience with full digital integration:
- Objective: Create a seamless customer experience between digital and physical interactions.
- Implementation: Expand capabilities for online prescription management, scheduling virtual consultations, and offering accelerated in-store prescription pick-up options. CVS and Walgreens already offer in-store pick-up, but there’s scope for enhancement with a unified customer profile (all past purchases across channels in one place with consistent promotions), integrated telehealth services (chronic care management, preventive care and wellness programs, employer/payer integration, remote specialty care), stickier loyalty programs (same rewards across channels that increases with purchase volume/value), and continuous inventory optimization seasonality, demographics, and based on change in purchase trends.
- Expected impact: An omnichannel approach would involve stores becoming part of a seamless service network, encouraging in-store pickups and consultations, and potentially boosting physical traffic by 10-15%. Enhanced digital offerings would also strengthen loyalty, especially among younger, tech-savvy demographics.
- Expand and localize health services:
- Objective: Increase customer reliance on stores as healthcare hubs, not just retail outlets.
- Implementation: Expand and streamline health services so they become the primary reason for customer visits rather than secondary or add-on services. Return to the trusted community healthcare provider role, personalize interactions, and develop relationships with consumers.
- Expected impact: Health services would draw more consistent, high-value foot traffic, making stores indispensable in communities. With added services, MinuteClinic and in-store urgent care could see a 20-30% increase in utilization, boosting the average spending per customer visit.
- Invest in analytics-driven inventory management:
- Objective: Reduce stockouts and optimize inventory for location-specific needs.
- Implementation: Predictive analytics and inventory management systems should be used to uber-optimize inventory by region, by demographics, and by focusing on local health needs and seasonal trends. This data-driven approach could help stores stock high-demand items such as prescriptions and specific health products and reduce low-margin, non-essential items.
- Expected impact: Optimized inventory reduces waste and stockouts, potentially increasing sales by 10-15% in health-related categories while freeing up working capital.
- Get creative about staffing challenges:
- Objective: Improve both pharmacy and pharm-tech pipeline.
- Implementation: A roadmap that begins to paint the joys of being pharmacists, including how they help health consumers improve their health and lives. Collaborate with pharmacy schools to develop and execute a grassroots campaign to engage high school students and help influence their career choices. Support the upgrade of pharmacy techs to the pharmacy. Streamline in-store processes and incorporate technologies to reduce burnout drivers.
- Expected Impact: Improving the staffing pipeline and reducing attrition can directly impact experience, costs, and revenues.
The Bottom Line: Pharmacy-first retailers can regain their mojo by shifting to smaller stores, digital integration, expanded health services, and data-driven operations.
An integrated approach, which requires courage to learn from other successful retailers and adapt the lessons to healthcare, could enhance accessibility for underserved communities, maintain financial viability, and ultimately redefine the pharmacy as an indispensable component of American healthcare.
