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Drug channel’s future: fewer stores, better experience

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Store closures are the order of the day among the major pharmacy chains, continuing a multiyear trend of consolidation of locations in the sector. This comes amid increasing digitalization and a push further into health care services by major chains, both necessitating

Deborah Weinswig

significant investments by major retail names. However, pharmacy retailers must continue to invest in their retail stores, too — especially as the drug store sector moves toward a future of fewer stores.

Each week, Coresight Research tracks announced store openings and closures by major U.S. retailers. Our figures show CVS Health and Rite Aid are planning to accelerate store closures this year. Our number for Walgreens, meanwhile, is based only on plans for January 2022.

  • Walgreens operated 8,965 retail stores as of its August 31, 2021, year-end, down from 9,569 in 2019. The retailer has been consolidating its store fleet in recent years, with hundreds of closures (dominated by closing a tranche of acquired Rite Aid stores) in the past five years. The company says that it is “focused on creating a neighborhood health destination” with a more modern pharmacy incorporating a wider range of health care services.
  • CVS Health operated 9,939 stores as of December 31, 2021, versus 9,896 at the end of 2019 (including stores in Target). It is reshaping its store portfolio with stores categorized into three formats: primary care clinics, enhanced HealthHUBs and traditional pharmacies. Despite the slight increase in locations in recent years, CVS is aiming to “de-densify” its stores based on consumer needs, omnichannel shopping preferences and changes in the U.S. population. That means closing around 900 stores in the period 2022–2024. In its latest earnings call (for the fourth quarter of 2021), CVS Health said that capital expenditures are expected to be in the range of $2.8 billion to $3 billion for 2022 as it invests in technology and digital improvements to enhance the consumer experience and its community locations.
  • Rite Aid is planning to close 63 stores of its approximate 2,500 total, and those closures began in November 2021. The company said that it anticipates the number of closures to increase as it finalizes its review of stores. In March 2020, Rite Aid announced a new strategic plan, named RxEvolution, which incorporates a merchandising overhaul, new marketing, and integration and operational initiatives, in its Retail Pharmacy and Pharmacy Services segments. In late 2020, Rite Aid unveiled its Store of the Future model, targeting younger consumers and developing the role of the pharmacist into a health advocate.

Competition and context

Drug stores are facing fierce competition for pharmacy and front-store customers not only from digital channels but from one-stop retailers such as mass merchandisers — and those mass merchandisers are investing in better store experiences.

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In early February 2022, Wal­mart unveiled a “signature” trial store format, designed to amplify “the physical, human and digital design elements” in its stores, and so “inspire customers and elevate the experience.” The store looks impressive and delivers an improved shopping experience through a number of features: displays and room-sets; elevated brand shops for national brands and private labels; digital touchpoints; and additional space for shoppers to explore with “optimized assortment to elevate storytelling.” Walmart did not specify pharmacy and health in announcing its trial store, but we would expect store refits to have a beneficial impact across all departments.

In early March 2022, Target management said that capital expenditure will be in the $4 billion to $5 billion range annually, with a focus on investments in its stores-as-hubs model — this includes new locations (around 30 per year with a focus on mid-sized stores), full-store remodels (200 in 2022), fulfillment retrofits and projects to support brand partnerships. CVS operates the pharmacies in Target.

Mark Schindele, executive vice president and chief stores officer, said on Target’s March 2022 earnings call: “In the year ahead, we’ll [deepen] our trust with our guests with an experience our competitors can’t match. That means clean, bright and on-brand floors that invite discovery, inspire guests with the latest products, all brought to life by an incredible team — a team that’s empowered and trained across the building so they can jump in wherever our guests need us.”

Future of Stores Matrix

The refocusing on quality of in-store experiences aligns with our long-standing view on where physical retail (and especially discretionary retail) is headed. For several years, we have pointed to stores likely clustering around one or more of four functions, as shown in Coresight Research’s Future of Physical Stores Matrix below. Concentrating on these key functions of convenience, collection, discount and destination enables brick-and-mortar stores to complement e-commerce and maintain competitive advantages versus the online channel. Wal­mart’s new store features add to its destination status.

  • Drug stores have traditionally focused on the convenience component; with a large nondiscretionary component and with some shoppers facing health and mobility challenges, proximity has been a competitive advantage in the sector. With e-commerce and digital services, proximity’s importance declines somewhat, although not entirely. As of August 31, 2021, for example, 78% of the U.S. population lived within five miles of a Walgreens or Duane Reade pharmacy, according to Walgreens Boots Alliance.
  • Those digital services include collection of online orders — both prescription and front-store. So the second component of our matrix is coming more into play for drug store chains.
  • Destination has somewhat limited applicability for drug stores, which is why stores have traditionally been local and often underwhelming in terms of the in-store experience. But, as going to the store becomes more of an active choice and less of a necessity — and particularly in the context of discretionary categories such as beauty, where competition is getting fiercer — store experience (and so “destination”) becomes incrementally more relevant for drug stores.

Digitalization and health care are key opportunities for drug stores. However, as more demand moves into digital channels and proximity becomes less of a competitive advantage, retailers must continue to review their store estates in terms of quality of experience as well as number of locations.

Deborah Weinswig is founder and chief executive officer of Core­sight Research. She can be reached at [email protected].


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