Isn’t CVS doing really well right now? Haven’t lots of people gone to drug stores during the pandemic to stock up on hand sanitizer, cleaning wipes and toilet paper? What about all those Covid-19 vaccine shots CVS gives out?
CVS, the largest drug store chain in the United States, pointed to “changes in population, consumer buying patterns and future health needs” as factors in its decision to close stores.
Here’s why CVS will close 900 stores.
Pivot to health care
The future of CVS is not selling snacks, candy, shampoo and greeting cards. It’s in health care.
CVS is “really pivoting and leaning into the health care aspects of the business,” said George Hill, an analyst who covers the company and the health care industry at Deutsche Bank. “You’d much rather be selling health care services that are high-dollar value, high-margin versus greeting cards.”
Too many stores
When you walk down the street or drive around the suburbs you’ll typically pass a CVS. And then hit a Walgreens right next door. Rite Aid is probably pretty close, too.
“There’s too many pharmacies in the country and there’s too much pharmacy capacity. That gives CVS a reason to go,” said Hill.
Its latest closings will “reduce store density in certain locations,” CVS said Thursday, which translates into the fact that CVS has too many stores too close to each other in some places.
Competition from Amazon and Dollar General
Although brick-and-mortar pharmacies are still an important stop for many elderly people,or those who don’t use the web or have access to it, they are increasingly becoming a thing of the past to the growing ranks of online shoppers.
Closing stores also reduces CVS’ costs while still keeping most of its sales. Its labor and store operations costs increased during the pandemic because of safety protections like plexiglass, floor decals and masks. The company said in August it planned to raise its minimum wage to $15 an hour from $11 in a bid to retain and attract workers.
“There are cost pressures in all directions,” said Hill, the Deutsche Bank analyst.
Seventy-five percent of CVS’ sales comes from filling prescriptions, but its profits from that segment have declined in recent years because of lower reimbursement rates.
But when CVS closes a store, it can hold onto most of those sales by shifting the prescriptions to its nearest pharmacies, Hill said.
Covid-19 vaccines weren’t a huge boost
CVS got a lift from people coming into its stores for their Covid-19 vaccines and tests. The company has administered 43 million vaccines and around 38 million tests, CEO Karen Lynch said on an earnings call earlier this month.
But the vaccines were only a short-term gain for the company, which said they will generate only $3 billion in revenue in 2021. That will decline by up to 40% next year, along with whatever sales CVS racked up as shoppers browsed aisles while they waited to get vaccinated, Lynch said.
And fewer people have also been coming into stores to pick up cough and fever medicines — big business for CVS — because they’re still wearing masks and spending more time at home than they once did.