MICHEL MARTIN, HOST:
America's biggest pharmacy chains are not healthy. CVS and Walgreens are closing hundreds of stores and rethinking their role in our lives. NPR's Alina Selyukh explains why.
ALINA SELYUKH, BYLINE: Pick a city, any city in America, and you'll probably find a corner just like this one in Washington, D.C., with a Starbucks, a sandwich shop and a CVS or a Walgreens or sometimes both.
BRIAN TANQUILUT: There are very, very, very few spots in the U.S. where you have to drive more than 5 miles to get to a pharmacy.
SELYUKH: Brian Tanquilut at the investment bank Jefferies sums up the first and the simplest part of why big pharmacies have languished - there are so many. They've gobbled up mom-and-pop shops, signed long leases for prime real estate, and now Walgreens says a quarter of its stores don't make money. And if you can't grow by adding stores, you have to grow the business inside the stores.
NEIL SAUNDERS: The bigger problem is that the stores that they have are not very good.
SELYUKH: That's Neil Saunders with the analytics firm GlobalData, delivering the bitter pill that's the second problem.
SAUNDERS: Their kind of very blunt response is to close stores. They do need to close some stores, but they also need to focus on making the stores they do have work better operationally.
SELYUKH: This problem is chronic. Walk with me through a CVS, and you quickly see it's understaffed while trying to be two things at once.
Getting to the prescription counter, which is arguably the heart of this operation, means first walking through a convenience store with snacks and laundry detergent. Most of that is locked up to prevent theft.
All these shelves were meant to boost profits, except sales here have sagged for years in a losing battle with Amazon, Walmart, grocery stores, dollar stores. So one big idea is for pharmacies to ditch the store and focus on the pharmacy.
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AUTOMATED VOICE: Please remember to take your receipt.
SELYUKH: But here lies the third and most complicated problem - the pharmacy business has been getting less and less profitable. There have been constant changes to how CVS and Walgreens get paid for filling prescriptions, and it has to do with a big shift years back in the balance of power between pharmacies and insurers.
TANQUILUT: Historically, there was a view that there was a lot of customer loyalty to their specific retail pharmacy...
SELYUKH: Brian Tanquilut.
TANQUILUT: ...And that patients or consumers would be all up in arms if they were forced to move their prescriptions.
SELYUKH: This idea was put to a test about a decade ago when Walgreens got into a public fight with a company called Express Scripts. It's one of the middlemen that helps insurers negotiate drug prices. They're called pharmacy benefit managers. Walgreens and Express Scripts played a game of chicken over how much Walgreens should earn from prescriptions, and Walgreens lost. Millions of people simply had to go elsewhere for their medicine.
TANQUILUT: That proved that patient loyalty is not to the retail pharmacy, but it actually is whatever my insurance is willing to pay.
SELYUKH: Beyond these three big problems, there are plenty more - a poor online presence, various government fines. The pharmacy chains have attempted to change. CVS actually bought one of those middlemen, called Caremark, and the insurance company Aetna. Both CVS and Walgreens added primary care clinics, a project that could be revolutionary but takes tremendous time and money. Here's Saunders.
SAUNDERS: Out of the two of them, there's no doubt that Walgreens is in real trouble, whereas CVS is just in a difficult spot.
SELYUKH: Walgreens has now shaken up leadership. CVS is reportedly considering a breakup to undo its mergers with Caremark and Aetna. Both chains are also proposing new ways to negotiate drug prices, hoping that's the big shot in the arm that they need.
Alina Selyukh, NPR News.
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AUTOMATED VOICE: Thank you for shopping at CVS. Transcript provided by NPR, Copyright NPR.
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