No Magic Pill for What Ails Pharmacies, Panel Says

Organized retail theft is just one of the problems facing U.S. drugstores, which are seeing their profits further dragged down by the high costs of running a pharmacy and keeping shelves stocked with groceries.

Retailers who operate as drugstores in some capacity have struggled with profitability thanks partly to the high-wage staff needed to hand out medications to the public as well as regulations dictating how the drugs are sold, according to panelists on Thursday at ICSC New York.

The result has been widespread closures of pharmacies across the country, including the October 2023 bankruptcy of Rite Aid, which emerged from Chapter 11 this past September. 

A gulf has formed between customers getting the pharmaceuticals they depend on and the retailers trying to find creative ways to meet that demand in a profitable way.

“It’s not been a sales issue. You can look at any pharmacy location, the sales are incredibly strong,” Meghann Martindale, director of market intelligence for retail at Avison Young, said. “But that store may not be profitable simply because of the pharmacy side, and this is something that is not specific to CVS, Rite Aid or Walgreens. It’s everybody, and I think we’re still trying to figure out what that new model looks like with issues that we don’t typically have to address in real estate.”

The panel “Drugstore Deserts” was moderated by Amanda Metcalf, editor‑in‑chief of ICSC’s magazine Commerce + Communities Today, and included Martindale, Placer.ai’s Ethan Chernofsky, Brixmor Property Group’s Tonya Creekmore and CBRE (CBRE)’s Ian Schroeder.

Over the last 10 years, 30 percent of the country’s nearly 89,000 pharmacies have closed, according to Schroeder, who believes that the worst for the market is in the past. Nevertheless, pinning down why closures happen in different markets boils down to three factors.

One, suburban pharmacy operators may open a slightly better location near an old one and just focus on the new store. Two, the drugstore might be in an unprofitable rural market. Or three, the store is in an urban market that is subject to issues of safety and theft. No matter the cause, the impacts are hard on consumers, panelists said.

“I think the areas that are getting hit the hardest is rural America where that pharmacy is maybe the first line of defense for someone that might be sick,” Schroeder said. “I saw a report that said 58 percent of Americans will go to the pharmacist before going to an urgent care or the ER. That’s a big service that is being pulled from local communities.”

Another vulnerable demographic are city dwellers who bring high volume to drugstores, but may have issues navigating the city to get to the nearest pharmacy because of whatever ailment they’re grappling with, according to Martindale.

Grocery stores and online pharmacies have been taking over thanks to the shortage of drugstores, according to Chernofsky.

“It’s not just the pharmacy piece at a Kroger. … One of the fastest-growing segments in terms of sales is health and wellness products,” Chernofsky said. “There’s the issue of pharmacy, the issue of front-of-house and there’s the issue of a front-of-house pharmacy that also is being moved. So there’s this fundamental question of evolution, optimization of retail footprint, avoiding cannibalization.”

Small-format stores may be the answer, according to Chernovsky. But reducing a traditional drugstore’s footprint can be complicated, Creekmore believes.

“[Retailers] don’t know what they are going to look like in the future, and it would be a huge bet on splitting the space. I think they need that flexibility,” Creekmore said. “It’s very costly to the point where in most instances, if we have to split a drugstore space, we typically would just scrap it and do new construction.”

Mark Hallum can be reached at mhallum@commercialobserver.com.