Walgreens to Close 1,200 U.S. Stores in Massive Restructuring Amid Financial Struggles and Strategic Overhaul

Walgreens Boots Alliance Announces Closure of 1,200 U.S. Stores as Part of Turnaround Strategy

Walgreens Boots Alliance (WBA) has announced plans to close 1,200 stores across the U.S. over the next three years, representing 14% of its total U.S. store base. This move is part of a broader turnaround strategy aimed at stabilizing the company’s finances and addressing operational challenges that have plagued its performance in recent years. The closures are projected to have an immediate positive impact on profitability and cash flow, with 500 store closures anticipated in the 2025 fiscal year. Investors have already responded positively to this news, with WBA shares rising by 5.5% in pre-market trading.

Financial Impact and Strategic Objectives

Walgreens Boots Alliance, which operates Walgreens in the U.S. and Boots in the U.K., has been facing increasing financial strain. Despite an uptick in sales for 2024, the company has seen a dramatic rise in operating losses, totaling $13.1 billion in the first nine months of fiscal 2024—up from $6.4 billion during the same period in the previous year. By reducing its store footprint, Walgreens aims to streamline operations, cut costs, and optimize profitability. The closures are expected to improve financial performance by late 2025, following the complete implementation of the store reduction plan.

This restructuring is part of a larger effort led by the new CEO, who is focusing on repositioning Walgreens within the evolving healthcare landscape. The company plans to enhance its digital offerings, expand healthcare-related services, and realign its resources to make its remaining stores more profitable.

Root Causes Behind the Store Closures

The decision to close 1,200 stores is driven by several key factors, many of which reflect broader challenges in the U.S. pharmacy sector.

1. Financial Strain and Underperformance: Walgreens has been struggling with decreasing profit margins, particularly in its pharmacy operations. Despite higher sales, increased operational costs, shrinking pharmacy margins, and external economic pressures have led to ballooning losses.

2. Sector-Wide Challenges: The retail pharmacy sector is under intense pressure due to the growing dominance of pharmacy benefit managers (PBMs) and drug distributors. These entities have contributed to reduced reimbursements for pharmacies, further squeezing Walgreens' margins. Other industry-wide issues, such as rising generic drug use, which offers lower profitability compared to branded drugs, have also contributed to the company’s financial difficulties.

3. Strategic Shift and Restructuring: Underperforming stores, particularly in oversaturated markets, are part of the reason behind the closures. By concentrating on high-performing stores and improving services like immunizations, Walgreens hopes to bolster the profitability of its remaining locations and refocus on its core strengths in healthcare.

4. Evolving Role of Pharmacies: Walgreens is shifting its focus to becoming a key player in the healthcare space, emphasizing community-based health services and digital care solutions. As consumer demand for convenient healthcare continues to grow, Walgreens is positioning itself to capitalize on these trends through enhanced digital platforms and health services.

Walgreens’ Operational Missteps

Several operational and strategic missteps have contributed to Walgreens’ current financial struggles. These missteps have not only eroded profitability but have also triggered the need for a significant restructuring plan.

1. Overexpansion and Market Saturation: Walgreens aggressively expanded its store footprint in the U.S., leading to market saturation in many areas. As a result, some stores began cannibalizing each other’s revenue, particularly in urban and suburban locations. This overexpansion diminished profitability and left underperforming stores as a financial drain on the company.

2. Erosion of Pharmacy Margins: One of the most significant challenges Walgreens has faced is the erosion of its pharmacy margins. PBMs have played a central role in reducing reimbursement rates for pharmacies, and Walgreens has struggled to absorb these losses. Furthermore, the increasing shift towards generic drugs, which are less profitable than branded medications, has exacerbated the financial pressure on the company.

3. Weak Retail Sales: The rise of e-commerce giants like Amazon, alongside the competitive pricing strategies of major retailers such as Walmart and Target, has severely impacted Walgreens’ front-of-store retail sales. As consumer behavior shifts towards online shopping, Walgreens has struggled to maintain its market share, contributing to underperformance in its brick-and-mortar retail operations.

4. Operational Inefficiencies: Many of Walgreens' closed stores suffered from significant operational inefficiencies. High labor costs, outdated store layouts, and logistical challenges hindered productivity and inflated operating expenses, further contributing to financial losses in these locations.

5. Failure to Innovate and Adapt: While competitors like CVS and Walmart were quick to adapt to changing market dynamics by investing in digital health, telemedicine, and omnichannel retail strategies, Walgreens lagged behind. This delayed response to industry trends left the company trailing in key areas such as healthcare services and online retail, weakening its competitive position.

Cost Reductions and Layoffs Expected

Walgreens’ store closures are part of a massive cost-reduction initiative that is expected to result in significant layoffs. Although the company has not yet disclosed specific numbers, industry experts predict that Walgreens could reduce its retail workforce by up to 10%. However, Walgreens plans to redeploy some employees into growth areas, such as pharmacy services, digital health, and telemedicine. This shift reflects the broader trend of transitioning retail workers into more specialized healthcare roles as automation and digital transformation reshape the labor market.

The store closures are also expected to yield immediate cost savings through reductions in labor, rent, and maintenance expenses. Walgreens hopes these savings will help stabilize its cash flow and improve its profit margins by 2-3% over the next few years. However, short-term costs related to store liquidations and closure logistics could offset some of these gains.

Conclusion

Walgreens Boots Alliance’s decision to close 1,200 U.S. stores marks a critical step in its effort to regain financial stability and reposition itself in the evolving healthcare landscape. The closures, while difficult, are expected to improve profitability, optimize operations, and strengthen the company’s competitive position. By focusing on its core strengths in pharmacy services and digital healthcare, Walgreens aims to meet the growing demand for convenient, community-based healthcare while delivering long-term value for investors. However, the road ahead involves not only massive cost reductions and layoffs but also a strategic overhaul of its store network and operational model.