Walgreens announced Tuesday it would close 1,200 stores. Rival drugstore chain CVS recently laid off thousands of employees to cut costs.

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Not too long after Tim Wentworth became CEO of Walgreens, he revealed a staggering number: About a quarter of the pharmacy chain’s stores aren’t making money.

On Tuesday he said 1,200 of these stores will close over three years. That comes two weeks after rival CVS announced it would lay off 2,900 corporate employees. Both chains are on a multibillion-dollar cost-cutting spree — closing hundreds of locations, cutting thousands of jobs and actually rethinking their role in Americans’ lives.

The slow tide of mistakes and misfortunes has boiled over for the largest U.S. drugstore chains. They have built up too much business at a time when shopping habits have changed. They are saddled with numerous Government fines and a particularly troubled relationship with insurers.

The problem of business

CVS and Walgreens have some notable differences. Walgreens, which also owns the British drugstore Boots, is focusing more on its pharmacy business. CVS has continued to expand into the healthcare space through mergers with the insurer Aetna and Caremark, a pharmacy benefits manager that helps insurers negotiate prescription drug coverage and costs. Yet the two companies have made similar missteps.

The simplest part of the problem is scaling. CVS and Walgreens have established a massive presence nationwide, with more than 9,000 and 8,000 stores, respectively. They have bought up mom-and-pop stores and signed long-term leases for prime street corner locations.

A chain of padlocks secures the freezer doors of a Walgreens store in San Francisco in July 2023. The store locked its freezers with chains and padlocks to prevent shoplifters from stealing frozen pizzas and ice cream.

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Shoppers now regularly complain that stores are chronically understaffed and products are locked to prevent theft. The shelves of snacks, makeup, greeting cards and cleaning products should increase profits. But sales have been declining for years – a result of a losing battle with Amazon, Walmart, Costco, grocery and dollar stores.

CVS and Walgreens “probably have too many stores because they’ve expanded too much, but the bigger problem is that the stores they have aren’t very good,” said Neil Saunders, a retail analyst at the firm GlobalData.

The chains have failed to offer shoppers new incentives beyond printing photos or filing returns, says Anshuman Jaiswal, a longtime consultant for retailers and pharmacies. And neither chain has built a meaningful online presence designed to give customers what they need.

“If you go to CVS.com or Walgreens.com and place an order for cough syrup, why don’t I immediately sell chicken broth as a product recommendation?” Jaiswal says. “It’s about rethinking the business model.”

The problem of recipes

Given retail’s difficulties, perhaps pharmacies could simply abandon supermarkets and concentrate on selling drugs — unless CVS and Walgreens say it’s becoming increasingly difficult to make a profit from that part of their business.

Years ago, a major shift in the balance of power between pharmacies and health insurers revealed the limits of drug stores’ influence.

“In the past, the prevailing view was that customers had great loyalty to their particular retail pharmacy… and that patients or consumers would be upset if they were forced to reschedule their prescriptions,” says Brian Tanquilut, healthcare services analyst at the Investment bank Jefferies.

Walgreens tested this theory about a decade ago when it had a public dispute with Express Scripts, a pharmacy benefit manager that worked with major health insurers.

Walgreens and Express Scripts duked it out over how much Walgreens should make from prescriptions – and Walgreens lost. For a time, it was banned from the insurance networks of millions of people who simply went elsewhere to get their medications at the lower in-network prices.

“This proved that patient loyalty is not about the retail pharmacy, but actually about what my insurance is willing to pay,” Tanquilut says. “And that opened the door for payers to further drive down prices for retail pharmacy chains.”

I hope reinvention is the cure

These days, CVS and Walgreens face stiff competition from pharmacies that don’t rely as much on profits from prescriptions because they belong to retail giants like Walmart and Costco. The drugstore chains have also spent millions of dollars in state fines amid allegations of unsafe staffing levels, excessive government insurance programs and contributing to the opioid epidemic.

Over the years, CVS and Walgreens tried to rebrand themselves as health centers by expanding primary care clinics. But these operations cost time and money.

On Tuesday, Walgreens CEO Wentworth said his chain was “returning to its legacy strength as a retail pharmacy-led company.” CVS is He is reportedly considering a breakup to reverse its mergers with Aetna and Caremark.

Both companies also make suggestions new structures about how they want to get paid to fill prescriptions in the hopes that this will be the big shot in the arm they need.

“I am very confident that over a two to three year period we will have redefined the framework for reimbursement discussions,” Wentworth told investors on Tuesday. “We are at the beginning of a turnaround that will take time.”