How Walgreens plans to retool the future of its pharmacies

• "Walgreens spent years building its business through acquisitions and completely neglected the fundamentals of its stores and its retail operations," GlobalData retail analyst Neil Saunders wrote Tuesday.
• And it's not just Walgreens: After years of industry growth, CVS is eyeing a breakup of its massive business, and Rite Aid recently emerged from bankruptcy after shedding many of its locations.

Driving the news: Walgreens CEO Tim Wentworth said on Tuesday the company is focused on simplifying and focusing the business, and sees both its stores and its digital channels as central to its strategy.

• "The customer has evolved. Demographics and preferences have shifted, and we need to reposition and operate our stores accordingly," Wentworth told analysts during a fourth quarter earnings call on Tuesday announcing the store closures and changes.
• Last quarter, officials said, Walgreens removed eight national brands from store shelves and replaced those products with items from "preferred partners" or its own store brand.
• The company launched 300 of its own store-branded products in 2024 and plans to launch another 300 before the end of the fiscal 2025.

Wentworth seems to be drawing from a pharmacy benefit manager playbook as it pares back its products, Michael Cherny, senior research analyst at Leerink Partners, told Axios.

• "You're replicating that same dynamic of a formulary," Cherny said. They can drive up margins through pushing high-value products where there's negotiating leverage, or in this case, self-branded products, Cherny said.

The big picture: Retail and pharmacy are the key drivers of revenue for Walgreens with retail key to ensuring Walgreens locations are seen as a "one-stop shop" for pharmacy customers.

• Walgreens retail sales declined 3.5% in the quarter, with executives saying "the consumer backdrop remains a challenge."
• They said they are seeing signs of strain among lower-income consumers hit by inflation and depleted savings.

Zoom in: Walgreens is also accelerating its digital and online offerings, saying roughly 80% of its same-day delivery orders are delivered within one hour.

• Wentworth said the company plans on working to upgrade its loyalty program as it seeks to become the "ultra convenient option" for its members.

Yes, but: What happens in the front of the store doesn't matter very much if Walgreens and its competitors continue struggling with the fundamentals of the pharmacy business at the back of the store, Rohan Kulkarni of HFS Research told Axios.

• "That's a retail table stake, being able to access what you want, when you want, online, and have the confidence that it'll actually be fulfilled in the time that you tell me it will be fulfilled," Kulkarni said.

What to watch: Walgreens' executives have left the door open to divesting some aspects of their business to try to generate cash. They are still sitting on a number of valuable assets, including their stakes in primary care company VillageMD, analysts note.

• It may also be worth watching which businesses ultimately move into the stores they close. Walgreens often boasts having the best corners in America and says it plans to use those real estate assets to its advantage to minimize losses on the stores that shutter.