Walgreens said 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 long after Tim Wentworth became CEO of Walgreens, he revealed a stunning statistic: About a quarter of the pharmacy chain’s stores don’t make any money.

On Tuesday, he said 1,200 of those stores will close over a three-year period. That comes two weeks after rival CVS announced the layoffs of 2,900 company employees. Both chains are in the midst of multibillion-dollar cost cuts, closing hundreds of locations, cutting thousands of jobs and essentially rethinking their role in Americans’ lives.

The slow simmer of mistakes and setbacks has come to a boil for America’s largest drugstore chains. They have built too many stores at a time of changing shopping habits. They are saddled with countless government fines and a particularly bad relationship with health insurers.

The problem of stores

CVS and Walgreens have some notable differences. Walgreens, which also owns the British drugstore Boots, is focusing more specifically on its pharmacy activities. CVS has expanded further into health care through mergers with 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 scale. CVS and Walgreens grew nationwide with more than 9,000 and 8,000 stores, respectively. They gobbled up mom-and-pop stores and signed long-term leases for prime street corner locations.

A padlocked chain secures the freezer doors of a Walgreens store in San Francisco in July 2023. The store padlocked the freezers to thwart shoplifters who stole frozen pizzas and ice cream.

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Now consumers regularly complain about chronically understaffed stores, with products locked to prevent theft. The shelves of snacks, makeup, greeting cards and cleaning products were intended to increase profits. But sales have been declining for years — due to a losing battle with Amazon, Walmart, Costco, supermarkets and dollar stores.

CVS and Walgreens “probably have too many stores because they’ve gotten too big, 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 create new incentives for shoppers beyond photo booths and return drop-off points, said Anshuman Jaiswal, a longtime consultant to 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?” says Jaiswal. “It’s about reinventing the business model.”

The problem of recipes

Given the retail industry’s woes, pharmacies might simply forego the grocery store and focus on selling medications — except that CVS and Walgreens say it’s becoming increasingly difficult to make a profit from this part of their business.

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

“Historically, there was a perception that there was a strong customer loyalty to their specific pharmacy… and that patients, or consumers, would be all up in arms if they were forced to move their prescriptions,” said Brian Tanquilut, a healthcare practitioner . services analyst at the investment bank Jefferies.

Walgreens tested this theory about a decade ago when it got into a public battle with Express Scripts, a pharmacy benefits manager that worked with major health insurers.

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

“What that did was prove that patient loyalty is not to the pharmacy, but to whatever my insurance is willing to pay,” Tanquilut says. “And that opened the door for payers to continue to drive down prices for pharmacy chains.”

Hoping that reinvention is the cure

Today, CVS and Walgreens face stiff competition from pharmacies that are not as dependent on prescription profits because they are part of retail giants including Walmart and Costco. The drugstore chains have also spent millions of dollars in government fines amid allegations of unsafe staffing, overbilling government insurance programs and contributing to the opioid epidemic.

Over the years, CVS and Walgreens sought to redefine themselves as health care hubs by expanding primary care clinics. But these operations cost time and money.

On Tuesday, Walgreens CEO Wentworth said his chain is “refocusing on its historic strength as a retail pharmacy-led company.” CVS is reportedly considering a breakup to undo its mergers with Aetna and Caremark.

Both companies are also proposing new structures for how they want to get paid for filling prescriptions, hoping this is the big opportunity they need.

“I am confident that in a two to three year period we will have reset the framework for repayment discussions,” Wentworth told investors on Tuesday. “We are in the early stages of a turnaround that will take time.”