The Collapse of Walgreens

0:05Walgreens, the store with the red squiggly W, has been an American institution for more than a century. It's a place where you can fill your prescriptions, buy deodorant, toothpaste, shampoo, or pick up a pint of ice cream late at night. And it's everywhere. 70 % of Americans live within five miles of a Walgreens-owned pharmacy.

0:33But this American institution is now at risk of falling apart. Walgreens, which has been a publicly traded company for close to 100 years, agreed to sell itself to a private equity firm called Sycamore Partners for about$10 billion or something like$90 billion less than it was worth about 10 years ago. — That's our colleague Joseph Walker. He's watched Walgreens go from a company worth more than$100 billion down to worth$10 billion today. — You know, a great American brand, over 100 years old, you don't really have this sort of ignominious demise or decline over the past, you know, 5, 10 years.

1:22in the way that it struggled to adapt to the market forces that were affecting its competitors, but didn't quite end up moving in the right direction. And you can add into it, you know, the Italian billionaire who stepped in and tried to help with that turnaround and, you know, so far has also failed to make it happen.

1:44Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Monday, March 10th.

1:57Coming up on the show, the collapse of Walgreens.

2:16Walgreens was founded in Chicago in 1901. That was the same year that President William McKinley was assassinated and Teddy Roosevelt took over. Roast beef cost 15 cents a pound, and a dozen eggs cost less than a quarter. Ford's Model T wasn't even built yet. Walgreens was started by a man by the name of Walgreen, and he was a pharmacist. He bought up a local pharmacy store where he worked, and the company expanded, you know, pretty fast. It went public in the 1920s. It was a very successful stock for a lot of years. It was managed by descendants of the first Walgreen up and through the late 20th century.

2:58A family business. Yeah, very much so. Very much so. Wow. Early on, you know, one of the things that sort of distinguished itself was that they had a lunch counter. And one of their people there came up with the malted milkshake, right, which is like a sweeter version of your regular milkshake. And that made it a big hit. They were the milkshake innovator to create the malted milkshake? It's true. I feel like this is like, you know, Americana trivia, like really good stuff. It is. It is. It's true. Walgreens kept growing. In the decades after, it would put pharmacies in neighborhoods across the country.

3:41And business boomed. Walgreens, the Pharmacy America Trust. For the nearest 24-hour location, call 1-800-Walgreens. To the point where today, you know, I think we all see where, you know, you go down the street and there's a Walgreens. Then a couple blocks later, there's another Walgreens, right? And then next to that is a CVS and then another Walgreens a block and a half away. And the idea there just being that you want to just give customers as many chances as possible to shop at a Walgreens. They implemented the drive-thru pharmacy, which is obviously now pretty standard at many pharmacies and suburban type of areas.

4:18If only you could get everything done without getting out of your car. Fortunately, Walgreens offers the most drive-thru pharmacies in America. And it kept going, really. I mean, I think if we want to say the peak, you know, probably going up until like 2010. I think the reimbursement pressures that the company is facing now really started to pick up around them and then accelerated. What do you mean by reimbursement pressure? They're getting paid less money than they were in the past, right? So every day they're going to pay a little bit less for the same prescriptions that they're dispensing.

4:52Pharmacy chains like Walgreens strike deals with pharmacy benefit managers, or PBMs. PBMs are businesses that set which medicines patients can get. And they are the ones that negotiate with pharmacies on reimbursement rates. In 2011, Walgreens tried to play hardball with one PBM. It wanted better terms from Express Scripts. But its tough tactics didn't work out. And what happened there was, in any negotiation, right, it's all about leverage. And so for many years, you know, Walgreens could say, hey, we're Walgreens. We're everywhere. People love us. You know, like our customers love Walgreens.

5:33You got to give us our terms or, you know, you can't exclude us from your network of pharmacies that you allow your patients to go to. And Express Scripts said, well, we're not so sure about that, and kicked them out of the network. And there was not a, you know, uproar among the customer base saying, you know, we want our Walgreens. You know, we're loyal to Walgreens. People weren't storming the barricades necessarily. And that was sort of a big sign that maybe the pharmacies like Walgreens, despite their omnipresence, were not as powerful as had been thought before. Being kicked out of Express Scripts' network meant that Walgreens lost access to millions of customers.

6:15And it added more financial pressure on the company.

6:21The next year, in 2012, Walgreens came up with a new solution. It hitched its wagon to a European pharmacy chain, Alliance Boots. The American retailer Walgreens has signed a deal to take a 45 % stake in Alliance Boots, the parent company of the high street chain Boots. As part of this deal, which was completed in 2014, Walgreens got a new director and shareholder, an Italian businessman named Stefano Pessina. Stefano is well known in Europe for being a very savvy businessman from building up this small pharmaceutical distribution business into a behemoth with properties across Europe, including the UK and France and Italy and so on.

7:12Pesina eventually became CEO, and he came up with a new plan for the company. One main focus was on its retail business. And I firmly believe that retail has a key role to play in improving life conditions, and not only in helping people living longer, but also living healthier. And his idea was that, well, number one, the front of the store. We got to beef up the front of the store. The front of the store meaning where you buy your candy, your chips, your batteries, your deodorants, right? But also your beauty supplies and making these stores into little comprehensive markets, where you could go and pick up your prescription, but also get anything else you need, right?

8:01And the idea there was that, you know, you offset the declining profit margins in the back of the store at the pharmacy with the front of the store.

8:13Beyond retail, Piscina also had a prescription to help the pharmacy side of the business, to buy up urgent care and primary care clinics. The other idea was to try to integrate more with the rest of the health care system. So let's buy up primary care medical providers, or let's invest in urgent care providers and other health care companies. And then maybe we can attach them to our pharmacies, right? So you can not only get your prescription at the pharmacy, but you can also see a doctor to check to see if you have the flu or not. And so it was diversifying, expanding, acquiring in all these different areas sort of besides pharmacy.

8:53In a 2019 interview with The Wall Street Journal, Pesina said he was building a company that could last centuries. So Pesina has this strategy for how he can turn around Walgreens. How does it work out? Well, it doesn't work well enough to solve their problems at the pharmacy counter. What went wrong for Piscina and Walgreens is after this break.

9:43With Walgreens' pharmacy business struggling, CEO Stefano Pessina identified other areas that he thought could be more profitable. He tried beefing up its retail business with Walgreens' branded merchandise. And when you go back to, like, the 2012-2015 timeframe from when Stefano and Walgreens first linked up, the thing that Stefano would talk about over and over again, right, is, look, the back of the store where we dispense the prescriptions, those margins are declining. You know, the American pharmacy business has had real rich margins for a long time, but that's declining. Now you've got to deal with that.

10:22And the way that you deal with it is the way that we dealt with it over in Europe, which was to make the front of the store into a desirable place to go shopping. But there was a problem with this formula. Online shopping. Aside from any other missteps that the company might have made there, Just people were buying less and less inside of the store. People, you know, are much more likely to shop online. Piscina also tried other things. Walgreens bought thousands of Rite Aid stores. It acquired a couple doctor's office chains. But the deals added more debt and failed to stop the pressure on its cash flow.

11:04Meanwhile, Walgreens and its rivals were searching for new solutions for their pharmacy businesses. Where everyone else zigged and Stefano zagged was not pulling off a big deal with an insurer. There was a period of time in the past, you know, five, ten years where it seemed as though every big health care company was merging with another big health care company. And so, you know, the most direct competitor that you could think of perhaps is CVS. So CVS and Aetna combine. Aetna is a health insurer, right? And so CVS pharmacies, they depend a lot on health insurers for how much they get paid and all that reimbursement.

11:45And so by hooking up with an insurer, it just gives it that much more leverage both internally and externally on the payments that it receives for dispensing prescriptions. That deal allayed the reimbursement pressure for CVS. And Walgreens tried to do something similar and get a deal with the insurance company Humana. But the deal fell through. And the number of potential partners was thinning out. Express Scripts, that big PBM with which Walgreens had this pretty nasty dispute back in the 2011 timeframe, they hooked up with Cigna. They merged with Cigna, which is another large health insurer.

12:25So they got bigger and bigger. And again, they're hooked up with the insurers that have so much power in this equation. And Walgreens was left, you know, sort of standing alone at the dance. A wallflower. Yeah. At the big PBM health insurance dance. And those are some like real exciting dances, let me tell you. Pesina stepped down as CEO in 2021, but stayed on as executive chairman. Walgreens hired two other CEOs in the past four years, but neither of them were able to turn the company around. And investors lost patience. Its stock has just been decimated. And there's just really, you know, very little faith that the company can turn it around.

13:10Because all of its other diversification strategies, again, just didn't solve its cash flow problems, you know, didn't solve its declining margins. Last week, the private equity firm Sycamore announced it would buy Walgreens for$10 billion, a fraction of the$100 billion it was once valued at. Pesino will stay on as a shareholder. Sycamore plans to take the pharmacy chain off the stock market. In a statement, Walgreens' CEO said this will allow the company time to focus more long-term in its decision-making. The deal is expected to close in about six months.

13:54What did Pesina get wrong about running pharmacies in America? I think that Pesina looked at the U.S. health care system as a European. And he said, this is crazy. These people spend so much money on health care. It's not even like their health outcomes are any better than us in Europe, who spend way less. In fact, their health outcomes are worse. But, you know, you can't just keep spending 15, 20 percent of your GDP on health care and it's just going to keep rising like that forever. This is unsustainable. There's going to be a focus on efficiency and payment reform in a way that's going to change things and make it more European-like.

14:34So it turns out that the rising health care costs in the U.S. aren't unsustainable, that Americans will continue to pay more and more out of pocket. and that there hasn't been this big reckoning of the government or health insurers really cracking down on the way we pay for health care, which, you know, easier said than done. And the system hasn't quite made that turn yet, if ever. So is Walgreens going to fall into the bucket of Kmart's and Borders books and other failed chains? Well, certainly not right away. You know, it still has a huge presence in the United States. So I don't think we'll see them disappear, at least not right away.

15:14I think a lot depends on, you know, what Sycamore and its new owners do to help the turnaround. When Sycamore completes the deal, it will have to decide, you know, how much more it can downsize and how much more efficiencies it can get out of this company and whether it can do what the previous management at Walgreens couldn't.

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16:01That's all for today, Monday, March 10th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Sharon Turlip.

16:15Thanks for listening. See you tomorrow.