Stolen razors are least of US drugstores’ concerns

Delayed checkout. Picking out items from drugstores used to be convenient, until recently. Wares from toothpaste to razors are under lock and key inside of pharmacies including Walgreens Boots Alliance’s and CVS Health. While retail shrink, another name for inventory lost to theft and damage, is hardly a new phenomenon, these companies have ramped up their focus on curbing it. Other issues of bigger concern – online competition, rising labor costs, and inflation – are out of their control.

Walgreens' Interim Finance Chief Manmohan Mahajan said in the $18 billion company’s most recent earnings call that shrink impacted the company's first-quarter retail gross margin by 110 basis points. Rite Aid, which filed for bankruptcy in October, said first-quarter results had a “sizeable” shrink headwind. CVS has been working with D.C. law enforcement to dismantle major shoplifting rings, and said in a November 2021 Senate testimony that CVS Pharmacy alone loses more than $200 million each year due to organized retail crime.

Yet the focus on theft may be overstated. According to the National Retail Federation, pharmacy, grocery, department stores and mass merchandise have average shrink rates of over 2%. Walgreens’ annual run-rate is twice that, but, still, it’s overall operating margins are negative, suggesting something else is afoot.

Online competitors like Walmart and Amazon.com rolled out virtual health clinics nationwide. More than half of Americans aged 18 and older have used an online pharmacy, a 10 percentage point increase compared to 2021, according to a recent ASOP Foundation Consumer Survey. Drugstores are trying to amend fulfillment processes to stay competitive. But competition could cut down on foot traffic, which means fewer impulse purchases. Sales in non-pharmacy-related goods at CVS and Walgreens both declined last quarter.

There are other issues. Wages increased by the most in nearly two years in January. Inflation is biting: Walgreens noted that customers continued to pull back on discretionary spending. Both CVS and Walgreens have made strides to push into healthcare services, offering patients an opportunity to see providers in-store. Whether this investment will generate a positive return isn’t clear and shareholders in CVS and Walgreens have lost 7% and 35%, respectively over the past year, including dividend payouts, underperforming the S&P 500 Index’s 31% gain over the same period.

Competitor Rite Aid cited increased competition as one reason it crumbled. Consumers may have to brace for more items behind plexiglass. Investors may find returns are similarly out-of-reach.