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Store Closures Show Strategic Change To Survive Amazon Era

There’s probably more to Walgreens’ planned five San Francisco store closures than the simplistic tale that it’s all the fault of a liberal city letting violators run wild.

The pandemic’s accelerated shift to e-commerce, Amazon’s entry as a pharmacy rival, labor shortages, oversaturation of stores, and Walgreens’ plans to become a destination for healthcare. primary health care are all things that may have influenced the movement, they say.

Walgreens spokesman Phil Caruso, however, disputed that these issues played a role in the decision to close the five stores.

“It’s rare to hear a retailer say that the main reason they close a store is theft,” said Ken Fenyo, president of research and consulting at Coresight Research, who specializes in retail and technology. . “It could be part of the equation. Companies end up closing stores because they are not making the profits they are looking for. “

Pharmacies only earn pennies for every dollar sold, said Brian Kilcourse, managing partner of RSR Research, specializing in retail and technology. Walgreens’ net profit margin for the five years ended August was 1.85%, according to

These low margins support the thesis that simple calculations on the income statement dictated the need to close the five stores. But some experts suggest there is more to the news of store closings.

“I believe that (the Walgreens closures in San Francisco) are part of a long-term transformation strategy,” said Kirthi Kalyanam, executive director of the Retail Management Institute at the University of Santa Clara. “Walgreens is positioning itself to adapt to new realities. It involves a lot of pruning underperforming stores so that they can invest in new things. “

Like health care. Walgreens and competitors like CVS and Walmart are adding medical clinics to their stores, betting experts and in-person services will trump the convenience of shopping online.

Walgreens invested $ 5.2 billion this month in VillageMD, a primary care provider, and plans hundreds of in-store clinics staffed by physicians as part of a new Walgreens Health division.

Ryan Mendoza leaves the Walgreens at 4645 Mission Street. The store is scheduled to close on November 11.

Constanza Hevia H./Special The Chronicle

“The best health care is deeply rooted in local communities, and Walgreens is committed to expanding convenient access to high quality, affordable health services for our patients and clients in our neighborhoods,” said the new CEO of Walgreens, Roz Brewer, to investors. this month.

Meanwhile, CVS has grown its in-store MinuteClinics, staffed by nurse practitioners, and is opening hundreds of HealthHub outlets with expanded health services, telehealth tours, pharmacy support services, and wellness products. -to be. Walmart has primary care clinics in stores in Texas, Georgia, and Illinois, with plans for expansion in Florida and other states.

“Increasingly, the local pharmacy is a very convenient place to get a flu shot or a COVID vaccine,” Kalyanam said. “Compared to (traditional) health care in the United States, retail has a much more convenient distribution, closer to homes. “

The San Francisco store closures also come as Walgreens, like all other mainstream retailers, faces a heartbreaking upheaval with more and more consumers shopping online and labor shortages making it difficult to keep up. store staff. For pharmacies, the problem became even more urgent a year ago when giant Amazon started selling prescription drugs online.

Pedestrians crossing the street are seen in a reflection on the window of the Walgreens at 4645 Mission St.

Pedestrians crossing the street are seen in a reflection on the window of the Walgreens at 4645 Mission St.

Constanza Hevia H./Special The Chronicle

At the same time, the United States is significantly “crowded” with about 24 square feet of retail space per consumer, according to consulting firm McKinsey & Company, compared, for example, to Germany with a little more than 2.

This has forced retailers, including Walgreens, to take a long and careful look at their footprints. Even before the pandemic, Walgreens said it would cut back on its real estate, telling investors in 2019 it would shut down around 200 locations in the United States.

Walgreens, which now has 53 branches in San Francisco (some of which are drugstores only) compared to rival CVS 22, had already closed 17 branches in San Francisco in the past five years. San Francisco Mayor London Breed is among those who said Walgreens may have oversaturated the local market.

Walgreens said its San Francisco stores are experiencing retail thefts at five times its chain average, as it spends 46 times more on security – mostly hiring San Francisco police officers on leave – than its average. chain.

The Walgreens at the corner of Cesar Chavez and Mission streets are scheduled to close on November 17th.

The Walgreens at the corner of Cesar Chavez and Mission streets are scheduled to close on November 17th.

Constanza Hevia H./Special The Chronicle

“The problem here is retail organized crime, by which I mean… professional thieves steal goods from retailers which are ultimately sold, primarily in digital online marketplaces,” Caruso said in an email. To combat this, Walgreens and other retailers are urging Congress to pass the Inform Consumers Act, which would require online marketplaces to verify that high-volume sellers are legitimate.

“To be clear, (organized retail crime) is not exclusive to San Francisco,” Caruso said.

Costs, crime and competition are all factors in store closures, said Ken Rosen, president of the Fisher Center for Real Estate and Urban Economics at UC Berkeley Haas School of Business.

Publicity about the crime, such as the viral video of a brazen theft from one of the Walgreens targeted for closure, created a perception that may have prompted senior management to want to flee San Francisco, he said. he declares.

“Everywhere I go, everyone asks me, ‘Why don’t we stop this proliferation of crime in retail stores?’ “, did he declare. “It’s embarassing.”

Carolyn Said is a writer for the San Francisco Chronicle. Email: [email protected] Twitter: @csaid

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