Why Drugstore Chains are Still a Good Investment
August 19, 2019
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Drugstore industry giants like CVS and Walgreens are rethinking their expansion plans. Changing consumer shopping habits, tightened pharmacy reimbursement rates and increased tariffs on Chinese products are just a few of the factors drugstore retailers cite for the slowdown in new store development.

Changing Retailer Strategies

CVS Health announced in early August its plans to slow annual store expansion for the next two years as it makes changes to its business model and focuses on delivering high financial returns for investors. The company is set to open only about 100 stores in 2019—just one-third of its typical volume—and only 50 new stores in 2020. The company also plans to shutter 46 underperforming stores and reevaluate nearly 500 annual lease renewals.

Walgreens Boots Alliance is scheduled to close at least 200 stores across the United States as it begins to implement a new cost-management program aimed at cutting operating costs by $1.5 billion by 2022. In 2018, Walgreens added 1,932 Rite Aid stores and distribution centers to its portfolio for $4.4 billion. As of August 2019, the company has more than 500 surplus properties for sale.

The Future of Drugstore Retailers

Like most retailers, CVS and Walgreens are reacting to a change in consumer spending and shopping habits. As the e-commerce industry continues to boom, both CVS and Walgreens plan to invest in experiential retail solutions to attract and retain customers. CVS plans to roll out 1,500 HealthHUB store formats by the end of 2021. The additional 20 percent of floor space dedicated to health services will include everything from on-demand health kiosks to space for yoga classes. Walgreens is doing much the same as it adjusts its business model to place more emphasis on merchandise like beauty products and health equipment. The company also plans to expand its Partners in Primary Care centers within retail stores which offer specialized services for seniors with Medicare Advantage health care plans.

What Does This Mean for Investors?

In the grand scheme of things, these store closings and the scaling back of future development is insignificant. Those impacted most will be current owners of drugstore properties. In the wake of these announcements by CVS and Walgreens, some owners will need to find new tenants and face the possibility of having to accept less rent. (After all, banks and drugstores tend to pay higher-than-average market rental prices.)

With a dwindling stock of new properties on the market, the biggest challenge for brokers going forward will be selling properties with shorter lease terms. However, drugstore properties are still in high demand. Steady cap rate trends, strong corporate guarantees and minimal landlord responsibilities all factor into the success of drugstore transactions.

Interested in investing in a drugstore property? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

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