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The Real Story Behind Walgreens Closures: Data, Myths, and Market Trends

 

Intro

Walgreens announces plans to close 1,200 locations over the next three years, monitoring an additional 800 for potential closures, and engaging in discussions about a potential sale to private equity. As a result, many Walgreens property owners are left wondering if their stores will be impacted. To provide clarity, here is data from the most recent 700 Walgreens closures nationwide, examining demographic profiles to identify commonalities and trends. Below are the key findings from this analysis:

 

Data

Foot Traffic Performance Correlation

In analyzing the nationwide 2022 Walgreens Placer.AI visits dataset, including 7,963 locations, 243 closed stores included on this list were identified. Only 33 of those 243 closed stores ranked above the 50th percentile on Placer.AI’s performance metrics, illustrating that 86.4% of closures were from open stores ranking below the 50th percentile in 2022.

 

Population Density

Where closures occurred based on population density:

  • 82.91% of closures occurred in areas with 5-mile populations above 50,000.
  • 52.82% of closures occurred in areas with 1- and 3-mile negative population growth.
  • 15.68% of closures occurred in markets with projected 5-year population growth above 5.00%.

 

Income Metrics

Where closures occurred based on income:

  • 82.20% of closures occurred in markets with 1-mile median household incomes below $90,000.
  • 51.38% of closures occurred in markets with 3-mile median household incomes under $60,000.
  • 74.44% of closures occurred in areas with 1-mile average household incomes under $100,000.
  • 47.88% of closures occurred in areas with 3-mile average household incomes below $80,000.

 

Age Demographics

Where closures occurred based on age:

  • 90.11% of closures occurred in areas with a 1-mile median age under 45.
  • 62.85% of closures occurred in areas where the median age within a 1-mile radius was under 40.

 

Real Estate Format Correlation

The following points highlight the different real estate formats in which Walgreens closed stores:

  • 85.73% of closures were in standalone stores.
  • 6.50% of closures were in 3+ tenant multi-tenant centers.
  • 6.50% of closures were in downtown storefronts.
  • 1.27% of closures were in small 2-3 tenant strip centers.

 

Of all of these closures, 22.60% were former Rite Aid’s acquired by Walgreens. This represents a large amount of the closures due to location/market overlap and undesirable stores.

 

Backfill Data

Surprisingly, only 44.77% of the last 700 Walgreens to close have been subleased/ re-leased. 51.98% remain dark/vacant, and 3.25% were demolished for new developments. Of those leased, 65.62% were national tenants and 34.38% are Mom & Pop tenants.

 

Dollar Stores were significant backfillers, occupying 46.06% of leased dark store locations. The rest are a mix of healthcare, grocery, hardware, beauty, and other uses.

 

Misconceptions Redefined

Closures are not limited to tertiary markets

The data reveals that 82.91% of closures occurred in areas with 5-mile populations above 50,000, challenging the assumption that drugstore closures are concentrated in tertiary or rural markets.

 

Closures do not exclusively occur in declining markets

While 52.82% of closures occurred in areas with negative population growth, 47.18% of closures occurred in growing markets with 15.68% of closures being in markets with significant population growth projections (5.00%+). This undermines the belief that closures happen solely in areas with stagnant or declining demographics.

 

Closures are linked to income levels

82.20% of closures occurred in markets with median household incomes under $90,000, and 74.44% were in areas with average household incomes below $100,000. This indicates that closures disproportionately affect less affluent areas, supporting the perception that closures are creating pharmacy deserts in low-income areas.

 

Insights

Economic Impact on Lower-Income Areas

The data shows a clear trend of closures disproportionately affecting markets with median household incomes under $60,000. While these areas typically have higher rates of theft that affect profitability, this is largely due to government healthcare plans, such as Medicare and Medicaid, which provide lower reimbursement rates to retailers than private insurers, reducing profitability in less affluent areas.

 

Challenges for Backfill Tenants

Even though Dollar Tree and similar retailers have emerged as dominant players in backfilling dark stores showcasing the adaptability of these spaces, 51.98% of closed stores over the past 5+ years remain vacant. This highlights the persistent challenges landlords and developers face. Some challenges include repurposing these properties, attracting suitable tenants, and overcoming market-specific barriers, such as location limitations and shifting consumer preferences. The largest issue has been that Walgreens is typically paying 50-100% above market rent. Also, backfill tenants will only pay market rents both affecting the real estate value significantly and preventing developers from making these projects pencil.

 

Demographic Targeting

With 90.11% of closures occurring in areas where the median age is under 45, it is evident younger or working-age populations don’t align with the traditional Walgreens customer base. This raises questions about how demographic shifts will influence store performance over the coming years.

 

Adaptation in Store Footprints

The high percentage of closures in standalone, storefront, and strip center formats highlights a potential reevaluation of real estate strategies by Walgreens to prioritize flexibility and profitability.

 

Conclusion

The analysis of the last 700+ Walgreens closures over the past 5+ years reveals a nuanced story about the factors driving these decisions. While low-performing stores are an obvious target, the data highlights deeper systemic challenges. This includes the disproportionate impact on less affluent areas and the influence of population and income dynamics. Misconceptions about closures being confined to tertiary or dying markets are dispelled, demonstrating that profitability concerns extend across various demographics and geographies. As healthcare reimbursement models and consumer behavior evolve, Walgreens must navigate these complexities to optimize their real estate portfolio and ensure long-term sustainability. For stakeholders, these insights underscore the importance of data-driven decision-making in adapting to a rapidly changing drugstore landscape.

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