Walgreens to Be Acquired by Sycamore Partners: Where Did the Retail Giant Go Wrong?

Walgreens has long been a staple of American life, with about 8,500 stores across the U.S. and Puerto Rico and reaching some of the most underserved communities. 

But after a series of headwinds — including a net loss of $8.6 billion in fiscal year 2024 and the closure of numerous VillageMD clinics — Walgreens Boots Alliance announced late last week that it is selling itself to private equity firm Sycamore Partners for about $10 billion. The total value of the deal is $23 billion including debt and other items. It comes after rumors of the deal emerged in December.

So where did the company go wrong, whereas competitors like CVS Health seemed to have fared better? One consultant noted that Walgreens tried numerous strategies, including expanding into Europe with its purchase of Alliance Boots and entering primary care by acquiring part of VillageMD. But the fact is that the pharmacy business is a “mature one with flat margins in the core function of dispensing prescription drugs,” said Michael Abrams, managing partner of Numerof & Associates.

He added that the business landscape has been changing, with consumer shopping habits shifting to online companies like Amazon, Hims & Hers and Ro. And while CVS has found success through its pharmacy benefit manager Caremark, Walgreens missed the boat on acquiring its own PBM, which would have helped.

“Unfortunately, management never really found a way to restore profitability, perhaps because most of the efforts it made at change were intended to bring traffic back into the stores, and that was, by itself, not the answer,” Abrams said in an email. “The merchandise on offer had been driven down in profitability by competition and, more importantly, was no longer an adequate attraction to consumers, who had multiple options for that same merchandise.”

A healthcare investor — Doba Parushev, the head of Healthworx, the innovation arm of the payer CareFirst BlueCross BlueShield — echoed Abrams’ comments, noting that CVS Health did a better job operating its retail pharmacies than Walgreens. It had better financial performance, moved away from underperforming locations quicker and integrated more services into its brick-and-mortar operations, he said. CVS’ extensive platform, including its insurance arm Aetna and PBM Caremark, also benefited the company.

And while both CVS and Walgreens expanded into broader healthcare services, CVS had a much stronger starting point, according to Parushev. About five years ago, CVS was about double the size of Walgreens and had three times more cash on hand, he said.

“As both companies embarked on a capital-intensive inorganic growth strategy, CVS had the upper hand in terms of asset selection, the ability to finance the acquisitions, and to bear any growing pains post-integration,” he argued.

Hal Andrews, CEO of Trilliant Health, seems to agree with this. While CVS, Walmart and Amazon have also faced challenges expanding into primary care, Walgreens had the “least scale to absorb the financial challenges,” he said.

Will Walgreens perform better under Sycamore Partners?

One just needs to look at Sycamore Partners’ past track record to see what could be ahead for Walgreens.

The private equity firm has a history of bankruptcy and OSHA violations among its portfolio companies, which includes retail stores like Nine West and Staples, according to Matt Parr, communications director of the Private Equity Stakeholder Project, a nonprofit that has been tracking private equity moves.

The private equity business model typically includes staff cuts, store closures, service cuts and other efforts to cut costs and drive up profit as “quickly as possible,” which could hurt patients in underserved areas who rely on Walgreens, he added. And private equity firms have limited liability with their portfolio companies, so even if Walgreens goes into further financial distress, Sycamore Partners could still be profiting off the company.

“All we really have to do is look at Sycamore Partners’ past operations, and that calls a lot of things into question for the way they’ve operated their past portfolio companies,” Parr argued in an interview. “In addition, Walgreens is still a staple in healthcare services. People rely on it. And what we found is many times, the private equity business model, which focuses on short-term profits, is contradictory to the healthcare industry’s goal, which is long-term care.”

Others have a less skeptical view, however, and believe this deal and going private could help Walgreens turn things around.

This includes Howard Gutman, private equity strategy and coverage lead for MorganFranklin Consulting.

“One thing that will help them is that they won’t have the pressure of quarter-to-quarter growth,” he said. “The PE firm is probably developing some strategy to generate cash, which could be done by evaluating and selling off parts of its business. Then, they can focus on the long-term growth of the core business. Having a multi-year hold period allows them to emphasize and drive the evolution of their business. After that, they can make some significant changes and then realize the results through whatever route they think is best.”

Walgreens likely agrees that Sycamore Partners will be able to help the company bounce back.

“While we are making progress against our ambitious turnaround strategy, meaningful value creation will take time, focus and change that is better managed as a private company,” said Tim Wentworth, CEO of Walgreens Boots Alliance, in a statement. “Sycamore will provide us with the expertise and experience of a partner with a strong track record of successful retail turnarounds.”

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