Are index funds killing competition?
An intriguing question without a clear answer
There are four drug stores within a short walk of my house, which gives me a lot of flexibility if I want to run multiple errands. But it doesn’t offer much in the way of actual competition because three of the four drug stores are owned by CVS, which is far and away the dominant player in the DC drug store marketplace. As a consumer, to the extent that I enjoy meaningful competition, it’s from the fact that most of the items sold at the CVS stores (or the one Walgreens) can also be purchased at one of the nearby supermarket chain locations. Some are available at 7-11, some at Target. And, of course, all brick and mortar retailers face competition from Amazon.
So it is a competitive retail market, it’s just not as competitive as “wow, there are four different drugstores nearby!” makes it sound, because from a competition standpoint, it matters who owns the stores.
But who owns CVS?
Well, nobody in particular. It’s a broadly owned public company, so its main shareholders are generic investment funds — Vanguard, BlackRock, and State Street are the top three owners. Walgreens is different. Through a baffling series of business deals, an Italian guy named Stefano Pessina managed to merge his family’s pharmaceutical wholesale company with a French one, which then merged with another company to become Alliance Unichem, which took over a British pharmacy chain called Boots, which in turn took over Walgreens. So now Walgreens is predominantly owned by this Italian guy who lives in Monaco for tax purposes. But after him, the top three shareholders are Vanguard, BlackRock, and State Street.
And this poses an interesting conundrum.