If you‘ve ever found yourself driving down a busy commercial street in America, you‘ve almost certainly encountered a phenomenon so commonplace, you probably don‘t even think twice about it anymore: a CVS store located right next door to a Walgreens. Or perhaps a Walgreens across the street from a CVS. Either way, the two largest drugstore chains in the country can often be found in remarkably close proximity to one another – so much so that it might seem like some sort of glitch in the Matrix.
As it turns out, however, there‘s nothing accidental about this arrangement. The propensity of CVS and Walgreens to cluster together is actually a textbook example of game theory in action. And while it may sometimes be irksome to picky shoppers like myself who prefer a bit more variety, this strategy offers some surprising benefits to consumers as well.
Dueling Drugstore Behemoths
First, a little background on the two companies in question. CVS, short for Consumer Value Stores, was founded in 1963 in Lowell, Massachusetts. After expanding throughout the Northeast and Midwest over the following decades, the company now operates approximately 9,900 locations across 49 states, Washington D.C., and Puerto Rico.
Walgreens, meanwhile, traces its origins all the way back to 1901, when founder Charles R. Walgreen Sr. purchased the Chicago drugstore where he worked as a pharmacist. The chain grew steadily over the 20th century and today boasts over 9,000 stores in all 50 states, plus D.C. and Puerto Rico.
Both companies have pursued aggressive growth through a combination of new store openings and acquisitions of regional chains. In 2015, Walgreens purchased Rite Aid‘s 4,600 stores in a deal valued at $17.2 billion, though it was forced to divest over 1,000 locations due to antitrust concerns. CVS, for its part, acquired more than 1,600 Target pharmacies in 2015 and purchased health insurer Aetna for $69 billion in 2018.
The net result of all this consolidation? An intensely concentrated drugstore market, with CVS and Walgreens collectively controlling an estimated 50-75% of the retail pharmacy industry, depending on how you slice the data. The next largest competitor, Walmart, comes in a distant third with around 5% market share.
The Game Theory of Competitive Clustering
Given the outsize influence of CVS and Walgreens, it‘s hardly surprising that the two chains frequently find themselves vying for the same prime real estate. But their tendency to plant their flags right next to each other isn‘t just a matter of fighting over the best street corners. It‘s actually a classic example of a concept in game theory known as the Nash equilibrium.
Developed by mathematician John Nash (of A Beautiful Mind fame), the Nash equilibrium refers to a stable state in a non-cooperative game where no player can unilaterally improve their outcome by changing strategies. In other words, each participant‘s actions are optimal given what the other participants are doing.
To see how this applies to CVS and Walgreens‘ location choices, let‘s imagine a simplified scenario where the two companies are considering where to open stores on a hypothetical Main Street that‘s a mile long. In this model, we‘ll make a few key assumptions:
- Customers are evenly distributed along the length of Main Street.
- Customers will always choose the pharmacy closest to their location.
- Each pharmacy wants to maximize its market share (i.e., the number of customers closer to it than the other pharmacy).
If we plop a CVS at one end of Main Street and a Walgreens at the other, each store will capture exactly half of the customer base. Not bad, but what if CVS decides to move to a new location a quarter-mile away from Walgreens? Now instead of a 50/50 split, CVS claims everyone within a quarter-mile of its store, plus half of the customers between the two stores. Walgreens‘ market share drops accordingly.
Of course, Walgreens won‘t simply stand pat while CVS encroaches on its territory. Its optimal response is to leapfrog CVS and open a new store at the three-quarter mile mark. That way, it wins back the customers on the far end of the street while forcing CVS to split the difference in the middle.
You can probably see where this is going. The logical next move for CVS is to open yet another store even closer to Walgreens‘ location, perhaps at the halfway point. If we assume this back-and-forth continues indefinitely with each company always choosing the profit-maximizing location, the ultimate outcome is that both CVS and Walgreens will open stores at the exact center of Main Street, right next to each other.
This result is the Nash equilibrium for our hypothetical location game. Neither company can improve its position by deviating from the clustering strategy, even though they‘d both be better off if they could somehow agree to stay on opposite ends of the street and not compete head-to-head. It‘s essentially a real-world example of the classic game theory setup known as the prisoner‘s dilemma.
Beyond the Textbook
Of course, the real world is far messier than a simplified model with three assumptions. In practice, CVS and Walgreens must contend with zoning restrictions, property costs, existing competitors, and myriad other factors when choosing where to set up shop. There‘s also the reality that customer preferences aren‘t solely determined by geography; factors like pricing, selection, and service quality matter too.
Nevertheless, the game theory framework helps explain why we see so many CVS and Walgreens stores in such close proximity. Even in a more complex environment with differentiated offerings, the incentive to cluster together remains strong.
"If they didn‘t locate together, one competitor may get the majority of customers in an area, making it difficult for the other to be profitable," explains Bart J. Bronnenberg, a marketing professor at Tilburg University who has studied retail competition. "This is particularly a risk in the drugstore industry because of the high fixed costs of renting convenient real estate locations and stocking a full line of products."
Moreover, the very ubiquity of CVS and Walgreens locations can make it more challenging for either company to distance itself from the other.
"They tend to have very similar location selection criteria, since they‘re targeting the same basic customer demographic," notes Alex Akulov, VP of analytics at location intelligence platform eSite Analytics. "Plus, once one chain establishes a presence in an area, it becomes that much harder to secure the remaining prime spots."
In other words, when there‘s a CVS or Walgreens (or both) on virtually every corner, trying to stake out exclusive territory is often a fool‘s errand. Clustering may be an unappetizing detente, but it beats ceding ground unilaterally.
Size (and Scope) Matters
The strategic calculations behind CVS and Walgreens‘ location choices are also influenced by the chains‘ sheer size and geographic reach. With thousands of stores apiece, the companies have to balance efficiency and consistency at a national level with the need to adapt to varied local markets. Opening stores in close proximity allows them to save on distribution costs and leverage economies of scale while still maintaining a targeted presence.
"They‘re not just competing with each other, but also with a wide range of other retailers who sell similar products, from convenience stores to supermarkets to Amazon," points out Neil Stern, a senior partner at retail consulting firm McMillanDoolittle. "Having multiple stores in an area gives them more flexibility to tailor their merchandise mix and marketing to local tastes."
This is especially important in the pharmacy business, where customer relationships and trust are paramount. Even as more prescription orders migrate online, many people still prefer the personal touch of face-to-face interactions with their pharmacist. By blanketing communities with stores, CVS and Walgreens can offer a level of service and convenience that‘s hard for mail-order or online-only competitors to match.
At the same time, the chains‘ expanding footprints have allowed them to diversify beyond the traditional drugstore model. In recent years, both companies have made major investments in health services, with CVS opening over 1,100 MinuteClinic urgent care locations inside its stores and Walgreens partnering with VillageMD to launch hundreds of primary care clinics.
These moves not only provide additional revenue streams, but also help drive foot traffic and customer loyalty. If you‘re already visiting a CVS MinuteClinic for a flu shot or strep test, you‘re more likely to fill your prescription and pick up a few grocery items while you‘re there. Similarly, if you have a regular doctor at the Walgreens down the street, you‘re probably not going to bother comparison shopping for toothpaste or snacks somewhere else.
The Customer Perspective
So what does all this mean for you, the consumer? On one hand, the fact that there always seems to be a CVS or Walgreens around the corner can certainly be convenient, especially if you‘re in a rush or don‘t want to go out of your way for basic necessities.
"There‘s something to be said for the reliability and predictability of knowing that you can always find what you need at one of their stores," says Jackie Ramler, a retail analyst at Kantar Consulting. "For a lot of people, that consistency is more important than having the absolute lowest price or trendiest product selection."
At the same time, the chains‘ dominance can limit shoppers‘ choices and stifle competition in local markets. While CVS and Walgreens may sell many of the same items, there are meaningful differences in things like store layout, private label offerings, and loyalty programs that matter to discerning customers.
Personally, I‘ve found that my shopping habits tend to vary based on the specific occasion and location. If I‘m traveling and just need to grab a quick snack or toiletry item, I usually pop into whichever store is closest without much thought. But in my day-to-day errands, I‘m a bit pickier. My neighborhood CVS has a better selection of healthy snacks and natural beauty products, so that‘s my go-to for regular drugstore runs. But the Walgreens a half-mile away often has shorter lines and more attentive staff, so I head there if I need to fill a prescription or make a quick return.
Of course, these are highly subjective preferences, and your mileage may vary. The larger takeaway is that while CVS and Walgreens may sometimes feel interchangeable, it‘s worth paying attention to the little things that set them apart. Even if you don‘t have much choice in where you shop, being an engaged customer can help you make the most of what‘s available to you.
The Future of Pharmacy Retail
Looking ahead, it‘s hard to imagine the pharmacy landscape changing too dramatically in the near future. With their entrenched market positions and expanding health services arms, CVS and Walgreens seem poised to maintain their dominance for the foreseeable future.
That said, there are some potential disruptors on the horizon. Amazon‘s acquisition of online pharmacy PillPack in 2018 sent shockwaves through the industry, and the e-commerce giant‘s recent launch of its own Amazon Pharmacy brand could threaten the drugstore incumbents‘ hold on prescription orders.
Likewise, the ongoing shift toward telemedicine and at-home diagnostic testing could eat away at demand for in-person pharmacy visits, particularly in the wake of the COVID-19 pandemic. And with more insurance plans and employers embracing mail-order and 90-day prescriptions as cost-saving measures, the local pharmacy could become more of an occasional destination than a regular part of consumers‘ routines.
Still, it would be unwise to bet against the resilience of CVS, Walgreens, and the corner drugstore model more broadly. As long as people need somewhere to pick up greeting cards, school supplies, and late-night snacks while waiting for their prescription to be filled, there will be a place for bricks-and-mortar pharmacies. And as long as those pharmacies are playing an eternal game of one-upmanship with their biggest rival, they‘re likely to remain a ubiquitous feature of the retail landscape – no matter how many Amazon delivery trucks whiz by.
