Virtual drug stores start to click

Drug Store News,  March 20, 2000  by Mark Tosh

• E-mail
• Print
• Link

E-retailing-the first year

The pure online drug store--a little more than a year after its heralded and well-financed debut--isn't what it used to be. In many ways, it's a lot more. That's more, of course, as in more of them, with some analysts estimating that there now are more than 260 Internet sites selling prescription drugs. (This doesn't even consider the number of sites for such specialty products as personal care, vitamins and OTCs.)

But e-retailing for drug stores also is more information driven and healthcare conscious than likely was imagined a year ago. It's also more competitive in terms of capturing customers and links with pharmacy benefit providers and--perhaps the biggest change--online drug stores are a lot more closely tied to the brick-and-mortar world than was predicted.

Indeed, one of the first online drug stores, soma.com, was gobbled up by CVS last May. In a way that deal signaled a recognition among the e-retailers that to be truly successful, the Internet drug stores would have to forge some kind of partnership with either a traditional drug chain or a PBM.

At the same time, the combination of CVS and soma.com, which has been renamed CVS.com, pushed other brick-and-mortar chains to become more diligent in their efforts to get online with an e-commerce and healthcare offering. Just a few weeks after CVS's soma.com acquisition, Rite Aid announced a far-reaching alliance and an equity investment in drugstore.com, the most visible and strongest financially supported of all the early e-retail players. Those two deals also intensified the competition for online sales--for both the traditional chains and the pure e-retail players.

"The biggest change in e-commerce in the past year is the cost of customer acquisition," said David Kriegel, chairman and chief executive of Drug Emporium, the first traditional drug chain to establish an online drug store with www.DrugEmporium.com. "They have raised the bar on the cost of acquisition, on a per customer basis. That is a lot of wasted money and effort."

New rules

While the bar has gotten higher, the nature of the game has changed, too. Almost all the entire major Internet players have tried to forge relationships with PBMs, wholesalers or traditional brick-and-mortar chains.

"The problem with [the first] online drug stores was that none of the concepts were based on studying what consumers really need in their life and then trying to meet it," said James Tenser, principal retail strategist with Nexgenix, an e-business consulting firm. "They were based on trying to create an analog to the existing store [on the Web] and then making compromises because there were limitations with the online delivery.

"So the thought process typically went, 'I see there is a retail channel out there. Let's try to create an online analog and be the first in and beat the market.' That's what happened with online drug stores," Tenser said. "But none of these companies considered at start-up time that there would be such a barrier in terms of the prescription drug plans. They didn't even understand their own market."

The restrictions imposed on e-retailers by PBMs are often "a pain in the neck," and serve to lock out many online drug stores from a sizable portion of the prescription businesss, said Claudine Singer, a senior analyst at Jupiter Communications in New York. "Consumers want value and convenience," she said, noting that in some ways it's still easier for consumers to purchase prescriptions off-line.

"While it is a market that potentially could provide significant benefits to the consumer, right now there are enough hurdles for consumers to get past that we're not seeing them shift their health-related shopping behavior [to online]," she added. Still, Singer said she has strong expectations for online drug stores to increase their share in the future--once they get past some thorny barriers, including the insurance issues, delivery lags and the problem of handling merchandise returns.

"On a comparative basis, certainly the brick-and-mortar stores are at more of an advantage," she added. "The players who have online as a complementary channel to their brick-and-mortar operations and those that have a brand already established and fixed in consumers' minds are relatively advantaged compared to the upstarts."

Singer said she believes there absolutely is a market for online health commerce. "And by the way, I don't think the market is fully landscaped yet. Some of the key players have yet to make their mark," namely Wal-Mart and Walgreens, she added.

Even as the e-retail sector has been transformed, however, it has not diminished the opportunities that are out there in cyberspace.

"Online drug retailers can capture 5 percent of the total drug store industry by 2004, [which represents] a $20 billion opportunity," said Deborah Weinswig, a securities analyst at Bear Stearns. "It is one of the fastest-growing categories in cyberspace."