Drugstore.com’s Plan
By George Anderson
Drugstore.com CEO Dawn Lepore knows exactly what the company needs to do to become profitable. It has been successful in attracting new shoppers to the site. Now, it needs to get them to come back more often than the 2.3 times a year they are currently doing.
A report on the Internet Retailer Web site said Drugstore.com currently has an active customer base of 1.9 million shoppers. The average purchase on shopping trips to
the site is $77.
To bring in new shoppers and encourage repeat visits, Ms. Lepore said the company is expanding its inventory beyond the 20,000 SKUs it currently carries. It will continue to emphasize price, with its health and beauty products 10 percent lower and prescription medicines up to 30 percent below what competing brick-and-mortar businesses charge.
Moderator’s Comment: What do you believe Drugstore.com must do to achieve profitability? What specific actions must it take and areas does it need to
improve in for it to achieve its goal? –
George Anderson – Moderator
DS pricing is ridiculous compared to other players in the online world. The high/low games are just conditioning their customer’s to buy during the sale period. They need to adopt an EDLP strategy and find a way to compete on a day-in day-out basis. If they could expand their customer base with an alliance with AARP or someone else, then there may be a ray of light on the horizon. The Rite Aid relationship is the only bright spot; fixing DS pricing strategy would be a step in the right direction of profitability.
One of our websites has only one sku for sale at a very, very high margin. We have no competition, an unassailable patent, and a unique niche. We’re profitable.
Drugstore.com, with 20,000 skus, low margins, shipping costs, and predictably humongous inventory, storage, and fulfillment costs is not profitable. It competes with mass merchants that sell stuff at reasonable prices that you can take home and use today, right now.
What’s wrong with this picture? It’s timing. Drugstore.com launched its business during a period when formerly high-margin drug and HBC items became loss leaders at major retailers to attract customers to buy other, higher-margin items like foreign-made clothing and electronics. Groceries used to perform this function, but prescriptions and HBC products have been added to the discount mix as our population ages and generic drugs supplant popular pills whose patents have expired.
My initial advice to Drugstore.com is to discount if you’re gonna discount. The popularity of Canadian-accessed drugs and mail-order petmeds illustrates our willingness to wait on delivery/use if the price is low enough. My secondary advice is to use some shareholder money to expand advertising significantly. If they don’t do it now, they’ll always wish they had.
Who are the customers who come once? Who are the customers who come back? What are they buying? What have they liked about the experience? What have they not liked? Just adding new SKUs randomly may not be the best choice. By gathering this information, they can add the SKUs that are important to their most valuable consumers and refine the online and/or delivery experience.
The worst thing about Internet retailing is the murderous cost of acquiring new customers. Drugstore.com spends about $25 for every new buyer. The company lost about $5 million last quarter. About $7 million was spent acquiring new customers. The Rite-Aid alliance helps reduce the new customer acquisition cost, but only about 25% of all customers seem to come from the RA alliance. Drugstore.com needs to make the RA connection more productive. They also need other major alliances (I assume they’ve explored the idea with the AARP, for example, which has 30 million members) to reduce marketing costs.
Isn’t it interesting that a company like Drugstore.com continues to receive significant press and attention, despite a not-yet-figured-out business model. Michael Banks is right; Drugstore.com should either decide to be a discounter or something else. And that something else may be a “specialist.” What if Drugstore.com evolved from a one-stop shopping experience to a truly informative health/wellness site that allowed consumers to understand how/when to use products and manage their well being rather than a commodity-focused sales site that is only profitable if enough users visit the site repeatedly? Would it be more profitable if the site attracted fewer, more premium patrons than cherry-pickers looking for the deal du jour? I surely don’t have the answers to the quandary, but I believe Drugstore.com (and its investors/followers) needs to start asking more questions … such as what is the long-term plan and how do they differentiate in an already crowded market?