Drugstore.com needs to be taken seriously

Chain Drug Review, Oct 13, 2008 by David Pinto

The chain drug retailing community has largely overlooked drugstore.com, the industry's only pure online retailer. Not without reason.

Drugstore.com is new to chain drug retailing, having been in business for fewer than 10 years. It isn't a chain in the traditional sense, though it does serve customers in all 50 states and currently ranks 13th in sales among all U.S. drug chains. And the retailer is not as yet profitable, though it has reported improved financial results of late, most notably reporting a positive adjusted EBITDA for the nine most recent quarters.

Despite that short history and uneven results, perspicacious observers have to admire some of the retailer's accomplishments, as well as its prospects going forward.

One reason is that drugstore. com has slowly but inexorably built a core of loyal and committed customers--especially for the retailer's health and beauty offerings, which account for 70% of its volume.

Another is the fact that the retailer's prospects, as outlined by the company's senior managers at a recent Analyst Day event in New York City, are full of promise. Specifically, drugstore.com is projecting a doubling of total revenue over the next five years, to some $750 million. Additionally, over the next five years the retailer plans to emphasize its core health and beauty categories even more aggressively than is the case today, while projecting its international business, which currently produces less than 1% of total volume, to balloon to 10% of health and beauty sales.

Drugstore.com brings other advantages to its business as well. Foremost among them is the retailer's customer demographics. Fully 82% of drugstore.com's customers are women, with an average age of 43. Three-quarters of these women possess a college degree, and 35% have children. The geographical distribution of these core shoppers is heavily skewed toward major urban markets. Most formidable is an average annual income that hovers around $90,000. That, combined with a level of customer loyalty that few off-line drug store retailers can claim.

But perhaps the strongest reason for optimism at drugstore.com is the caliber of its management team. Perhaps reflective of the company's online heritage, the retailer's senior managers are uniformly young, bright, inquisitive, dynamic, confident and impressively talented. More than that, they share a commitment to the concept and the possibilities of online drug store retailing--to a degree where they honestly believe it offers customers better value and a more-valuable shopping experience.

In Dawn Lepore, drugstore. com's president, chairman and chief executive, the retailer boasts a leader with an extensive technological and e-commerce background; an executive who previously distinguished herself at the Charles Schwab brokerage firm, where she played a key role in building Schwab's e-commerce business; a top manager who, in four years at drugstore.com, has revived and revitalized the online drug chain.

David Lonczak, chief marketing officer, is quite simply in a class by himself as a marketer of online merchandising. The proof lies in the fact that Lonczak--a drugstore.com staffer who, like so many other senior members of the company, boasts a broad and varied background (Procter & Gamble, Starbucks, AT&T Wireless, Cingular Wireless)--has succeeded in presenting the 40,000-SKU drugstore. com merchandise assortment, one that runs the gamut from O-T-Cs and mass and prestige beauty brands to a broad general merchandise assortment, in an online format and environment that is relevant, exciting, immediate and relatively easy to navigate.

Julie Johnston, vice president of front-end merchandising, is every bit as capable as the best of her brick-and-mortar counterparts. Like so many other drugstore.com staffers, Johnston came to the retailer with a broad and varied background (Sears, Marshall Field's, Dayton Hudson), bringing with her a breadth of knowledge and set of skills that has enabled drugstore.com to offer its customers the most extensive drug store assortment available anywhere, a mix that includes an extensive range of products in such categories as personal care, household products, pet products and, most recently, natural products.

Kathleen McNeill, vice president of beauty, has assembled what is easily the most impressive beauty web site in all of retailing, a site that offers customers extensive assortments of mass and prestige beauty brands, one that could easily stand on its own did it not fall under the drugstore.com umbrella. McNeill, like every drugstore.com staffer, came from somewhere else, in this instance Macy's West, Sephora and Bath and Body Works. And, like every drugstore.com staffer, she bangs to her assignment a blend of youth, dedication, ability and a willingness to think and act beyond the brick-and-mortar community from which she came.

Finally, there's drugstore. com's agenda going forward. Its recently concluded agreement with Rite Aid to sell that retailer's front-end products online will surely benefit both companies. Its vision care unit is currently the second-largest direct marketer of contact lenses in the U.S. And drugstore. com's international aspirations, if fulfilled, will give the company a global online presence within the next two years.