Trying to attract consumer groups to online drug stores

Drug Store News, June 17, 2002 by Liz Parks

If the online drug store segment ever regains its momentum, it's a likely bet that the Creatives are among those consumers giving it a push. Creatives, the most educated of the six ValueScope segments, are the most interested in technology and also like to research before buying.

At the moment, however, the viability of the online drug store channel is undetermined. Only one blue-chip player, drugstore.com, remains standing, and it has yet to come close to turning a profit.

Yet, executives of drugstore.com have told investors that it is making "continued financial progress" and that the business will have positive earnings before interest, taxes, depreciation and amortization in 2003. The company's return on investment will be "substantially better" in the months ahead, the executives said at a recent presentation at the Goldman Sachs Internet and e-Commerce Conference.

Drugstore.com chairman Peter Neupert outlined a number of financial metrics that point to a turnaround for the 3-year-old company, which has yet to generate a positive cash flow. Among other things, Neupert and chief financial officer Bob Barton noted that drugstore.com spent just $7.9 million in its recently ended quarter, the lowest spending level since the second quarter of 1999.

For the same period, EBITDA decreased from a negative $20.1 million in last year's first quarter to a negative $10.9 million in the first quarter of 2002. Neupert told investors that the company has enough cash in the bank, $71 million, to carry it until it reaches break even.

He added that drugstore.com, which previously had reported sales of $43.9 in the first quarter, projects revenue of $300 million to $315 million in 2003 with gross margins averaging between 21 percent and 22 percent of sales. Gross margins, which have been trending up for 11 quarters were at 19.4 percent in the first quarter, up 0.9 points from the fourth quarter last year and up 4.4 points from the year-ago period.

Stacey Rich, an analyst with Jupiter Media Metrix, a New York-based Internet research firm, said that there are several reasons why drugstore.com could soon prove its business model is valid.

Unlike such rivals as PlanetRx.com, which has gone out of business, Rich said drugstore.com "early on saw the need for a quasi-channel strategy, and that led them to a key partnership with Rite Aid. [It] also had much stronger financial backers than did their competitors.

"[drugstore.com] ... quickly expanded the product mix to include many higher-ticket, higher-margin items like electric toothbrushes and beauty and spa products," said Rich.

Drugstore.com, Rich noted, was the only online drugstore to land "the plumb assignment of helping P&G pre-launch Crest Whitestrips back in early 2001." During the cause of that promotion, she said, drugstore.com generated "a high degree of product trial and solidified a relationship with a $39 billion supplier."

In their presentation at the Goldman Sachs conference, Neupert and Barton also cited improving metrics that included:

* A revenue gain of 34 percent in the first quarter

* Reduced expenses, which fell 23 percent in the same period.

* Annual revenue per active customer up from $50 in 1999, when drugstore.com launched, to $147 in 2001.

Neupert and Barton also stressed to investors that drugstore.com can generate a higher return on investment than brick and mortar stores because they don't have the expense of opening new stores, they tie up less dollars in inventory, and they turn their inventory four times faster than the average bricks-and-mortar drug store.