A Real Shot In The Arm For A Virtual Pharmacy

Drugstore.com learns Net merchandising from Amazon

Amazon.com sure proved it can hawk books on the Internet. But can it show how to push Prozac as well as it promotes Proust? The Seattle-based online-sales giant has been tutoring startup drugstore.com in the art of building a successful cyberstore. On Feb. 25, drugstore.com opened its cyberdoors and started filling orders for close to 19,000 items, from prescription drugs to toothpaste. "These guys are better prepared for their launch than we were by a factor of about a million," says Amazon CEO Jeffrey P. Bezos.

Over the past seven months Amazon.com Inc., which owns 40% of drugstore.com, has shared its vast Net knowledge. Bezos is a director and adviser, and most new drugstore employees get an Amazon mentor. "The competition can watch Amazon and learn," says Kate Delhagen, director of online retail strategies for Forrester Research Inc. But "that's a totally different experience than the kind of DNA transfer that has been happening between Drugstore and Amazon."

WEB RIVALS. Amazon's protege isn't the only drugstore on the Net. Startups PlanetRx, Soma.com, and RX.com have opened or are opening their E-doors within weeks of drugstore.com. And the chains that dominate the $155 billion industry--such as Walgreens, Rite Aid, and Drug Emporium--have Web sites, too. The relationships they have with the big insurers could make it tough for drugstore.com to sign up with some health-care plans. And since it fills prescriptions by mail, drugstore.com can't compete in the $55 billion market for acute prescriptions--the medicines that patients need to take immediately.

Drugstore's backers think they can offset the limited prescription volume with higher margins on other goods. There are other challenges, too. Drugstore.com promises low prices, but will customers pay $4.95 in shipping costs to get shampoo, diapers, and medicine delivered to their doorsteps? If consumers need certain medicines or items such as contraceptives, will they be willing to entrust personal data to drugstore.com, even knowing that the company has strict policies on confidentiality?

If drugstore.com can clear these hurdles, it will be largely thanks to the Amazon connection, says Chief Executive Peter M. Neupert. In fact, it was Amazon's involvement that persuaded Neupert, a 15-year Microsoft veteran, to join the startup. The company was founded by Jed Smith, who had launched the CyberSmith chain of software stores. Now drugstore.com's vice-president for strategic alliances, Smith sold venture-capital powerhouse Kleiner, Perkins, Caufield & Byers on his idea. Kleiner Perkins partner L. John Doerr wooed Neupert. Now, alongside Amazon, venture firms including Kleiner Perkins have nearly $60 million in the company, and Neupert has $3.5 million.

Amazon has helped solve dozens of problems for drugstore.com. How to catalog 16,000 retail items? Bezos suggested Electronic Scriptorium Ltd., a company that hires monks and nuns to create databases. "You can be thinking of God while you do it," explains Sister Florence McManamen, prioress of St. Martin Monastery in Rapid City, S.D., where some of the work was done. Nuns balked at keying in data about a shipment of condoms. Secular employees now do that work.

To make sure it can fill prescriptions as promised --within three to five days--drugstore.com turned to RxAmerica. The Fort Worth mail-order pharmacy handles 25,000 orders a week by mail and says it has the capacity to quadruple its business. The partnership with RxAmerica also gives drugstore .com lower wholesale prices on drugs.

SATISFACTION. Doctors can call in prescriptions to drugstore.com as they do to traditional pharmacies. And the startup, which has already signed with Aetna U.S. Healthcare Inc., is racing to join with more insurers. As for nonprescription offerings, drugstore.com is teaming with Walsh Distribution Inc. in Texarkana, Tex., to handle cosmetics and sundries. Neupert says he can match the 20% to 30% profit margins traditional drugstores derive from such items.

As with Amazon, the ultimate challenge for drugstore.com is to convince consumers that shopping online is not only convenient but also as satisfying as wandering the aisles. "How would Amazon take one item, like a lipstick, and show it in all 80 colors?" wonders Suzan Fine DelBene, vice-president for drugstore.com's marketing and store development. But if drugstore.com can reinvent a visit to the pharmacy the way Amazon changed browsing in a bookstore, then Rite Aid and its rivals need to watch their backs.

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