November 30, 2004, 12:00 AM

Food & Drug: Finding the right mix of product, service and fulfillment

One of the biggest challenges in online retailing has been to persuade shoppers to trade the familiarity of their neighborhood food market and drugstore for the convenience of shopping on the web. The current crop of food and drug e-retailers are giving consumers more reasons to shop online.

Internet Retailer`s Best of the Web 2005

Drugstore.com
FreshDirect.com
Peadpod.com
Schwans.com
SimonDelivers.com

One of the biggest challenges in online retailing has been to persuade shoppers to trade the familiarity of their neighborhood food market and drugstore for the convenience of shopping on the web. And after some spectacular failures by others in early dot-com days, the current crop of food and drug e-retailers are giving consumers more reasons to shop online.

"Grocery is growing, but still one of the smaller categories in online retail," says Jupiter Research analyst Patti Freeman Evans. "So a site has to offer additional value to make consumers willing to pay for shipping or wait for delivery."

The food and drug web merchants in this year`s Top 50 are doing just that. And not only with extensive product lines and high-end service, but with innovative marketing that supports multi-channel shopping.

At Schwans.com, for instance, registered online shoppers earn a point redeemable toward the purchase of gift and housewares items in the store with every dollar spent online. The web site, meanwhile, offers a growing list of more than 400 non-food items ranging from cookware to travel services. "We know that when we bring our customers online, they buy more from us, their average order increases, and customer retention goes up," says director of e-commerce and emerging channels Glenn Bader.

Peapod.com has mastered the art of balancing the online shopper`s need for speed with increasingly sophisticated grocery merchandising that boosts basket size. "First-time customers weren`t getting their orders in because there was so much information," says Thomas Parkinson, chief technology officer and senior vice president. "What they want to see is the browse aisle, search and specials, so now the information is lined up that way in three panels."

On successive visits, registered Peapod customers see progressively different displays, with merchandising becoming more extensive as they gain experience with the site and build up history in the database. Peapod is also taking advantage of co-branding opportunities with eastern grocery chains Giant and Stop & Shop, which are sister companies to Peapod through Royal Ahold. "You`ve got loyal shoppers to those chains, so there`s instant credibility for Peapod," Parkinson says.

In New York City, where street traffic alone presents a major challenge to grocery deliveries, online food shoppers can place an order on FreshDirect.com as late as midnight on weekdays and 9 p.m. on weekends and still receive next-day delivery.

But FreshDirect is growing with more than just an effective delivery system. It`s also building relationships with customers in multiple ways. To personalize the shopping experience, FreshDirect features its executive chefs and food department managers prominently in merchandising portals and on the sides of its 100 delivery vehicles.

At Drugstore.com, one key to growth has been taking the extra step to get customers what they want, in effect providing the kind of service shoppers would expect from a neighborhood pharmacy. When a supplier discontinued a line of wood-stick cotton swabs, for instance, "We went back to the manufacturer and made it worthwhile for them to bring it back, because customers had fallen in love with it," says Ron Kelly, senior director of site merchandising.


Drugstore.com
Trust-and functionality

Getting consumers to pass up their neighborhood pharmacy to shop online is not an easy task. "What`s the value proposition of going online?" asks Peter Spear, a stock analyst with investment firm Delafield Hambrecht. It may be convenient for some, but shipping costs and a general lack of discounted prices puts the online pharmacy business in a tough position to win shoppers, he says.

Nonetheless, he adds, Drugstore.com is building both revenue and number of loyal customers. "There`s a solid niche of people who use their site," says Spear, who owns no shares of Drugstore and whose firm has no investment relationship with it. "They`re definitely the most prominent of online pharmacies."

So what is Drugstore doing right that sent third-quarter sales up 41% year-to-year to $84 million? It`s building trust with its customers, says Joe LaCugna, senior director of web analytics. He ticks off Drugstore`s fortes: offering a useful range of competitively priced products not always found in stores, a responsive customer service department and a functional web site ranked as having the top site search in a recent study by Jupiter Research. "75% of our revenue comes from repeat customers," he says.

Ron Kelly, senior director of site merchandising, says Drugstore has also been willing to take an extra step to get the products its customers demand. When a supplier discontinued a line of wood-stick cotton swabs, "we went back to the manufacturer and made it worthwhile for them to bring it back, because customers had fallen in love with it," he says.

Drugstore offers a "Your List" feature that lets customers re-order products from a menu of previously purchased items, helping to boost conversion rates, LaCugna says. "The conversion rate on repeat customers who use our site search is 10 times higher than it is for new customers," he says.

Drugstore also offers a loyalty program that provides a 5% rebate on all purchases in each quarter. That comes in pretty handy when someone purchases one of Drugstore`s newer offerings, the $1,495 Philips heart defibrillator, which more than anything proves the strong relationship Drugstore has built with its customers, Kelly says. "We`ve shown that even at $1,500 we can move products," he says.

Drugstore.com Inc.
13920 SE Eastgate Way Bellevue, WA 98005
Date Launched
February 1999
Unique visitors (monthly)
2,731,000*
Annual Web-Based Sales
$355-$370,000,000 (est. `04)
Vendor Relationships
Site Design
In-house
E-Commerce Platform
In-house
Web Hosting
Sawis, Exodus
Site Search
In-house
Content Management
In-house
Order Management
In-house
Payment Processor
Global Payments
Fulfillment
In-house
Affiliate Marketing Management
LinkShare, In-house

Search Engine Management
In-house
E-Mail Marketing
In-house
CRM
In-house
Web Analytics
In-house
Content Delivery Network
Akamai Technologies, In-house
Rich Media
RichFX

*comScore Networks report, October 2004


FreshDirect.com
Delivering the goods
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