February 28, 2005, 12:00 AM

Drugstore`s Vitamin Boost

Drugstore.com gets a new CEO with a new marketing and merchandising plan that the company hopes will bring on profitability.

When Drugstore.com Inc. launched in 1999, it made a splash like other early dot-coms through an aggressive advertising campaign. But while many other early e-retailers overspent on hype until they went out of business, dying before they had secured an effective infrastructure and loyal customers, Drugstore sharply cut back on marketing to focus on building a loyal base of customers who would return to a retail web site that worked.

In many ways, Drugstore has met the goals of its second strategy. Its 2004 net sales grew 47% year-over-year to $360.1 million, and, with an active customer base of 1.9 million, it generated 74% of last year`s revenue from repeat customers. And though it hasn`t bombarded consumers with advertising messages, Drugstore has won accolades for its customer service and technology.

JupiterResearch, for example, cited the pure-play retailer in a report last fall for having the most effective site search feature. While some leading online retailers disappoint many customers with site search that lacks product information or proactive messaging, the Jupiter report, "Retail Site Search, Site Ranking and Best Practices," cites Drugstore for such features as highlighting specials and best-sellers on the first page of search results and supporting further navigation through several categories of related information. "When consumers try us, they like us," says Dawn G. Lepore, the company`s new CEO and chairman of the board.

Looking for something big

But Lepore, a former Charles Schwab Corp. vice chairman who was brought in last fall with a strong reputation for building and marketing e-commerce operations, faces big hurdles in overcoming Drugstore`s ongoing financial losses. Despite the rise in 2004 sales, Bellevue, Wash.-based Drugstore posted a net loss for the year of $47.7 million, widening by about 150% its year-earlier loss of $18.6 million.

To straighten out its financial situation and head toward profits, analysts say, Drugstore must implement major improvements sooner rather than later. "They have enough cash to continue operating for a few years, but their guidance for 2005 is not that great and they haven`t answered what they need to do to be profitable and to scale their business," says Peter Spear, an analyst with investment research firm Delafield Hambrecht Inc. in Seattle, which does not have a financial stake in Drugstore. He says Drugstore is on the right track in its pursuit of multiple marketing partnerships and the trend toward mail-order prescription sales required by health insurance plans. Beyond that--and outside of dressing up Drugstore for an acquisition by a larger retail organization--Lepore and her team need to find new ways to streamline costs while also building revenues, he adds. "It`s a wait-and-see story, but something has to happen with this company, something big," he says.

Drugstore is projecting 2005 net sales to grow about 10-16% to a range of $400 million to $420 million, but as it figures out the right growth formula it also faces formidable competition from large multi-channel drug retailers Walgreen Co., CVS Corp. and Wal-Mart Stores Inc. Even Amazon.com Inc., which holds a 16% equity stake in Drugstore, has entered a big part of its market with two beta sections of its mass merchandise web site: one covering non-prescription drugstore items like painkillers, toothpaste and razors, the other offering beauty products like designer-brand perfumes that compete for the high-margin market Drugstore is pursuing through its own Beauty.com.

Small and nimble

But if all that sounds like a lot on the shoulders of Drugstore`s new CEO, it doesn`t seem to dampen her confidence for bringing the 6-year-old, 625-employee e-retailer to a new level of performance. "I came to Drugstore partly because I missed being with a company that`s small and nimble, where it`s easier to get things done," Lepore says.

Lepore, who succeeded Kal Raman, a key designer of Drugstore`s e-commerce platform, is no newcomer to taking on challenges that mix business and Internet technology. She served as Schwab`s vice chair in charge of technology, operations and administration and, as its one-time CIO, played a key role in building out the investment firm`s e-commerce strategy. Lepore has also served as a member of the board of Wal-Mart, a position she left when joining Drugstore to avoid a conflict of interest, and continues to serve on the board of eBay Inc. "Even though she`s from financial services retailing, she`s a successful, seasoned executive and brings a lot to the table in online retailing," Spear says.

Lepore wasted no time in making her mark on Drugstore after she arrived in October. Her multi-pronged strategy targets growth in Drugstore`s four core areas of general over-the-counter merchandise, mail-order prescription goods, local in-store pickup of online orders through Rite Aid stores, and online sales of contact lenses through VisionDirect.com, which Drugstore acquired in late 2003.

Taking all that on, she admits, will require additional investment in both marketing and technology, risking a delay on the road to profits. But Lepore is betting that leveraging those investments will lead to the scale of customer activity necessary to produce profits, as Drugstore raises its image in the minds of consumers, improves its e-commerce technology platform to provide customers an easier shopping experience and creates more revenue-boosting cross-selling opportunities.

Driving up OTC traffic

Figuring the most important key to growth is getting consumers to move more of their non-prescription purchases from stores to the web, Lepore quickly filled a void in over-the-counter product marketing and merchandising by naming Kathy Gersch, a veteran e-retailing executive of GiftCertificates.com and Nordstrom.com, to the new position of vice president, chief marketing officer and general manager of the retailer`s non-prescription business. For the first time in several years, Drugstore will have a single executive in charge of both marketing and merchandising for its over-the-counter business--making it easier to present a coordinated merchandising and marketing strategy to consumers, Lepore says.

"We need to spend more time on marketing and branding," she says. "We hear from customers that they love us but don`t know the breadth of products we carry. Others say they don`t come back, not because they`re unhappy, but that they just didn`t think of us."

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