February 28, 2005, 12:00 AM

Drugstore`s Vitamin Boost

(Page 2 of 3)

She knows what Drugstore needs to do about that. "Our message has to be consistent," she adds. "The way the web is designed, brand ads, e-mail ads, all need to be consistent with a branding strategy, with who we are and what our value proposition is."

Gersch lays out in hard numbers one of the immediate goals Drugstore needs to reach. "Our average customer shops with us 1.4 times per year, then the other 25 times in a brick-and-mortar drugstore," she says. "I don`t expect to get to half and half, but if I can get them to shop with us one more time a year, we`ll double our sales."

Offline advertising

Much of Lepore`s and Gersch`s success in pushing Drugstore`s growth this year will hinge on an advertising campaign that will debut later this year. Drugstore has retained Acme Idea, New York-based marketing agency, to work on a campaign that will go beyond Drugstore`s current marketing emphasis on online campaigns. Although they`ve yet to decide on the ingredients of a new campaign, it will likely encompass multi-media offline advertising, including TV spots, that emphasize the Drugstore.com brand and inform consumers that the web site can make life easier when ordering everyday staples like tissues and soap as well as recurring medicines, Gersch says.

A more aggressive advertising campaign, especially one designed to promote a brand rather than individual product promotions, Lepore admits, can add to operating expenses before bringing in a noticeable increase in customers. The new campaign is likely add to Drugstore`s cost of acquiring news customers, now at a favorable $19 each, down from about $22 in the past, Lepore says.

And though a new advertising campaign will add to expenses Drugstore is already carrying for its 3-day free shipping offer, which put a squeeze on Drugstore`s Q4 gross margin of 20.2%, Lepore says she`s confident the investments will continue to pay off in sales increases.

Drugstore`s new executives say they`ll leverage the advantages the web channel brings to the table in scaling up to more customer activity and sales. In addition to spreading the message that the online channel can make life easier for, say, a busy parent with young children who can shop online after getting the kids to bed, Drugstore is planning to promote other advantages that may be less apparent to consumers.

One is the use of flexible spending accounts, which let consumers use untaxed income to purchase health care items not covered by insurance. A forthcoming Drugstore campaign will inform consumers what many apparently don`t know--that they can use FSAs to pay for many non-prescription items like Tylenol, Gersch says. In addition, Drugstore provides an online tool that lets shoppers check a list of FSA-approved products and monitor the balance in their account. It`s also working on a feature that will let shoppers purchase items with funds directly drawn from their FSAs.

The retailer is also looking into developing more personalized and easier-to-read e-mail marketing campaigns. "We`ll have customers tell us what communication they want from us," Lepore says. "For example, if they like a product that a manufacturer plans to discontinue, we`ll tell customers to let them stock up on it."

In addition, Drugstore is testing several new site features to make online shopping easier and encourage customers to return more often, Lepore says. One thing under consideration is a simpler version of the site for new customers. "Our web site can be a little overwhelming for the first-time user, so an easier shopping experience could be very effective," she says.

Among its several marketing efforts, partnerships stand out as the most efficient and effective tool for acquiring new customers, Gersch says.

Drugstore spends 6% of its marketing budget on partnerships to realize 49% of orders, compared to spending 53% on search engine marketing to generate 30% of orders, she says. "95% of customers that come to us through partners are new to us," Gersch says.

The Rite-Aid connection

One of its most established partnerships is with Rite Aid Corp., which allows orders placed over Drugstore.com to be picked up at any of more than 3,400 Rite Aid stores. Drugstore`s net sales processed through Rite Aid stores rose 8.6% last year to $92.4 million, up from $85.1 million in 2003. Although that may be strong growth by most retail measures, it was the only one of Drugstore`s operating units with a single-digit growth rate.

By comparison, online prescription drug sales grew 30% to $63.9 million from $49.2 million; over-the-counter sales surged 42.3% to $155.3 million from $109.2 million; and the VisionDirect unit grew 20-fold to $48.5 million from $2.3 million.

Lepore says she plans to meet with her counterpart at Rite Aid to discuss how the two companies can better cooperate and describes store pick-up as an element of customer choice that can help Drugstore compete with multi-channel rivals.

But her main emphasis for growth, she says, is on developing online shopping to lure more consumers to pass up stores for the web.

Other partnerships that support this strategy include an exclusive arrangement to handle online sales for GNC, the vitamin and natural foods retailer, and groups that cater to specific communities of health care recipients. Drugstore is working on a multi-channel marketing campaign, for example, with dLife, an organization that educates diabetes patients on proper health care through several channels, including dLife.com and the dLife cable TV show, which will debut this month on CNBC.

Prescription edge

Drugstore is also working to shore up its prescription sales by taking advantage of a move by health care benefit plans to require policy holders to order recurring drugs through the mail and in larger quantities than is typically ordered through neighborhood pharmacies. Jefffrey J. Kimmell, vice president of health care services and chief pharmacy officer, says he spends a good part of his time meeting with benefit plan administrators to arrange for Drugstore to operate as their distribution vehicle.

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