Drugstore.com finds new profits fulfilling orders for Amazon
Drugstore.com’s new e-commerce agreement with Amazon.com announced last week gives consumers an expanded selection of products under Amazon’s new Health & Personal Care tab and the convenience of one-click checkout on some products as well as other services. It also stands to give Drugstore something new: more profitability from any resulting transactions than has been the case in recent iterations of the multi-year e-commerce relationship renegotiated with Amazon several times over the past five years.
Under the new agreement announced last week, Drugstore will continue to be a non-exclusive wholesaler and fulfillment provider for certain products sold by Amazon at the new Amazon.com Health and Personal Care store. Separately, Drugstore and Amazon, a 19% stakeholder in the online drugstore, also have a multi-year agreement that covers the sharing of technology and operational expertise.
Previous to last week’s announcement on the marketing contact, Drugstore paid Amazon for every customer Amazon sent its way. But under the new agreement, Drugstore will instead fulfill orders received through Amazon from its distribution center in Amazon-branded boxes. Though invisible to those customers under the new arrangement, Drugstore, instead of paying Amazon, will be paid by Amazon for its cost of goods and labor plus a margin, says Drugstore.com CEO Kal Raman.
“Before, we had to pay a bounty on each customer from Amazon. It was too expensive for Drugstore to afford. That earlier deal was not profitable, but this deal is. On every box that we ship out of our distribution center for Amazon, we make money,” Raman says. He didn’t disclose the percentage Drugstore had been paying Amazon on transactions.
Raman adds that under the new agreement, Drugstore does not get the digital marketing rights--e-mail addresses that would allow it to market directly to the customers that it fulfills for Amazon--as it had under previous versions of the marketing agreement. However, Amazon is the source of only about 3% of Drugstore’s customers, he adds. For customer acquisition, Drugstore is strengthening its relationships with portals such as MSN, Yahoo, and AOL, which are in turn focusing on search as a means of facilitating product sales in which they share.
“The portals are also changing the way they do business, centering everything on making it easy for their visitors to buy products,” says Raman, who says that in the last 18 months, Google, Overture and other search engines have become the biggest driver of Drugstore’s business. “So we have started spending more time and money with the portals that are moving toward promoting product finding as a way to shop,” he says.
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