How Drugstore.com plans to achieve profitability
Though it’s still looking to become profitable for the long term, Drugstore.com sees plenty of growth opportunity ahead, particularly in the online health and beauty space and in filling even more prescriptions for Baby Boomers. In a recent presentation to shareholders, Drugstore.com CEO Dawn Lepore said the company will grow and achieve profitability by following a multi-point strategy that emphasizes lower cost customer acquisition and building repeat business in the retail drugstore market.
In 2004, Drugstore.com, No. 28 in the Internet Retailer Top 400 Guide to Retail Web Sites, achieved total sales of $360.1 million, up almost 50% from $246 million in 2003. In 2004, the company grew its total active customer base to 1.9 million, achieved annual revenue of $187 per average active customer and increased its average order to $77.
But for Drugstore.com to grow the company needs to follow a long-term strategy of building up its brand awareness, particularly among Baby Boomers, and finding ways to build more repeat business. “The goal is to support growth and drive long-term sustained profitability,” Lepore said in her presentation “Customer retention and purchase frequency are the keys to success.”
Drugstore.com is doing a good job of acquiring new customers and driving customer acquisition costs down, she said. For example, Drugstore.com acquires 33% of new customers through search engine marketing followed by 26% through traditional direct marketing and word of mouth, 20% through various online media programs, 13% from marketing partners such as Rite Aid and Cigna Healthcare and 8% through affiliate marketing. Drugstore.com has lowered its marketing costs to acquire a single new customer from an average of $50 in 2001 to $21 in 2004, she says.
But to finally achieve profitability, Lepore said, one strategy Drugstore.com must follow is implementing new programs to increase the rate at which customers make purchases, which in 2004 averaged out to 2.3 times per year.
To draw more new and repeat customers, Drugstore.com is expanding its online inventory of 20,000 SKUs and adding basic health and beauty products such as razor refills and harder-to-find specialty items, including natural skin care products. Drugstore.com is also looking to keep its health and beauty products priced 10% lower and its prescriptions between 20% and 30% lower than competing bricks-and-mortar pharmacies and chains.
In her presentation, Lepore pointed out that Drugstore.com generates the most visitor traffic in its category and carries the broadest inventory. But the company is still working to turn a longer term profit. For the second quarter of 2005, Drugstore.com turned in sales of $96.9 million, an increase of 10% from second-quarter sales of $87.8 million in 2004. Drugstore.com also reported a net loss for the second quarter of $4.3 million, compared to a net loss of $5 million for the second quarter of 2004.
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