The online pharmacies seek an Rx
Consumers have been slow to buy drugs online—and the chains have been slow to go online.
By Mary Wagner
The death in March of PlanetRx.com wasn’t just a story of another failed dot-com retailer. It also was a story of consumers’ resistance to having their prescriptions filled online.
The brave new world of Internet retailing wasn’t just about books, electronics and videos—it had a place for pills, diapers and cosmetics, too. The ease of online shopping would, some believed, forever end long lines at the drugstore check-out counter, eliminate embarrassing price checks on personal items and make hauling bulky paper goods home a thing of the past.
But the web’s early advocates misjudged how quickly people would change their habits and embrace the web for their drugstore needs. Web enthusiasts with their eye on the medium’s seemingly limitless prospects focused on what was technically possible. But as any psychologist—as well as PlanetRx and MotherNature.com—will tell you, human behavior is difficult to change.
It turns out that shoppers accustomed to making their drugstore purchases in-store so far perceive little benefit to buying health care products online. Evidence: almost 70% of online users have never purchased health-related products online—significantly more than the 40% average across other retail sectors, Jupiter Media Metrix reports.
Why all the foot-dragging on switching drugstore purchases to more convenient online sources? For one thing, it may not be so convenient. In fact, 50% of consumers in the Jupiter survey said it’s easier to shop offline. Buying heart drugs on the Internet is a lot more complicated than buying the latest Harry Potter. “The pharmacy business doesn’t follow the same ‘consumer is king’ rules that other online retailers have exploited,” observes Liz Boehm, an analyst with Forrester Research. “Third-party payers and physicians both must authorize a prescription before the product ships, and drug histories must be coordinated across channels to ensure patient safety.”
For now, doctors must still call in their approval or patients must present a written prescription. Until the use of electronic prescribing tools that put physician, patient and insurer on the same platform becomes widespread, authorization will remain an issue when filling new prescriptions online.
Who’s your pharmacist?
And shoppers may not care who ships them books and CDs as long as the packages show up as promised, but they want to know who their pharmacist is. “We’re not talking about checking out at the supermarket here,” says George Thompson, an analyst who covers retail pharmacies for Prudential Securities. “We’re talking about someone who is providing you with something potentially injurious if it’s not filled properly.”
So what about that lipstick—or razors, or hairbrushes, or any of the other so-called “front-of-store” goods that drugstores offer in addition to prescription medicines? Do they sell online?
Some of these items provide higher margins than prescription drugs that cost the consumer more because health benefits providers have beaten down the margins on branded prescription drugs. And much as in the offline world, online pharmacies offer sundries to boost the basket size of shoppers who come to the store to fill prescriptions. But as an extension rather than the main event, they tend to contribute a smaller percentage of revenues. Thompson estimates that at CVS, for example, one of the country’s largest fillers of prescriptions, front-of-stores sales are only 35% of total revenues across all channels. At Walgreen’s, which also has an online channel, they’re about 43% of total sales.
Though online pharmacy players like Drugstore.com seek to offset smaller Rx business with the heavy promotion of higher-margin front-of-store goods, for most online drugstores, prescription drugs remain the core of the business and the road to revenues.
The barriers to executing a successful drugstore business online are high—high enough to have knocked some sector pioneers such as PlanetRx.com and MotherNature.com into oblivion. Even so, Americans bought $105.5 billion in branded prescription drugs last year, and with a prize that lucrative at stake, plenty of drugstore companies are making determined efforts to scale the walls and capture the web’s share of those sales.
That share is still small, but it’s growing. Estimated at $600 million today, or less than 1% of offline consumer health spending, sales at online drugstores are expected to increase to $14.4 billion by 2005, predicts Jupiter. Forrester’s projections are similar—$15 billion in 2004. In the near term, say analysts, growth in online sales will most likely come from new customers and new products and services than from any mass migration to the web of consumers now accustomed to mail order or in-store purchasing.
In trends that mirror other retail sectors, the web arms of brick-and-mortar drugstores could be the biggest winners in the long run. They’re able to leverage their offline brand presence into online sales and offer what’s emerged as consumers’ overwhelming desire to pick up in a store the pharmacy goods they order online. More than 90% of the prescription drugs ordered online are picked up in-store, Thompson estimates. And a quarter of consumers surveyed by Jupiter said the option of ordering online and picking up in-store would be compelling enough to make them switch drugstores.
Slow-moving
Nevertheless, the national chains have moved slowly to capitalize on their advantage. While some of them have very good sites—Walgreen’s for example has a link to Mayo Clinic health care information, keeps a history of prescriptions and e-mails refill reminders to customers—they don’t rank very high in the traffic department. CVS.com had only about half the visitors in March that pure-play pharmacy webRx.com had, while offline giant Walgreen’s website drew less than a third of the visitors of Drugstore.com, notes Stacey Rich, an analyst with Jupiter. “Traffic doesn’t necessarily translate into purchases, but it’s a good indicator of consumers’ awareness of a site,” she says.
While the remaining pure plays don’t have the offline customer base of chains to draw from, they’re competing by promoting higher-margin front-of-store goods, as well as prescription drugs and nutritional supplements not covered by insurance for which consumers pay out of pocket. And they’re finding ways to boost their offline presence. Drugstore.com, for example, has an agreement with national pharmacy chain RiteAid in which items ordered online at Drugstore.com can be picked up in RiteAid’s 4,000 stores. Local, independent pharmacies and smaller regional chains, meanwhile, aren’t throwing in the towel. They’re seeking to turn what was initially perceived as the competitive threat of the web into an opportunity by working with partners to develop strategies and access infrastructure that will give them a foothold online.
As relative newcomers to the online channel—at least in comparison to the likes of Drugstore.com—the major chains are still feeling their way and are little inclined to ballyhoo web initiatives. A number of national drugstore chains including Walgreen’s and CVS declined to be interviewed for this story. In fact, Walgreen’s gave as a reason for declining an interview that its executives were too busy building stores.
Yet the chains stand to be the biggest gainers from the web if they can harness its power as a research tool that drives consumer spending in their stores. Web influenced-health spending—that is, medicine and other health-related products researched and even ordered online but picked up in-store—is expected to dwarf online health spending by three to one in the next five years, predicts Jupiter. By 2005, web-influenced health spending will leap to more than $50 billion a year. “More than a quarter of this will be reaped from consumers who never purchase health items online, therefore representing market share and wallet share impossible for online-only retailers to tap,” says Jupiter’s Rich.
Darwin at the drugstore
To fully leverage their advantage, though, the chains will have to boost functionality at their web storefronts with store location information, detailed product data—even compliance programs organized around different medical conditions that encourage patients to stick with their regimens by checking in with them online. They’ll also have to accept more health insurance plans and expand options to pick up online orders in-store, says Rich. As with their brick-and-mortar counterparts in other retail sectors, “Companies that create a seamless cross-channel brand identity and flexibility will win in the long term,” she adds.
As national pharmacy chains like Walgreen’s continue to grow, more than a few local and independent pharmacies have folded their tents. But others have fought back against the offline competition, even using the web they once regarded as competition to their own advantage. “There was a lot of survival of the fittest going on,” says Tom Menighan, president of the American Pharmaceutical Association, the leading professional association for pharmacists. He’s also CEO of SymRx, a venture-backed company that provides services and solutions for independents, regional drugstore chains, and specialty pharmacies seeking to expand online.
SymRx supports pharmacies with two branded programs. One, Cornerdrugstore.com, offers web sites and services for independents. The Cornerdrugstore.com site provides store location information by ZIP code and city for participating pharmacies in the user’s area, as well as a link to the store’s own site. Cornerdrugstore builds those store sites to order, using a basic template it’s developed for that purpose.
In addition to offering online ordering and delivery of prescription drugs, independents can add to their hosted site a prefab web store also developed by the company. The store features 5,000 pre-selected front-of-store items, fulfillable out of the pharmacy’s own store, that can be priced at any of five different tiers set by SymRx.
SymRx recently launched a second brand, ChainRx, on a different technology platform. ChainRx offers regional drugstore chains with greater in-house IT capacities more flexibility to create their own look and feel as well as price structure on the hosted site.
Independents and specialty pharmacies pay SymRx $60 to $75 a month per store; currently, pharmacies pay no set-up fees for the service. The per-store price for regional chains is slightly lower. Consumers pay a transaction fee of 25 cents to $2.
Eye on the future
Some 1,900 independents ranging from a small pharmacy in rural North Dakota to a 100-store regional chain in Iowa are Cornerdrugstore.com participants. Among them are the two retail stores of Green Brothers Pharmacy, a family business operating in Stockton, Calif., since the 1930s. Green Brothers has annual revenues of about $8 million, 90% of it in prescriptions, of which 88% is paid for by health insurers.
Green Brothers has been online for about a year, and it’s at the opposite end of the spectrum from the heavily financed and aggressively promoted pure-plays. While Drugstore.com partners with Amazon to pull in traffic that numbers in the tens of thousands, Green Brothers is just getting around to printing its URL on its store bags. “We’re lucky if we get one or two web orders a month, because we’ve done little so far to drive it,” CEO Charles Green says. But Green’s not in it for the short term, and his belief in the Internet’s eventual importance to his business shows a bedrock understanding of the web’s increasing power.
“Drugs are primarily consumed by older people, and they’re not the ones who tend to use computers,” he says. “But we need to have a web presence now, because a younger and more computer-literate bunch will make more use of the web in the future.”
Green is a firm believer that the Internet will only grow as a place of commerce. “Right now, it’s still just as easy for consumers to pick up a phone. But in five, 10, or 15 years the web will be a routine, practical way of doing things. So having our site up now is one of the ways we move into the future,” he says. “I’m betting on the Internet.”
mary@verticalwebmedia.com
A different approach from the corner drugstore
While national chains already tied into health benefits providers work to integrate those relationships into their new online channels, Drugstore.com is taking another approach. Most of its prescription business involves drugs not covered by health insurance. And it actively promotes its brand online, with prominent placement on the health and beauty tab on Amazon.com.
The company does have a relationship with health benefits provider WellPoint and it gains broader access to third-party payers under an agreement it has had since 1999 with the RiteAid chain for customers to pick up and pay for prescriptions at RiteAid stores. Under the exclusive arrangement, Drugstore pays RiteAid for product ordered online but picked up in store at a contracted price.
But by dealing largely with prescriptions for which consumers pay out of pocket, Drugstore.com skips the paperwork and expense of coordinating reimbursement from third-party payers. Drugs not typically covered by health insurance include big sellers such as Propecia, Viagra, and various weight control drugs. While he won’t reveal how much they contribute to revenues, Mark Grey, Drugstore.com’s general manager of pharmacy, says so-called “lifestyle” drugs represent a good portion of the company’s Rx business.
Third-party payers call the shots on pricing the prescription drugs they cover by telling the drugstores how much they’ll reimburse them when they fill a scrip. That means retail pharmacies that deal with health insurers don’t really use price to compete for consumers—but Drugstore.com does. By bypassing health insurers and running a cash prescription business, Drugstore.com has been able to negotiate discounts in some cases as much as 65% less than prices in retail stores. Some of the discounts are for acknowledged loss leaders, but Drugstore also takes costs out of the system for consumers by how it handles and packages drugs. Recently, for example, the site promoted 90-day supplies of prescription hair-grower Propecia. More often, prescriptions are filled in 30-day supplies, but Grey points out that bundling a three-month supply into one shipment cuts two-thirds of the shipping, handling and processing costs on the back end.
“We haven’t actively marketed the Rx side of our business, yet our pharmacy continues to grow quarter by quarter by word of mouth,” Grey says. What the company does market heavily is its brand. The Amazon deal has helped drive significant sales of high-margin personal care items, says senior director of marketing Betsy Hawkanson. “High-end spa items like massagers and electric razors sold incredibly well around the holidays, and it was because a lot of people went to Amazon to buy gifts,” she says.
While front-of-store goods are a smaller portion of total sales at chains like Walgreen’s and CVS, they’re a key contributor to both revenues and strategy at Drugstore.com, where they account for as much as 50% of sales. “Our pharmacy and front of store play off each other in important ways,” adds Hawkanson. “When you get regular customers coming back to you every month, it’s a great opportunity to sell to them from the front of the store.” To make it easy for customers to return, Drugstore works hard to make the site sticky. For example, a “Your list” feature on the home page navigation bar captures in one location every purchase the shopper has ever made on the site, so he or she can call up the list and replenish any item with a few clicks. Leaving no stone unturned when it comes to driving re-orders, Drugstore also will e-mail the reminder list to registered customers as often as they wish.
Drugstore.com has yet to produce net profits, but its strategy drove Q1 revenues up 44% to $32.8 million this year over the first quarter of 2000, while its net loss for the quarter narrowed by 44% to $21.8 million. Some $378 million¯most of it equity financing¯has been invested inDrugstore.com. “The ballgame has changed over the past two years,” Grey says. “Before, we were trying to grow and stay ahead of the competition. Now we’re much more focused on trying to be profitable in our business and doing the smart things we probably should have done all along.”
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