Toothpaste, shampoo, razor blades, diapers: these everyday household items are helping drugstore.com to survive in the down economy. The Bellevue-based e-commerce company had its first profitable quarter in the fourth quarter of 2008, and did it again in the first quarter of this year — at a time when many other retailers, not to mention entire industries, are suffering.
For drugstore.com, the key is focusing on over-the-counter items, such as Tylenol and face cream, that people need to replenish on a regular basis.
“This is a very tough economy. We are growing and we’re growing very nicely,” said CEO Dawn Lepore.
Drugstore.com, which launched in 1999 during the dot-com bubble, initially saw itself as an online pharmacy, filling prescription orders online. But Lepore, who took over as chief executive in 2004, has emphasized non-prescription, over-the-counter (OTC) items, which she believes have bigger potential for growth.
“People thought OTC products were a bit of an afterthought,” Lepore said of drugstore.com’s early years.
“What was compelling to me was how fast we were growing in the OTC area. We focused on that and beauty,” she said, adding, “Beauty is the crown jewel of the company because the margins are so high.”
Today, 73 percent of drugstore.com’s sales come from over-the-counter items, 18 percent from vision products, and 9 percent from prescriptions.
In the fourth quarter of 2008, which ended Dec. 28, drugstore.com reported net income of $289,000 on sales of $93.9 million, the first quarterly profit in the company’s history. In the first quarter 2009, the company reported net income of $1.3 million on sales of $98.3 million — though $1.2 million of the net income came from a one-time sales-tax settlement with the state of New Jersey.
“This last quarter showed that despite everything going on in the economy, people continue to buy product even at an accelerated pace from them,” said Mark Argento, an analyst covering drugstore.com for boutique investment bank Craig Hallum in Minneapolis.
“They saw some people pulling back from spending a little more in higher-end beauty products, but the core staples buying remained intact,” Argento said. “That speaks to the quality of their customer base.”
Drugstore.com’s predominantly female customer base is clearly on the hunt for bargains. The company says the number of visitors to its coupon, sale and clearance pages for non-prescription health and beauty products has jumped 75 percent in the past year.
“Drugstore has really focused on a core consumer — the woman who has a family and is driving the purchasing decisions,” said Brian Walker, a Seattle-based e-commerce analyst for Forrester Research. “They have honed in on her needs in terms of products and optimized the experience and marketing around that.”
Drugstore.com is looking for new ways to extend its reach. In addition to the flagship drugstore.com web site, the company operates two others, beauty.com and visiondirect.com, focused on specific product categories. Lepore said the company is looking at creating other such “microsites” to drive sales.
One big change ahead for drugstore.com is the winding down of its 10-year agreement with the Rite Aid retail chain. Starting in 1999, drugstore.com ran the software for Rite Aid’s web site for refilling prescriptions (receiving a fee for every order). Rite Aid last fall took control of that operation itself, and is paying drugstore.com $1 million a month through this June to end the contract early. Those payments will eventually total $10 million.
Drugstore.com is putting in place some new e-commerce deals. The company has a new agreement with Rite Aid to handle online orders for over-the-counter products. It also has a similar deal with Medco Health Solutions Inc., a $22-billion pharmacy benefits manager. The Medco partnership starts in June.
“They are now talking their category expertise, technology, and operations and providing that to others in the OTC and beauty market. This appears to be a growing aspect of their business,” said Forrester’s Walker.
Drugstore.com has some connections to the Seattle area’s online retail giant, Amazon.com Inc. Amazon owns 14 percent of drugstore and gets to appoint a director to the company’s board (currently venture capitalist Geoff Entress). Drugstore’s beauty.com site sells products on Amazon.com through Amazon’s third-party merchant program.
Lepore herself sits on the board of online auction giant eBay as well as the New York Times.
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