It was a post on Techcrunch last Friday which alerted us to the fact that Drugstore.com, one of the worlds largest online pharmacies, had actually made a quarterly profit for the first time, ten years after launching. Congratulations to the team at Drugstore.com - it hasn’t been an easy road for them. Of course we should put this into context and say that for the year, Drugstore.com actually still lost $9 million on $445 million in sales.
The company started off in a promising way - on 28 July 1999, the day it went public through an IPO, the stock soared from an initial price of $18/share to as high as $69/share valuing the company at more than $2.9 billion - the fastest any company had ever reached a valuation of more than $1 billion. This was a truly staggering performance considering that only a year earlier, the company had a total of just 12 employees working out of Peter Neupert’s (CEO) garage.
In the beginning phase the execution was brilliant, with the management team securing investment from KPCB and partnerships with RiteAid, RxAmerica, GNC and Amazon. In 2000 it acquired Beauty.com to strengthen its personal care division and in 2003 it acquired Custom Nutrition Services (CVS) to bolster its nutritional supplement business. And although the customers came, the profits didn’t follow, so that by 2004 the company was serving nearly 2 million customers & generating sales of $360 million but was still making a loss of $47.7 million. Ouch !
So what was the problem at Drugstore.com ? Firstly they were an unknown brand that had to invest heavily (eventually overspending) on marketing in the face of competition from established pharmacy brands. Secondly the sales value and the margin per product in health mail-order are not exactly stellar. But overall there must have been a high degree of operational inefficiency considering that by nature, web-only companies should be leaner and meaner in their cost structures compared to bricks & mortar companies, which in this case they clearly were not.
Drugstore.com is an astonishing story of how venture capitalists, rather than setting up a business that grows organically on a small amount of funding, often try to create huge companies too quickly out of nothing more than an idea and then ensure that so much money is pumped into them that they are prevented from going under for years. The theory is probably something akin to a gambler who thinks that if he can just play one more hand, he’ll make all his losses back, which funnily enough reminds us of Ocado, another such high-financed etailer, that has also been making astronomical losses for years but still loves to talk up the potential of the business. Did all these guys learn nothing from the dot com implosion of 2001; that following customer & sales growth over profitability per unit is a sure way to end up in the deadpool (see Kozmo.com).
The future of Drugstore.com will not be easy as this compete graph shows in the traffic numbers relative to established pharmacy brands. Greg Howlett has some other interesting points to make about this on his blog MarketingPilgrim.com.
Let us know your own thoughts about the future of Drugstore.com and online pharmacies in general in the comments section.
