StockHawk........DEMP
Mixed reviews on the entire concept of
on-line drugstores....no margins.....
-----------------------------------------------------------------
Taking another look at Net drugstores
Readers argue that success isn't a sure thing
By Darren Chervitz, CBS MarketWatch
Last Update: 12:59 PM ET Feb 26, 1999
SAN FRANCISCO (CBS.MW) -- You live, you learn.
Many readers reacted to the column I wrote in this
space last week on the emerging online drugstore
market. In that piece, I wondered why the
brick-and mortar drug chains seemed to be sitting
on their hands despite the efforts of a number of
online players, most notably Drugstore.com.
On Wednesday, Drugstore.com made a splash by opening up its Web
site and announcing that Amazon.com (AMZN) had taken a 46 percent
stake in the new company. Rival PlanetRx will be next to debut, with the
launch coming "in a matter of days," according to Chief Executive Bill
Razzouck.
Yet judging by the e-mails I received, readers aren't convinced that these
digital upstarts will make much headway in the $150 billion-$200 billion
U.S. drugstore market.
"Hype is a great thing, but the brick and mortar retailers in the drugstore
category may know something that the "anything.com" public doesn't
know," said Eli Katz, president of Allou Health & Beauty's (ALU)
Fragrancecounter.com subsidiary.
Katz and many others noted the low-price,
low-margin nature of the drugstore business, where
the average ticket is often under $10. "You are
dealing with low ticket items (i.e. [you] need to
stock 200 different kinds of toothbrushes yet the
average profit is under $1)," Katz wrote.
Katz also pointed out that many items sold in drug
stores are needed immediately, such as condoms,
diapers and, yes, drugs. People may not be willing
to wait for the goods to arrive as they do with
books or CDs.
Another reader who did not give a name noted that
drugstores make most of their money from
over-the-counter checkout goods like Halloween
candy, items that will be hard to sell in an online
environment.
Razzouk admitted that drug stores count on
customers to make impulse purchases once they
come in. "That's why the pharmacy's at the back of the store," he said.
But Razzouk added that the driving thrust of PlanetRx's business will be
higher-margin prescription drugs and nutritional products.
Pushing drugs
But not everyone thinks the online pharmacy business is going to be a
good one. Readers like John Grout of Reasoning Inc. noted that the
industry is highly regulated, with each state having its own laws governing
the sale of prescription drugs.
"Any attempt to rationalize the pharmacy business across state lines is
almost certain to draw harsh regulation and could be blocked outright
(e.g., Texas's attempts to prevent the use of Quicken Family Lawyer for
drawing up simple wills)," Grout wrote.
The online pharmacists seem to be
getting around this issue, however. Using
a Texas mail-order pharmacy that is
licensed in all 50 states, Drugstore.com
says it is able to sell prescriptions to
everyone. Razzouk said PlanetRx, which
will be using its own pharmacy, says it
should also be licensed in all 50 states
by the time of the launch.
Others pointed out that selling drugs over the Internet is ripe for abuse and
that the industry will come under even more scrutiny from regulators as
such instances occur. Yet Drugstore.com is taking significant precautions
to ensure the validity and safety of prescriptions sold.
Razzouk said PlanetRx is also going to be vigilant about the process and
has from the beginning asked for advice from numerous pharmacists and
pharmacy schools. The company has even patented some technologies
that help verify the identity of prescriptions that are faxed into the
company, he said.
Will disasters happen that put an unflattering spotlight on online drug
selling and spur the call for additional regulation? Undoubtedly. Will such
events put an end to the practice of Internet prescriptions? Unlikely.
A bigger battle
A bigger problem, however, is the control that HMOs and pharmacy
benefit managers exert over the industry. "On the prescription side of the
biz, the key decision makers are the HMO's not the consumers - and
Web sites need not apply as far as the HMOs are concerned," Katz
wrote.
Added Grout: "Favoritism runs rampant (e.g., Walgreens (WAG) is cut
out of Cigna's California business) and 'maintenance' drugs have already
been pushed out to on-phone (rather than on-line) pharmacies (which are
much less threatening to the status quo because they don't do ordinary
short-term prescriptions at all)."
Indeed, Razzouk said that while some HMOs and PBMs have signed on
to the PlanetRx site, many others have resisted. In many cases, HMOs
have launched their own mail-order pharmacy businesses to complement
the brick-and-mortar retail networks they have established. They rightly
view the online initiatives as a bigger threat to those operations.
Razzouk said that HMOs will eventually have to play ball with the online
drugstores. "They can be in one business or the other [managing or selling
prescriptions], but not both."
Carve-out criticism
My contention that traditional brick-and-mortar drug stores should
separate their online businesses and sell a piece to the public or private
investors also drew a healthy torrent of criticism.
Of course, some of the idea's critics, like Grout, argued that the online
drug industry would only be a niche market unworthy of such a drastic
plan. Others believed in the potential of the market, but argued spinning
off the online unit could be a short-sighted move that would be regretted
in the future.
"By keeping the online division internal... they will be able to reap the
benefits in the future. they will be able to fully LEVERAGE [caps
included] their online distribution arm," wrote self-described "eBusiness
consultant" Mahin Samadani.
I agree that the Internet is just another sales channel for the
brick-and-mortar drug chains, but still contend that competing effectively
on the Web requires a focus, skill set and budget that brick-and-mortar
management teams either do not have or are not willing to devote.
A complete spin-off may indeed be unwise. But carving out a minority
portion of the online unit, such as Barnes & Noble (BKS) proposed last
year, would allow the online unit to take advantage of the parent's
important resources while giving management the freedom to do whatever
necessary to win on the Web.
A minority carve-out would also allow the parent company to bring the
online unit back in its fold rather easily if the business matured sufficiently.
Hey, what about us?
Finally, several readers brought to my attention a couple of traditional
brick-and-mortar drugstore chains that are being more aggressive with
their online plans.
Jeff Matthews of Greenwich, Conn.-based Ram Partners, mentioned
Drug Emporium (DEMP), while another reader moaned, "Hey what about
Pharmor (PMOR)?".
Unlike the bigger chains, Drug Emporium and Pharmor have a lot less to
lose, both in terms of valuation and the cannibalization of their physical
real estate investments.
"In Drug Emporium's case, they only have about 150 stores and $800
million in sales; the top public chains have $30 billion in sales," Matthews
wrote. "If DEMP could get half of the share Amazon has taken in three
years, that's a $3 billion opportunity, dwarfing their own store base,"
Also, I want to bring up one fact I overlooked in the original article:
Rite-Aid (RAD) announced in January it will work with General
Nutritional to create an online health superstore, which should become an
immediate force in the market.
I.P.Onder
Thanks to some insightful reader comment, I'm no longer 100 percent
convinced the drugstore market is a gimme for the Internet players.
However, many people also doubted the online book market would take
off, arguing that customers enjoyed browsing the luxurious, cafe-style
book stores.
It'd seem hard to make that enjoyment case with the drugstore, but a
couple of readers tried, including "Steve", whose father owned a
pharmacy in New Jersey. "Most of the women I know love going to the
drug store. I've dated some that go more than once a week," Steve wrote.
Well, there ya go.
EOM-----------------------------------------------------------------
Still haven't made up my mind on this one..
All I know is the market is paying
more than 90 million for I-net anything..
Jim in CT.. |
