Interview with Kal Raman, CEO of Drugstore.com

Drugstore.com was founded in 1998 to provide a service around purchasing health, beauty, and pharmaceutical products on the web. After being in business for 4 years, we are looking to do $200 Million in sales in 2002. We believe that we are operating in a huge market, which is approximately worth $250 Billion dollars in 2002, and is going to be worth over $300 Billion in 2003. Our business has been growing despite the macroeconomic conditions, and we will be growing the business from 35-40% year over year in 2002, while reducing the expenses by the same amount. Our EBITA loss will come down by 30-40% this year as well, with the growth in the business. As a matter of fact we have accelerated our profitability plan by a year, and we now believe that we will be profitable for the entire year of 2003. As a whole we are operating in a great category, business is growing, our profitability is approaching fast, and we are having fun doing it.

I have to start with the category that we are in, which is made up of must have replenishment products. People use our products day in and day out. There is a famous saying within the company, that ?Whether or not the Federal Reserve raises or lowers interest rates, you never stop brushing your teeth or taking your medication.? We are in the business of selling those must have products. The second thing is that we have great partnerships. Right from day one, we worked on building strategic partnerships, which have been extremely helpful in the tough times that we have faced. Two examples are Rite Aid and Amazon.com. Rite Aid is a brick and mortal pharmacy chain, which is the third largest in the country, and they have over 3,800 outlets and we are their exclusive online pharmacy.

Actually, they handle they fulfillment. A customer can go to either RiteAid.com, which is powered by Drugstore.com order online, and pick up their purchase at a local Rite Aid. That is a huge piece of our pharmacy business. Another one of our main partners; Amazon.com, as you well know is one of the largest retailers on the web, and we have a 10 year relationship. Jeff Bezos, is also on our board, and we work continuously to refine the Marketing relationship with them. As a matter of fact, we have just signed another Marketing agreement, that will be for the next nine months to be the health and beauty provider on their website.

Absolutely, and the reason that this occurred, is simply that things change, and it was time to reevaluate our relationship. We entered into the original agreement in 2000, which was at the height of the Internet boom. Many things have changed, which have led to our current agreement. We were forced to reevaluate, and to make sure that the deal we had was a win for Amazon.com, Drugstore.com, and our consumers. This new deal is economically sound for us, is a win for Amazon.com, and for the customers on Amazon.com looking for our range or products on Amazon.com. The fact that the agreement has been renegotiated four times in the last two years, doesn?t mean we wouldn?t do it again next year.

Correct. That is very important. Fine tuning details is the only way to do a retail business.

We have growth in all of our categories, and as a matter of fact all of the categories have experienced double-digit growth. This has translated into 30-40% growth for out entire business. We work very hard finding niche, high margin extension categories; products in the extension categories, which you are unable to find in a regular drugstore. This gives us a level of uniqueness of shopping online. Not only do we carry three to four times the number of products found in a regular drugstore, but we are always adding new products and brands, which contributes to our growth.

Product is the key of retailing. It consists of finding the right product, marketing it correctly; to the right people at the right time. The best example I can give you is Crest White Strips?. When Crest White Strips were launched we sent free samples to our customer base, but due to our technology, we were able to target the people who would be most likely to purchase this product in the future. In addition to samples, we also pre-sold the product to those customers we had identified as being very interested, by their previous purchase in the teeth care section of the site, and previous interest/purchase of similar products. Using a variety of methods, from email, direct mail, to targeted promotions on the site we accounted for 18% of the total retail sales of the entire country in the first two weeks.

This product was sold through tens of thousands of different retail outlets, and we created such a huge demand, that this $40-50 high margin product, that we shipped over 15,000 units in the first day of launch.

Absolutely, that is the beauty in our business model. When people ask me if the company is valued properly. What I say is that we can be three times more effective than a brick and mortar operation, with half the investment.

We actually consider ourselves a direct marketing company. I am retailer, but the technology is completely based upon customizing the shopping experience. Cross selling the right products to the right consumer at the right time, is our focus.

The interesting thing is that we have competition, but at the same time the market is so huge, with it expanding to over $300 Billion in 2003. The category is going to expand by over $48 Billion in one year, between 2002 and 2003. All we need is $300 Million, so all we are targeting is less than one-half the percent of growth in the category. I believe that there is plenty of space in this category, with the main winners being more profitable. When we get to half a billion in sales, we will only need one-third to one-fourth the capital investment.

Correct. Our effectiveness is key. I am not worried about garnering the space, I am just focused on getting our peace of this very large market.

Exactly. I believe that 10% of all retail business will take place online. Today, no matter what metrics you use, we are the number one health and beauty retailer on the web. We need to continue to evolve and refine our strategy to be successful. There are a number of key factors: we are already in an extremely large market, the baby-boomers are again, and the population continues to become more and more computer literate. Additional key factors are that vanity drugs will continue to be developed, and preventive medicine will become key products in the coming years. There are so many advantages to this business model, all we have to do is fine to our technology, focus on the customer experience, and keep delivering excellent customer service.

Well, we actually coined the term ?Brick and Click.? Right after we launched our site, we immediately began clarifying with our customers, as to what services they wanted most from us. One of the key things they kept telling us was that there were times when they needed their prescription immediately. They would like to order online, and then drive down to the local pharmacy and pick it up. Working with Rite Aid, we created this type of solution for our customers.

When we first started the company, we knew the products we sell were available for everyone, and the partnership allowed us to target a large amount of online customers.

With these two partnerships we are able to target two key markets; those individuals that don?t shop online, and would prefer the ability to pick up their products at the local pharmacy, as well as those customers who prefer the online experience.

We are in business to make money, and the only thing that matters to us is profitability. You want to be in a profitable business that is growing, and in that order. First you want to make the company profitable, and then you want to grow the company. I am most focused on fine-tuning the retailing fundamentals within the company to make sure that we are growing in the most profitable fashion possible.