Online Drugstores Face Some Real-World Hurdles

There are barriers that may make it more difficult for Internet drugstores to win customers from their bricks-and-mortar counterparts.
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Drugstores have caught an online chill.

Shares of apparently healthy companies like

CVS

(CVS) - Get Report

and

Walgreen

(WAG)

began

acting sickly earlier this year after news spread that several startups would begin selling drugs, health-care products and beauty aids online. Since Feb. 24, the day

Amazon.com

(AMZN) - Get Report

said it took a minority stake in

drugstore.com

, shares of those two leading traditional drugstore chains have fallen 13%.

After watching Amazon, a virtual nothing three years ago, give real-world giant

Barnes & Noble

(BKS) - Get Report

a cyberscare, drugstore investors figure they have good reason to be skittish.

But while the Net holds innumerable promise, there are several barriers that may make it more difficult for Net drugstores to win customers from their real-world counterparts. Road blocks include: the red tape of insurance, the immediacy with which some prescriptions must be filled and the fact that many brick-and-mortar companies already rank high on convenience with services like pharmacy drive-throughs.

All of these issues conspire to make "the threat from online companies very small," says Meredith Adler, a

Lehman Brothers

analyst who tracks traditional drugs stores. She estimates that insurance claims account for 80% of the $102 billion retail pharmacy business -- an area that traditional companies have locked up thanks to contracts with HMOs and other third-party providers.

Adler adds that half of all prescriptions must be filled immediately. Online sites are mainly equipped for refills, and customers must wait to receive their medication in the mail.

And while shoppers have largely turned to the Net for convenience, pharmacy drive-through windows may prove even more expedient than ordering online, says Marie Griffin, editor of

Drug Store News

, an industry publication.

"Roughly 90% of Americans have a drugstore within two miles," Griffin says.

Debby Fry Wilson, a spokeswoman for the Redmond, Wash.-based drugstore.com, counters that "nobody thinks going to the drugstore is anything but a chore. Nobody views it as something they wish they could do more of."

As for losing out on insurance contracts, Wilson says it's not an issue. She estimates that the uninsured prescription business totals $25 billion annually. "Even if we never get reimbursed, that's a big market," says Wilson, who declined to provide drugstore.com's sales figures.

She says online drugs stores will win consumers by empowering them. "As customers, we've had very little control over purchasing these products," she says. "We've been conditioned to buy them in a setting with a limited selection, no information and very little privacy. Customers have been operating in the blind and letting the big chain drugstores and insurance companies tell them how it will be."

drugstore.com employs 40 pharmacists who research customer inquires and respond within 24 hours. By contrast, Wilson says, "filling a prescription in a chain drugstore usually means a 45-minute wait and very little interaction with a pharmacist."

The Web site, which has been operating for six weeks, also boasts resident beauty experts, a buying guide that details some 17,000 products, a drug index that allows customers to compare prices and a special section dedicated to pregnancy and baby issues. Customers can access this information around the clock from the privacy of their homes, which Wilson and other online proponents are hoping will prove more comfortable than asking an in-store pharmacist how a certain wart-removal cream works in front of nosy neighbors.

Still, researching prescriptions online is different from actually ordering medicine through the mail. Griffin, the editor, points out that insurance companies have been offering cost-incentive, mail-order programs for prescriptions like birth-control pills for years. "Even with the incentive of saving money, it's still a small portion -- maybe 15% -- of the overall market," she says. "Prescriptions are a serious thing," she continues, adding that consumers don't want to be faced with the question: "'Is the blue pill that I got in the mail really what I'm supposed to take?' "

Backing up that concern is research from

Jupiter Communications

showing that only 10% of women and even fewer men actually buy the product online after researching it. That compares with 50% of men and women who purchase books via the Web. True, the online book business has been around longer.

Still, before writing the obituaries of traditional drugstore chains, perhaps a second opinion is in order.

A Who's Who of Drugs Online

The Newcomers

drugstore.com: Aligned with two Internet titans, Amazon.com, which owns a minority interest, and venture-capital firm Kleiner Perkins Caufield & Byers, which is backing the company.

PlanetRx: A three-year deal with AOL gives it instant access to 15 million households.

Soma.com: Although it recently signed a contract with Medicare, the firm may be at a marketing disadvantage given its obscure name.

Real-World Players

CVS: Offers the HealthTracker for personal medical records as well as prescription refills, photos and greeting cards online.

Eckerd: E-pharmacy and e-photos.

Rite Aid: Special programs like "Mother's Day Mammograms," and provides natural remedies as part of the Vitamin Institute.

Walgreen: Expects to launch a full site by year-end.