In-store & Internet Marketing
In-store & Internet Marketing
Drug Store News
ATLANTA -- In many respects, the Internet has raised more questions than it has answered. This certainly is true in the retail channel, where many companies, both large and small, are struggling to develop winning Internet strategies by answering some basic operating questions.
Does the Internet represent an incremental growth opportunity? Will it change the way consumers get information and shop? Can it be a profitable business?
Those are just a few of the questions facing retailers today. To help find some answers, Drug Store News and the National Association of Chain Drug Stores co-sponsored the In-Store and Internet Marketing conference here last month. As part of the conference, a distinguished group of retailers addressed these issues and others during a panel discussion moderated by Drug Store News editor-in-chief and associate publisher Marie Griffin. Griffin led the panel of five retailers in a discussion of Internet retailing, electronic marketing and possible avenues of vendor participation in e-commerce.
The panelists included Larry Zigerelli, executive vice president of marketing for CVS; John Gleeson, vice president of corporate strategy for Walgreens; Tim Ziemke, senior vice president of marketing and merchandising at Drug Emporium; John Roehm, director of electronic marketing for the drug division of Albertson's; and Mike Concannon, director of manufacturer relations for drugstore.com.
Following is an edited report from that panel discussion.
Marie Griffin: How do you view the Internet?
Larry Zigerelli: Intuitively, we see e-retailing as a logical, natural channel extension of our overall convenience and value strategy.
Looking at our proposition of what CVS had to offer, it seemed clear from beginning that an integrated bricks and clicks model would be the best strategy. Our IT department has been integrating the CVS and cvs.com infrastructures so there will be one common business base, one centralized conduit to customers whether they shop in a CVS store or the CVS Web site.
Today, when a CVS customer buys a prescription and other items online, two-thirds of those shoppers elect to pick up their purchase in their neighbor CYS store rather than have it shipped to them.
Online shopping seems to be perceived as the same as phoning in a prescription refill to a store.
Online customers have a tendency to do more stock-up shopping. As a result, the online shopper buys in large quantities and generates a higher average ticket: the average front-end ring at CVS.com is $40 compared with $10 in the stores.
The model that has emerged is one we believed would happen from the beginning. It is a seamless shopping experience to the customer.
John Roehm: We had the same feelings as Larry. We wanted a platform that supported the whole organization. We have different name plates for our stores, so there were opportunities for our drug and food stores to take the expertise of both parts of our organization and to come together to provide more consumer value.
Mike Concannon: We are an Internet-centric business that has gone into partnership with Rite Aid. We use net technologies to build personal relationships with our customers so we can empower them to improve their health and well being. It was important for us to look for ways to work with partners like Rite Aid and with manufacturers to create added value for our customers.
Rite Aid has developed strong customer relationships over a long period of time. We think that's a competitive advantage for us.
We use our brick-and-mortar partner to create great service for our pharmacy-centric customers. It's worked out fantastically marrying those two things up.
We're the sole distributor of General Nutrition Center products on the Internet. Wellness is a very fragmented business. GNC with 5,000 stores is the biggest brand in wellness. Drugstore.com today has a GNC store within our online store. It's the same relationship we have with Rite Aid.
Tim Ziemke: Drug Emporium through its partnership with Vitamins.com and HealthCentral.com has the same kind of triangle base. For us to offer 10,000 to 12,000 SKUs of vitamins, nutraceuticals and related health products in our stores would be an inventory nightmare, but to have it sitting in a distribution center in Louisville, we're able to handle a global business. It's a pretty good deal.
Vitamins and pharmacy rank as No. 1 and No. 2 in what we are offering to our customers.
John Gleeson: Through our pharmacy, we have terrific relationships with customers. Over the past seven years, we built a large pharmacy database with over 45 million families, and leveraging that database has really extended over into our Internet business. Our big thing is not so much to have an Internet pharmacy per se, but to ensure that our customers are able to access our stores however they want, through a phone, a store, a fax. We want our customers to have all kinds of convenient access.
Griffin: Jupiter Communications projects that online consumer health commerce spending will climb from $200 million in 1999 to $9.8 billion by 2004. That estimate includes sales of prescription pharmaceuticals, over-the-counter drugs, nutraceuticals [vitamins and nutritional supplements], personal care products [health and beauty aids] and medical supplies. How realistic are such expectations? How big a role will e-retailing play in pharmacy?
Gleeson: I can't estimate how far e-pharmacy sales will develop as far as the general public goes, but it will grow.
But our hope is that it will become an excellent way to share information with our customers. I'm not sure I can call that a business you can quantify in dollars, but it is a way to create intimate sharing of information with customers about their health care.
It's very difficult in the retail environment to provide customers with that kind of relationship. The Internet will extend beyond what pharmacists can deliver today in terms of information.
Ziemke: Content will have a lot to do with growth. If the customers are not getting as much good content today as they should, then that becomes one more service we can offer them.
Concannon: Did anyone make the right prediction about personal computers, supercenters, drive-through pharmacies? You learn and progress from there. One projection is that health and beauty sales on the Internet are going to $18 billion by 2004 with 80 percent of that being from pharmacy sales. Does that come true? Does it come true in that time frame? I don't know. For consumers learning to shop online, it is almost like learning to use personal computers. It's still not easy enough for them. It's still too hard to shop. But what will happen when there is more marketing muscle behind the Internet? Today, it's still hard to predict.
Roehm: As content evolves and as it can be linked to patient medical conditions or disease states, people will be more receptive toward that.
We're beginning now to get the infrastructure in place. We're dealing with privacy concerns.
But if consumers understand the types of medications they are on, they could make better front-end purchasing decisions, particularly with respect to OTC and vitamin products and the way they can interact with prescription products.
Zigerelli: When we were contemplating launching an online presence by buying soma.com (which became CVS.com), the first question we asked was: Do we think this business will grow to be big enough to fundamentally change the business model?
If the answer is no, then whether it becomes 5 percent or 12 percent, doesn't matter.
We concluded the answer was no, and that's because the viability of Internet retailing has to be determined on a category by category basis.
If you're in the computer business, which entails heavy analysis of what to buy, you can really get that information over the Internet and then make a buying decision. That's a value proposition to consumers.
With us, the value proposition category is not acute prescriptions, it is mail order. Now the mail order business is about 12 percent of pharmacy sales, and the biggest share of that business on the Internet is Merck Medco and that's because Merck converted their mail order business to the Net. That is working because the Internet is a better value proposition for mail order consumers.
Vitamins are also high on the list of what sells on the Net. This is also a business with a strong mail order component. If you take a lot of vitamins, it's hard to keep up with trends. Shoppers have to go to more than one place to find what they need. If they find a good mail order business, they buy from it. So today, companies like Vitamin Shoppe are converting their mail order business to the Internet.
Look at the rest of our businesses, think about how much time it takes to get on a computer, go down a list, and order. For the time it takes, you could have already gone to CVS or Walgreens, gotten what you want, and you're home or at work.
How big a business will it get to be? For us, not big enough to stop building 400 brick-and-mortar stores a year.
Griffin: Today, the consumer is in the driver's seat more than ever and that's because, thanks to the Internet, they have more information than ever before. In relation to our channel, to what extent is there a revolution in customers; to what extent have they changed their shopping habits?
Ziemke: You can hear the distant hoof-beats, but can't see the horses yet. There have been all kinds of changes going on in the way people do business, club stores that didn't exist until recently, specialty stores, category killers, so I think this is another evolution.
We don't know how big it will be, but it will develop first primarily in areas where there is information and selection issues. As computer use gets better, and as people start to find the value in it, it will expand.
Concannon: If you look at our business, we had 1.2 million new customers coming into our third quarter.
Of course, you could say that since Wal Mart gets 100 million customers a week, what's so great about 1.2 million. But in a very short period of time and in a learning organization, we are showing good growth. And in our last quarter, 59 percent of our orders were from repeat customers.
So those are some underlying dynamics and fundamentals that are really solid. But we never believed that stores were going to be empty. For us to be a pretty big business in a relatively short period of time, there is a lot of growth and dynamics that will take place.
But you also will be doing more value added services on the Internet. You can counsel patients, provide personalized information, help them search and be very precise with purchases. But then the question is if CVS.com does a very good job on the Internet, what happens when that customer goes into a CVS store?
Does the store now have to deliver differently to match what the Internet offers? Does it mean better counseling by pharmacists in the stores? There are a lot if different ways to see what the influences will be, not just shopping online. The ripples will be from more than just transaction purchases on the Internet.
Multi-channel shopping
Griffin: Everyone is talking about customers who shop in stores and customers who shop online. What about the evolution of multi-channel marketing? Does it currently happen?
Roehm: Our challenge is to understand where it is today and service our customers in all our formats, whether physical or not. We have to provide services and figure out where our customers are going, then build the formats that will service consumer needs in ways that make sense for them and us. There will be higher expectations for our stores because of the Internet, and it's up to us to meet those challenges.
Zigerelli: In existing markets, the customer who is most likely to come back regularly to CVS.com is our key customer using us in a multi-channel way.
In markets with loyalty cards, the number of customers using their cards on the Internet is growing.
If you think about it, the average consumer today shops more multi-outets than ever before. Five or 10 years ago, a woman who shopped at Saks would never admit that she also shopped Marshalls. But today, it doesn't matter because you're a consummate shopper who might find something on the Internet as well as in the stores. This whole concept of shopping anywhere any time is true.
How hard is it to integrate?
Griffin: What does it take to create an integrated model where the consumer can seamlessly move from the store and back?
Gleeson: We made a $150 million investment in our pharmacy system and today that system lets people access us on the Internet, through the mail, through the phone, through the fax and through the stores.
Ultimately, we will also have to have the same type of integrated infrastructure for the front end.
Until we get to the point where we can provide loyalty aspects however, it will be difficult to tie them into stores through the front end.
We think the Internet is best for categories that are complicated or information intensive like cosmetics, computers, medicated shampoos. There are probably 80 products on our site that relate to that.
But they all relate to something that has to do with product ingredients, and when you get into that, you start to realize that consumers are looking more at solutions and less at brands. When a consumer can go in with a condition like dermatitis and look at brands across product ingredients, you've got a whole new approach at brand marketing.
Is one-to-one marketing working?
Griffin: How do you balance respect for the customer and their privacy without leaving on the table the opportunities to serve them better one to one?
Zigerelli: We are finding that when you ask people to opt in for health care, the results are much more positive when we say we are CVS. We have your prescription records, and we are keeping them to ourselves. We are managing the one-to-one relationship. We are not giving them to a third party. That's a big plus.
Gleeson: Our policy is not to share private information. We don't share this information with anyone. I don't know how many millions of dollars we've left on the table, all of us have.
It's part of the deal in pharmacy that privacy is way up on the top of the list. The issues being dealt with by people in more general merchandise categories on the Internet have been dealt with by us for many years.
It boils down to this: We share the information only with people within our company who have something to do with the actual services they are providing and nothing beyond that.
Concannon: Particularly as a new pharmacy building new trust and new reputations, we have to be that much more careful.
We separate the person's account from their credit card until they're at the end of their transaction. Even if they were intercepted, one wouldn't be any good without the other, and it wouldn't reveal anything.
And with the e-mail reminders, it looks a little unfriendly because it says: 'Dear so and so, prescription l23xyz is ready to be refilled.' There's no mention of what that drug is or what it's usage is for.
We saw from day one that the privacy issues on the prescription side and the privacy issues on the front of the store have a significantly disproportionate rank within the store. Anything you don't want to be asking your next door neighbor about does extremely well on the site. That's our currency. That's the one thing that can't be squandered.
Ziemke: We use target e-mail as a reminder so if it's a customer we haven't seen in a while, they'll get a reminder, a special offer, to come back.
Somebody who orders frequently, but with smaller orders, will get a targeted e-mail that will suggest that we will give a $20 discount on orders over $80 or more.
It's more of a targeted e-mail based on slicing and dicing of demographics and not so much product orientated.
Roehm: We tend to use the people who opt in for reminders and currently, about 97 percent have opted in for e-mail reminders for front of store products.
As time goes by, consumers will be more likely to log on and ask to consult with an online pharmacist in a secure environment rather than opt in to be sent e-mail.
The information relevant to pharmacy we keep close to our vest.
Zigerelli: In markets where we have in-store loyalty programs, we ask consumers when they sign up if they are interested in finding out more about certain information categories like stress or heart disease, and we found that service is tremendously popular.
If a consumer believes they are opting into something valuable to them that they chose, they are much more likely to see that as care-taking rather than going after them to sell more products.
Griffin: How are you changing the way you market and acquire customers?
Concannon: Because of the dictates of the market and because we're getting a little smarter, we've gone from a dozen affiliate or portal deals down to three or four.
One of our biggest deals is with our on-going partnership with Amazon.com. Amazon is a part owner in drugstore.com, and we bought the health and beauty tab at Amazon. And now we're part of the pervasive navigation at Amazon in each page of the store, and that has been a significant source of customers for us.
In today's tight capital marketplace, marketing is a matter of where we put focused resources to draw the most customers.
Rite Aid is currently marketing the drugstore.com brand in a half dozen ways, including weekly circulars, on register receipts, at the front end, in TV advertising and in pharmacies.
Gleeson: Because Walgreens stores have substantial traffic count, one of our major new marketing endeavors is to get e-mail addresses into our systems, and we are actively promoting that in our stores. That does create a good channel for customers to visit the Web site.
But the main thing is to use the site as a logical extension of the stores and people naturally gravitate there if they are Internet users for their prescription services and other things. So we have not really gone through a major promotional campaign outside of that.
It would be very expensive to do a major television campaign just for walgreens.com.
Zigerelli: In the past, CVS has done some special television commercials to build awareness for its Internet store.
Now instead of television, we market CVS.com by tagging the Web site in all of our circulars, and we sometimes do a special page in the circulars with offers unique for CVS.com, which drives a lot of traffic.
On the Internet, we have just a couple of select partnerships to drive traffic. WebMD drives traffic that converts into sales and they get a piece of revenues back for that, so we're not spending millions of dollars up front to create traffic. We give them a piece of the sale after it happens so that the traffic that is being driven is financially affordable, and we also give WebMD advertising in our stores.
I think that, like Walgreens, what's important to us is that we have 20 million people every week coming into our stores with e-mail addresses, and that's our best source of advertising.
Evaluating marketing strategies
Griffin: Which marketing vehicles have really worked and which haven't?
Ziemke: What hasn't worked for us are the AOLs of the world. It turns out that those types of things don't even come close to good affiliate programs and utilizing in-store opportunities. We've done selected e-mail, but we've never gone the TV route. Too expensive.
But banner advertising didn't seem to produce at all. They were extremely cost ineffective.
Concannon: We will work with the manufacturers to give the customer what they want and at the same time, the manufacturers can address strategic brand objectives. They can tell their brand story. They can provide consumers with the information they were seeking.
What we did is approach the manufacturers and say, listen, you know your brands, your categories and your consumers better than we ever will, and what we know is how to create a really great shopping experience and use the personal experience of the Internet to draw customers, so to merge these two is pretty potent, and we've been pleased at how successful it's been so far--a win for everyone.
Brands on the 'Net
Griffin: How are the branded manufacturers fitting in with what retailers are doing online?
Gleeson: We would all like to see a way for our customers and our store associates to have Internet access methods to get product information.
It's a terrific new avenue and it's a terrific opportunity to enhance not only the shopping experience, but the information content in the stores.
Beyond that, there are suppliers that have more direct involvement in this. There is digital photography. We will see deep involvement with suppliers on digital photography.
Roehm: We are in the process of developing brand strategies with manufacturers. We're looking forward to reaching the point where we can offer manufacturers an opportunity to market within our environment both within the stores and on the Internet.
Eventually, we want to slice and dice information, particularly on things like product ingredients, so consumers can make buying decisions not just on price and value, but on how product ingredients in different products might interact. We will see shopping evolve to include quadrants of different types of products to fit consumer needs in different areas of our environment.
Zigerelli: Marketing with manufacturers is an excellent way to further strengthen partnerships.
We're currently doing a brand marketing program with Kodak. We were the first, I think, with Kodak to combine what we are doing in the stores with what we are doing on the Internet.
So you can come into CVS stores and if you want to get two-day processing, you can get single prints. We give you a code, and if you come back two days later, we have already loaded the pictures onto CVS.com so you have pictures to send to family and friends, even if you don't have a digital camera.
We're doing similar things with the pharmaceutical companies. We have an allergy channel for Claritin on CVS.com. We put Claritin on the prescription bags in stores. We have an endcap for Claritin, so we're looking for ways to create an enhanced shopping experience for the consumer in an integrated way.
We tie in with the Web sites of our partners when we want to hype an event. If, for example, Coke is going to do a special celebrity event, then we will tie into that event on CVS.com by inviting consumers to enter the contest online much in the same way as we do in our circulars for the stores.
Griffin: Could a supplier become an Internet competitor?
Zigerelli: Most manufacturers that we do business with have concluded that trying to become a retailer is not exactly the expertise that manufacturers have.
But just as we have a right to sell store brands that compete with our manufacturer's brands, manufacturers have a right to sell on the Internet if they choose.
But the partnerships that I have with suppliers are very deep in terms of sharing information. With that deep a partnership, as a manufacturer, I would think twice about the death of the partnership because it becomes more complicated. I don't know of any supplier that we do business with today that I feel threatened with in terms of competing on the Internet. What consumer would want to go to Gillette.com to buy two razors or to Coke to buy a can of Coke? That's not the way the consumer shops. I just don't see it as an issue at this time.
Ziemke: I agree with Larry, They're not in the retail business. To try to get into a fulfillment process to take care of a limited number of people, it just runs contrary to their mission statements. I don't know of any manufacturer who is aggressively pursuing it.
Gleeson: It is difficult enough to sell convenience-oriented merchandise on the Internet, even as a retailer.
It is even more difficult to do that as a manufacturer without a full assortment, unless you're in a very specialized business with specialized products in which case, we are probably not carrying it anyway.
Opportunities ahead
Griffin: What is the biggest near-term opportunity on the horizon?
Ziemke: Providing a larger offering to a larger customer base, particularly with products that you cannot afford to put into your mix on a store-by-store basis.
You can take a category like vitamins and nutritionals, and you can have a huge offering. When you let people know it's there, it becomes a service issue. It lets you say to customers: Look what else we have for you.
Concannon: We're very fond of saying that our biggest competitor is not stores or other dot-coms. It's ingrained customer buying habits. They're use to driving to stores and picking the stuff up, so the opportunity to change customer behavior rests on us making it as easy, convenient and intuitive as possible.
We have the mechanisms to drive traffic to our site, so if we have what they want, and you're covering the four P's of retailing and making it easy to shop the store, I'm confident that we can win the customer. That's what it comes down to. It cuts into things like having the right items. That's how we're going to win the day by making it very easy and intuitive.
Roehm: You have to continue to evolve and redefine the site both on the drug and food side. There will be integrations with the distribution centers that are not commonplace today. We need further integration throughout our stores and service areas. We need expansion of product selection and more of an integration between food and drug operations.
Zigerelli: The key challenge is to continue to enhance the shopper experience and to grow, while at the same time making the economics work better and better.
We have integrated a lot. We still have room for integration. Photo is totally integrated. The same category manager handles the whole business for stores and the Internet.
We are getting tremendous success with incremental sales without incremental people. We expect to make money in the next year or so. To be able to accomplish that while keeping up with consumer demands on the Internet is our key challenge.
Gleeseon: Because of the pharmacy, drug store operators have a bond with our customer that doesn't exist in other types of convenience outlets, and a lot of that is because of the information that we store on their prescription history.
There's a very strong feeling on the part of consumers that those stores have my information. What we will experience on the Internet is the ability to extend that type of advantage with that customer relationship in other areas, as well.
I think as we go forward, the people who are able to leverage that customer technology to lock that bond in are going to be the real winners, and the Internet is the ideal medium to build these relationships. It is the No. 1 opportunity for the future.
Drug Store News
ATLANTA -- In many respects, the Internet has raised more questions than it has answered. This certainly is true in the retail channel, where many companies, both large and small, are struggling to develop winning Internet strategies by answering some basic operating questions.
Does the Internet represent an incremental growth opportunity? Will it change the way consumers get information and shop? Can it be a profitable business?
Those are just a few of the questions facing retailers today. To help find some answers, Drug Store News and the National Association of Chain Drug Stores co-sponsored the In-Store and Internet Marketing conference here last month. As part of the conference, a distinguished group of retailers addressed these issues and others during a panel discussion moderated by Drug Store News editor-in-chief and associate publisher Marie Griffin. Griffin led the panel of five retailers in a discussion of Internet retailing, electronic marketing and possible avenues of vendor participation in e-commerce.
The panelists included Larry Zigerelli, executive vice president of marketing for CVS; John Gleeson, vice president of corporate strategy for Walgreens; Tim Ziemke, senior vice president of marketing and merchandising at Drug Emporium; John Roehm, director of electronic marketing for the drug division of Albertson's; and Mike Concannon, director of manufacturer relations for drugstore.com.
Following is an edited report from that panel discussion.
Marie Griffin: How do you view the Internet?
Larry Zigerelli: Intuitively, we see e-retailing as a logical, natural channel extension of our overall convenience and value strategy.
Looking at our proposition of what CVS had to offer, it seemed clear from beginning that an integrated bricks and clicks model would be the best strategy. Our IT department has been integrating the CVS and cvs.com infrastructures so there will be one common business base, one centralized conduit to customers whether they shop in a CVS store or the CVS Web site.
Today, when a CVS customer buys a prescription and other items online, two-thirds of those shoppers elect to pick up their purchase in their neighbor CYS store rather than have it shipped to them.
Online shopping seems to be perceived as the same as phoning in a prescription refill to a store.
Online customers have a tendency to do more stock-up shopping. As a result, the online shopper buys in large quantities and generates a higher average ticket: the average front-end ring at CVS.com is $40 compared with $10 in the stores.
The model that has emerged is one we believed would happen from the beginning. It is a seamless shopping experience to the customer.
John Roehm: We had the same feelings as Larry. We wanted a platform that supported the whole organization. We have different name plates for our stores, so there were opportunities for our drug and food stores to take the expertise of both parts of our organization and to come together to provide more consumer value.
Mike Concannon: We are an Internet-centric business that has gone into partnership with Rite Aid. We use net technologies to build personal relationships with our customers so we can empower them to improve their health and well being. It was important for us to look for ways to work with partners like Rite Aid and with manufacturers to create added value for our customers.
Rite Aid has developed strong customer relationships over a long period of time. We think that's a competitive advantage for us.
We use our brick-and-mortar partner to create great service for our pharmacy-centric customers. It's worked out fantastically marrying those two things up.
We're the sole distributor of General Nutrition Center products on the Internet. Wellness is a very fragmented business. GNC with 5,000 stores is the biggest brand in wellness. Drugstore.com today has a GNC store within our online store. It's the same relationship we have with Rite Aid.
Tim Ziemke: Drug Emporium through its partnership with Vitamins.com and HealthCentral.com has the same kind of triangle base. For us to offer 10,000 to 12,000 SKUs of vitamins, nutraceuticals and related health products in our stores would be an inventory nightmare, but to have it sitting in a distribution center in Louisville, we're able to handle a global business. It's a pretty good deal.
Vitamins and pharmacy rank as No. 1 and No. 2 in what we are offering to our customers.
John Gleeson: Through our pharmacy, we have terrific relationships with customers. Over the past seven years, we built a large pharmacy database with over 45 million families, and leveraging that database has really extended over into our Internet business. Our big thing is not so much to have an Internet pharmacy per se, but to ensure that our customers are able to access our stores however they want, through a phone, a store, a fax. We want our customers to have all kinds of convenient access.
Griffin: Jupiter Communications projects that online consumer health commerce spending will climb from $200 million in 1999 to $9.8 billion by 2004. That estimate includes sales of prescription pharmaceuticals, over-the-counter drugs, nutraceuticals [vitamins and nutritional supplements], personal care products [health and beauty aids] and medical supplies. How realistic are such expectations? How big a role will e-retailing play in pharmacy?
Gleeson: I can't estimate how far e-pharmacy sales will develop as far as the general public goes, but it will grow.
But our hope is that it will become an excellent way to share information with our customers. I'm not sure I can call that a business you can quantify in dollars, but it is a way to create intimate sharing of information with customers about their health care.
It's very difficult in the retail environment to provide customers with that kind of relationship. The Internet will extend beyond what pharmacists can deliver today in terms of information.
Ziemke: Content will have a lot to do with growth. If the customers are not getting as much good content today as they should, then that becomes one more service we can offer them.
Concannon: Did anyone make the right prediction about personal computers, supercenters, drive-through pharmacies? You learn and progress from there. One projection is that health and beauty sales on the Internet are going to $18 billion by 2004 with 80 percent of that being from pharmacy sales. Does that come true? Does it come true in that time frame? I don't know. For consumers learning to shop online, it is almost like learning to use personal computers. It's still not easy enough for them. It's still too hard to shop. But what will happen when there is more marketing muscle behind the Internet? Today, it's still hard to predict.
Roehm: As content evolves and as it can be linked to patient medical conditions or disease states, people will be more receptive toward that.
We're beginning now to get the infrastructure in place. We're dealing with privacy concerns.
But if consumers understand the types of medications they are on, they could make better front-end purchasing decisions, particularly with respect to OTC and vitamin products and the way they can interact with prescription products.
Zigerelli: When we were contemplating launching an online presence by buying soma.com (which became CVS.com), the first question we asked was: Do we think this business will grow to be big enough to fundamentally change the business model?
If the answer is no, then whether it becomes 5 percent or 12 percent, doesn't matter.
We concluded the answer was no, and that's because the viability of Internet retailing has to be determined on a category by category basis.
If you're in the computer business, which entails heavy analysis of what to buy, you can really get that information over the Internet and then make a buying decision. That's a value proposition to consumers.
With us, the value proposition category is not acute prescriptions, it is mail order. Now the mail order business is about 12 percent of pharmacy sales, and the biggest share of that business on the Internet is Merck Medco and that's because Merck converted their mail order business to the Net. That is working because the Internet is a better value proposition for mail order consumers.
Vitamins are also high on the list of what sells on the Net. This is also a business with a strong mail order component. If you take a lot of vitamins, it's hard to keep up with trends. Shoppers have to go to more than one place to find what they need. If they find a good mail order business, they buy from it. So today, companies like Vitamin Shoppe are converting their mail order business to the Internet.
Look at the rest of our businesses, think about how much time it takes to get on a computer, go down a list, and order. For the time it takes, you could have already gone to CVS or Walgreens, gotten what you want, and you're home or at work.
How big a business will it get to be? For us, not big enough to stop building 400 brick-and-mortar stores a year.
Griffin: Today, the consumer is in the driver's seat more than ever and that's because, thanks to the Internet, they have more information than ever before. In relation to our channel, to what extent is there a revolution in customers; to what extent have they changed their shopping habits?
Ziemke: You can hear the distant hoof-beats, but can't see the horses yet. There have been all kinds of changes going on in the way people do business, club stores that didn't exist until recently, specialty stores, category killers, so I think this is another evolution.
We don't know how big it will be, but it will develop first primarily in areas where there is information and selection issues. As computer use gets better, and as people start to find the value in it, it will expand.
Concannon: If you look at our business, we had 1.2 million new customers coming into our third quarter.
Of course, you could say that since Wal Mart gets 100 million customers a week, what's so great about 1.2 million. But in a very short period of time and in a learning organization, we are showing good growth. And in our last quarter, 59 percent of our orders were from repeat customers.
So those are some underlying dynamics and fundamentals that are really solid. But we never believed that stores were going to be empty. For us to be a pretty big business in a relatively short period of time, there is a lot of growth and dynamics that will take place.
But you also will be doing more value added services on the Internet. You can counsel patients, provide personalized information, help them search and be very precise with purchases. But then the question is if CVS.com does a very good job on the Internet, what happens when that customer goes into a CVS store?
Does the store now have to deliver differently to match what the Internet offers? Does it mean better counseling by pharmacists in the stores? There are a lot if different ways to see what the influences will be, not just shopping online. The ripples will be from more than just transaction purchases on the Internet.
Multi-channel shopping
Griffin: Everyone is talking about customers who shop in stores and customers who shop online. What about the evolution of multi-channel marketing? Does it currently happen?
Roehm: Our challenge is to understand where it is today and service our customers in all our formats, whether physical or not. We have to provide services and figure out where our customers are going, then build the formats that will service consumer needs in ways that make sense for them and us. There will be higher expectations for our stores because of the Internet, and it's up to us to meet those challenges.
Zigerelli: In existing markets, the customer who is most likely to come back regularly to CVS.com is our key customer using us in a multi-channel way.
In markets with loyalty cards, the number of customers using their cards on the Internet is growing.
If you think about it, the average consumer today shops more multi-outets than ever before. Five or 10 years ago, a woman who shopped at Saks would never admit that she also shopped Marshalls. But today, it doesn't matter because you're a consummate shopper who might find something on the Internet as well as in the stores. This whole concept of shopping anywhere any time is true.
How hard is it to integrate?
Griffin: What does it take to create an integrated model where the consumer can seamlessly move from the store and back?
Gleeson: We made a $150 million investment in our pharmacy system and today that system lets people access us on the Internet, through the mail, through the phone, through the fax and through the stores.
Ultimately, we will also have to have the same type of integrated infrastructure for the front end.
Until we get to the point where we can provide loyalty aspects however, it will be difficult to tie them into stores through the front end.
We think the Internet is best for categories that are complicated or information intensive like cosmetics, computers, medicated shampoos. There are probably 80 products on our site that relate to that.
But they all relate to something that has to do with product ingredients, and when you get into that, you start to realize that consumers are looking more at solutions and less at brands. When a consumer can go in with a condition like dermatitis and look at brands across product ingredients, you've got a whole new approach at brand marketing.
Is one-to-one marketing working?
Griffin: How do you balance respect for the customer and their privacy without leaving on the table the opportunities to serve them better one to one?
Zigerelli: We are finding that when you ask people to opt in for health care, the results are much more positive when we say we are CVS. We have your prescription records, and we are keeping them to ourselves. We are managing the one-to-one relationship. We are not giving them to a third party. That's a big plus.
Gleeson: Our policy is not to share private information. We don't share this information with anyone. I don't know how many millions of dollars we've left on the table, all of us have.
It's part of the deal in pharmacy that privacy is way up on the top of the list. The issues being dealt with by people in more general merchandise categories on the Internet have been dealt with by us for many years.
It boils down to this: We share the information only with people within our company who have something to do with the actual services they are providing and nothing beyond that.
Concannon: Particularly as a new pharmacy building new trust and new reputations, we have to be that much more careful.
We separate the person's account from their credit card until they're at the end of their transaction. Even if they were intercepted, one wouldn't be any good without the other, and it wouldn't reveal anything.
And with the e-mail reminders, it looks a little unfriendly because it says: 'Dear so and so, prescription l23xyz is ready to be refilled.' There's no mention of what that drug is or what it's usage is for.
We saw from day one that the privacy issues on the prescription side and the privacy issues on the front of the store have a significantly disproportionate rank within the store. Anything you don't want to be asking your next door neighbor about does extremely well on the site. That's our currency. That's the one thing that can't be squandered.
Ziemke: We use target e-mail as a reminder so if it's a customer we haven't seen in a while, they'll get a reminder, a special offer, to come back.
Somebody who orders frequently, but with smaller orders, will get a targeted e-mail that will suggest that we will give a $20 discount on orders over $80 or more.
It's more of a targeted e-mail based on slicing and dicing of demographics and not so much product orientated.
Roehm: We tend to use the people who opt in for reminders and currently, about 97 percent have opted in for e-mail reminders for front of store products.
As time goes by, consumers will be more likely to log on and ask to consult with an online pharmacist in a secure environment rather than opt in to be sent e-mail.
The information relevant to pharmacy we keep close to our vest.
Zigerelli: In markets where we have in-store loyalty programs, we ask consumers when they sign up if they are interested in finding out more about certain information categories like stress or heart disease, and we found that service is tremendously popular.
If a consumer believes they are opting into something valuable to them that they chose, they are much more likely to see that as care-taking rather than going after them to sell more products.
Griffin: How are you changing the way you market and acquire customers?
Concannon: Because of the dictates of the market and because we're getting a little smarter, we've gone from a dozen affiliate or portal deals down to three or four.
One of our biggest deals is with our on-going partnership with Amazon.com. Amazon is a part owner in drugstore.com, and we bought the health and beauty tab at Amazon. And now we're part of the pervasive navigation at Amazon in each page of the store, and that has been a significant source of customers for us.
In today's tight capital marketplace, marketing is a matter of where we put focused resources to draw the most customers.
Rite Aid is currently marketing the drugstore.com brand in a half dozen ways, including weekly circulars, on register receipts, at the front end, in TV advertising and in pharmacies.
Gleeson: Because Walgreens stores have substantial traffic count, one of our major new marketing endeavors is to get e-mail addresses into our systems, and we are actively promoting that in our stores. That does create a good channel for customers to visit the Web site.
But the main thing is to use the site as a logical extension of the stores and people naturally gravitate there if they are Internet users for their prescription services and other things. So we have not really gone through a major promotional campaign outside of that.
It would be very expensive to do a major television campaign just for walgreens.com.
Zigerelli: In the past, CVS has done some special television commercials to build awareness for its Internet store.
Now instead of television, we market CVS.com by tagging the Web site in all of our circulars, and we sometimes do a special page in the circulars with offers unique for CVS.com, which drives a lot of traffic.
On the Internet, we have just a couple of select partnerships to drive traffic. WebMD drives traffic that converts into sales and they get a piece of revenues back for that, so we're not spending millions of dollars up front to create traffic. We give them a piece of the sale after it happens so that the traffic that is being driven is financially affordable, and we also give WebMD advertising in our stores.
I think that, like Walgreens, what's important to us is that we have 20 million people every week coming into our stores with e-mail addresses, and that's our best source of advertising.
Evaluating marketing strategies
Griffin: Which marketing vehicles have really worked and which haven't?
Ziemke: What hasn't worked for us are the AOLs of the world. It turns out that those types of things don't even come close to good affiliate programs and utilizing in-store opportunities. We've done selected e-mail, but we've never gone the TV route. Too expensive.
But banner advertising didn't seem to produce at all. They were extremely cost ineffective.
Concannon: We will work with the manufacturers to give the customer what they want and at the same time, the manufacturers can address strategic brand objectives. They can tell their brand story. They can provide consumers with the information they were seeking.
What we did is approach the manufacturers and say, listen, you know your brands, your categories and your consumers better than we ever will, and what we know is how to create a really great shopping experience and use the personal experience of the Internet to draw customers, so to merge these two is pretty potent, and we've been pleased at how successful it's been so far--a win for everyone.
Brands on the 'Net
Griffin: How are the branded manufacturers fitting in with what retailers are doing online?
Gleeson: We would all like to see a way for our customers and our store associates to have Internet access methods to get product information.
It's a terrific new avenue and it's a terrific opportunity to enhance not only the shopping experience, but the information content in the stores.
Beyond that, there are suppliers that have more direct involvement in this. There is digital photography. We will see deep involvement with suppliers on digital photography.
Roehm: We are in the process of developing brand strategies with manufacturers. We're looking forward to reaching the point where we can offer manufacturers an opportunity to market within our environment both within the stores and on the Internet.
Eventually, we want to slice and dice information, particularly on things like product ingredients, so consumers can make buying decisions not just on price and value, but on how product ingredients in different products might interact. We will see shopping evolve to include quadrants of different types of products to fit consumer needs in different areas of our environment.
Zigerelli: Marketing with manufacturers is an excellent way to further strengthen partnerships.
We're currently doing a brand marketing program with Kodak. We were the first, I think, with Kodak to combine what we are doing in the stores with what we are doing on the Internet.
So you can come into CVS stores and if you want to get two-day processing, you can get single prints. We give you a code, and if you come back two days later, we have already loaded the pictures onto CVS.com so you have pictures to send to family and friends, even if you don't have a digital camera.
We're doing similar things with the pharmaceutical companies. We have an allergy channel for Claritin on CVS.com. We put Claritin on the prescription bags in stores. We have an endcap for Claritin, so we're looking for ways to create an enhanced shopping experience for the consumer in an integrated way.
We tie in with the Web sites of our partners when we want to hype an event. If, for example, Coke is going to do a special celebrity event, then we will tie into that event on CVS.com by inviting consumers to enter the contest online much in the same way as we do in our circulars for the stores.
Griffin: Could a supplier become an Internet competitor?
Zigerelli: Most manufacturers that we do business with have concluded that trying to become a retailer is not exactly the expertise that manufacturers have.
But just as we have a right to sell store brands that compete with our manufacturer's brands, manufacturers have a right to sell on the Internet if they choose.
But the partnerships that I have with suppliers are very deep in terms of sharing information. With that deep a partnership, as a manufacturer, I would think twice about the death of the partnership because it becomes more complicated. I don't know of any supplier that we do business with today that I feel threatened with in terms of competing on the Internet. What consumer would want to go to Gillette.com to buy two razors or to Coke to buy a can of Coke? That's not the way the consumer shops. I just don't see it as an issue at this time.
Ziemke: I agree with Larry, They're not in the retail business. To try to get into a fulfillment process to take care of a limited number of people, it just runs contrary to their mission statements. I don't know of any manufacturer who is aggressively pursuing it.
Gleeson: It is difficult enough to sell convenience-oriented merchandise on the Internet, even as a retailer.
It is even more difficult to do that as a manufacturer without a full assortment, unless you're in a very specialized business with specialized products in which case, we are probably not carrying it anyway.
Opportunities ahead
Griffin: What is the biggest near-term opportunity on the horizon?
Ziemke: Providing a larger offering to a larger customer base, particularly with products that you cannot afford to put into your mix on a store-by-store basis.
You can take a category like vitamins and nutritionals, and you can have a huge offering. When you let people know it's there, it becomes a service issue. It lets you say to customers: Look what else we have for you.
Concannon: We're very fond of saying that our biggest competitor is not stores or other dot-coms. It's ingrained customer buying habits. They're use to driving to stores and picking the stuff up, so the opportunity to change customer behavior rests on us making it as easy, convenient and intuitive as possible.
We have the mechanisms to drive traffic to our site, so if we have what they want, and you're covering the four P's of retailing and making it easy to shop the store, I'm confident that we can win the customer. That's what it comes down to. It cuts into things like having the right items. That's how we're going to win the day by making it very easy and intuitive.
Roehm: You have to continue to evolve and redefine the site both on the drug and food side. There will be integrations with the distribution centers that are not commonplace today. We need further integration throughout our stores and service areas. We need expansion of product selection and more of an integration between food and drug operations.
Zigerelli: The key challenge is to continue to enhance the shopper experience and to grow, while at the same time making the economics work better and better.
We have integrated a lot. We still have room for integration. Photo is totally integrated. The same category manager handles the whole business for stores and the Internet.
We are getting tremendous success with incremental sales without incremental people. We expect to make money in the next year or so. To be able to accomplish that while keeping up with consumer demands on the Internet is our key challenge.
Gleeseon: Because of the pharmacy, drug store operators have a bond with our customer that doesn't exist in other types of convenience outlets, and a lot of that is because of the information that we store on their prescription history.
There's a very strong feeling on the part of consumers that those stores have my information. What we will experience on the Internet is the ability to extend that type of advantage with that customer relationship in other areas, as well.
I think as we go forward, the people who are able to leverage that customer technology to lock that bond in are going to be the real winners, and the Internet is the ideal medium to build these relationships. It is the No. 1 opportunity for the future.
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