Virgin on Business: R.I.P., Drugstore.com

An Icon of the dot-com boom proves loss leaders can’t last forever.
| FROM THE PRINT EDITION |
 
 
 
Eighteen years isn’t much of a business lifespan, especially in a region that has companies from the Klondike gold rush still operating.  But the dot-com boom and bust might as well date from the Paleozoic Era for all the notice and influence those events command today. In the internet sector alone, too much history in the intervening years and too many companies compiling much fatter résumés allow little time for reflection on the first generation of dot-coms.
 
Every now and then, though, a news item surfaces to provide a refresher course on what it was that drove the formation of those dot-coms. Walgreens announced earlier in July it would shut down its Drugstore.com and Beauty.com websites by the end of September. The company says it wants to put more emphasis on its own online retailing site.
 
In one sense, Bellevue-based Drugstore.com was very much of its time. It favored a lowercase first letter, random capitalization being a typographical trend of the era. Incorporated in 1998, it went public just a year later at the height of dot-com froth, at $65 per share. That was a price driven not by its track record — it had little at that point — but by a mania for any internet-related investment, especially if it involved online retailing.
 
As internet retailing ventures go, Drugstore.com made more sense than most. Health-and-beauty items tend to be small, light and easy to ship. Returns aren’t the problem that they are with apparel. And shopping at a drugstore is not one of life’s rewarding experiences; no one browses to check out the latest in toothpaste.
 
That the idea had some merit is validated by the fact that Drugstore.com did not meet the same early demise of its contemporaries. It endured as an independent until 2011, but it was hardly a flourishing existence. It was propped up with capital infusions from investors like Amazon. To quote from its 10-K in 2011: “We have had only four profitable quarters, and we may never achieve profitability on a full-year or consistent basis.” Walgreens picked it up that year for $429 million, or $3.80 a share — more than twice its trading price at the time. 
 
 
So why didn’t it work? The S-1 filing for the initial public offering provides fascinating insights. While Drugstore.com was banking on attributes like selection, convenience and pricing, it acknowledged such risks as shipping charges, delivery delays and price competition.
 
Retailing is a thin-margin business to start with, but those margins really get squeezed with high-volume, low-priced commodity items typical of a health-and-beauty store. Brick-and-mortar stores are an expensive feature of retailing, but they’re not the only cost. You still have to build infrastructure to move product, and if you’re taking over the last-mile job from the consumer, there’s another layer of expense. It’s a lot more efficient to ship some cartons of disposable razors to a store than to ship individual packages to customers. 
 
It’s a service and a layer of expense that, by the way, customers may not be willing to pay for. Getting consumers to pay for the privilege of shopping with you is a trick only a few, like Costco or Amazon, can pull off. 
 
That Drugstore.com never quite made the formula work is of cold comfort to the physical retailers who have had their own struggles in making online retailing compensate for the business they’ve lost to the internet. Walgreens buys Drugstore.com; Walmart buys this week’s Amazon-wannabe, Jet, in its ongoing effort to catch up with you-know-who; department stores offer online ordering with in-store pickup.
 
Even the online folks aren’t sure of the formula. Seattle-based online jewelry retailer Blue Nile has been opening physical showrooms on the East and West coasts. You-know-who is opening actual bookstores. 
 
They’re interesting experiments, but so were all the online retailing ventures now found on the scrap heap. Not that people are going to stop trying to make it work. It always looks as if it ought to.  
   
Monthly columnist Bill Virgin is the founder and owner of Northwest Newsletter Group, which publishes Washington Manufacturing Alert and Pacific Northwest Rail News.

Final Analysis: The Sporting Life in 2017

Final Analysis: The Sporting Life in 2017

Three predictions for the coming year on a new arena, an old arena and the Mariners.
| FROM THE PRINT EDITION |
 
 
 
As every first-year business student knows, a city’s economy is not considered “world class” until said city has erected at least four shrines to professional sports and these shrines remain empty and unused most days of the year. Seattle is knocking on the door of world classiness because it already has KeyArena, Safeco Field and CenturyLink Field up and running. Occasionally. Just one more monument to appease the great mass of athletic supporters and we’re there. Hallelujah!
 
It’s only a matter of time because Chris Hansen, the San Francisco rich guy who wants to build a new arena on First Avenue South and bring pro basketball and pro hockey to Seattle, is this close to getting his way. In October, Hansen revealed that he and his investors are now willing to pay the whole honkin’ bill for plopping a new arena into the SoDo neighborhood a block from Safeco Field. He still wants a piece of Occidental Way vacated and also expects some tax breaks from the city, but that’s how rich guys are. (See: Trump, Donald.) Besides, the people who believe we’re not world class until the NBA returns to Seattle are salivating over this deal because it’s the best deal we’re ever going to get
 
Of course, these same people said Hansen’s previous offer, which would have required that $200 million in public money be plowed into a new arena, was also the best deal we were ever going to get. 
 
Hansen’s decision to pay more for his arena places the sports economy clearly in the local spotlight this year. Heaven knows we could use more opportunities to pay $9 for a beer and see millionaire athletes selling Jaguars and BMWs on TV. It’s the kind of economic shot in the arm that only comes around whenever a sports league is in a coercive mood. 
 
And so, in the spirit of this January issue’s “looking ahead” theme, we offer three predictions relating to the regional economy as the Hansen arena intrigue continues to unfold.
 
Prediction 1: Hansen, who has already spent more than $120 million buying up property in the area of his proposed arena, will persuade the Port of Seattle, his arch nemesis in this melodrama, to fold up its tent and send all cargo-handling operations to Tacoma. That decision will pave the way for so many trendy bars and restaurants with names like Kale & Kumquat or Cobblestone & Wingtip that Hansen will be persuaded to create a private streetcar system to connect Pioneer Square with the burgeoning Stadium District. 
 
Prediction 2: The city-owned KeyArena, whose very future is clouded by the Hansen proposal, will announce plans to house up to 10,000 homeless persons every day. Even on days when the Seattle Storm and Seattle University basketball teams need the building, the city believes the Storm and the Redhawks could use the attendance boost, so it becomes a classic win-win.
 
Prediction 3: The Seattle Mariners, who still don’t like the arena proposal, will channel their hostility onto the field of play — and still not win the World Series. (This is called pattern-recognition analysis.) However, always mindful of improving the fan experience — because it’s not whether your team wins or loses, but whether you’re inclined not to press charges for being gouged by a vendor — the Mariners will introduce several new fan-friendly food items, plus mani/pedi stations in the pricey seats and roving loan officers to assist anyone trying to finance the purchase of hot dogs and sodas for a family of four. 
 
JOHN LEVESQUE is the managing editor of Seattle Business magazine. Reach him at john.levesque@tigeroak.com.