Virgin on Business: R.I.P.,

An Icon of the dot-com boom proves loss leaders cant last forever.

October 24, 2016

Bill Virgin

Eighteen years isnt 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 resumes 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 and 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 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, made more sense than most. Health-and-beauty items tend to be small, light and easy to ship. Returns arent the problem that they are with apparel. And shopping at a drugstore is not one of lifes rewarding experiences; no one browses to check out the latest in toothpaste.
That the idea had some merit is validated by the fact that 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 didnt it work? The S-1 filing for the initial public offering provides fascinating insights. While 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 theyre not the only cost. You still have to build infrastructure to move product, and if youre taking over the last-mile job from the consumer, theres another layer of expense. Its a lot more efficient to ship some cartons of disposable razors to a store than to ship individual packages to customers.
Its 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 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 theyve lost to the internet. Walgreens buys; Walmart buys this weeks 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 arent 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.
Theyre 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.