E-tailers and Space Invaders

Some thought Internet startups would wipe out whole sectors of traditional bricks-and-mortar firms. But old-economy companies are carving out their own presence, and some may become the biggest winners on the Web.

Barely a year old, Drugstore.com (www.drugstore.com) has been hailed as the biggest and most successful online pharmacy on the Internet. Since the Bellevue, Washington, startup opened for business in February 1999, its revenues have climbed steadily. For the fourth quarter of 1999, Drugstore.com recorded prescription sales of approximately $10.4 million. Total sales for that quarter topped $18 million, a 52 percent jump from the previous quarter. All told, Drugstore.com has served nearly 700,000 paying customers in its first year of operation.

Now compare those numbers with the recent performance of 100-year-old Walgreen Co. (www.walgreens.com), an $18.6 billion-in-revenues drugstore chain with nearly 3,000 bricks-and-mortar stores in the US and Puerto Rico. In October 1999, Walgreen launched its own Internet-based pharmacy. According to Jeffrey Rein, who oversaw the rollout, the drugstore’s online operation is logging daily prescription sales that — if they hold — will work out to a quarterly run rate of about $7.4 million. Meanwhile, new customer registration at Walgreens.com is growing by about 25 percent each month, with the site handling 2,000 prescriptions each day. At that rate, Walgreens.com will fill more than 700,000 prescriptions in its first year of operation.

Whether Walgreens actually surpasses Drugstore.com remains to be seen. But the fact that the venerable retailer is even catching up to its virtual rival speaks volumes about the outlook for traditional companies in the brave new world of E-commerce. Until recently, consultants and industry gurus predicted that Internet startups would wipe out whole sectors of traditional bricks-and-mortar competitors. From automobiles to zippers, the experts said, anything that could be sold in a store could be sold cheaper, faster, and better on the Web. The E-commerce revolution, they argued, belonged to the dot-coms.

But a funny thing’s happened on the way to the revolution. Rather than cede cyberspace to their E-tailing competitors, old-economy companies have begun to fight back, carving out their own presence on the Internet. In fact, many observers are now suggesting that clicks-and-mortar operators will be some of the biggest winners on the Web.

“There are certainly dot-com companies that have unseated traditional companies,” concedes Mary Modahl, vice president of research for Internet consultant Forrester Research Inc., in Cambridge, Massachusetts. “But where my thinking — and the thinking of a lot of other people — has shifted is in the notion that traditional companies would never or could never respond (to the online threat).”

Admittedly, some outfits haven’t fared so well in the virtual universe. When Levi Strauss tried to sell its jeans online, its longtime retailers raised such a ruckus about losing business the company eventually shelved its plans. And managers at investment banking giant Merrill Lynch steered clear of online stock selling for years, apparently worried in part about a backlash from the company’s army of brokers.

But other bricks-and-mortar businesses have found a home in cyberspace. Says Modahl: “We can already see traditional companies that have done a tremendous job of seizing opportunities on the Internet.”

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