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Drugstore.com, Amazon renegotiate partnership

By Monica Soto Ouchi
Seattle Times technology reporter

Kal Raman
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Several years ago, drugstore.com became the first Internet retailer to hang a shingle on Amazon.com's site, marking the start of the online retail giant's transformation from a store that attempted to sell everything itself to one that grew through partnerships.

The companies announced yesterday that drugstore would no longer be the sole provider of health and beauty products to Amazon, but rather one of many retailers featured under a new health and personal-care tab on its site. In exchange, Bellevue-based drugstore said it received favorable terms for each customer Amazon sends its way.

If anything, the renegotiated partnership highlights the evolution of online marketing and the increasingly sophisticated ways in which retailers reach potential customers.

Whereas drugstore's marketing efforts were once dependent upon putting its wares before Amazon's customer base, it now has a variety of ways to reach consumers.

"When this (original) deal was struck, it was one of the bellwether deals of the time," said Jeff Lanctot, vice president of media at Seattle-based online ad agency Avenue A.

Drugstore originally launched a tab on Seattle-based Amazon in April 2000, at a time when the online bookseller was expanding its selection through partnerships.

Called the Amazon.com Commerce Network, the company chose other Internet retailers to sell products and services through co-branded stores on its site, in exchange for payment and minority stakes in some of the companies. (Amazon, one of drugstore's initial investors, today remains its largest shareholder, with 13 million shares, or roughly 16.8 percent of stock. Amazon's Chief Executive Jeff Bezos sits on drugstore's board of directors.)

It was an alternative to the massive and unfocused marketing agreements many online retailers were striking with Internet portals. Peter Neupert, drugstore's then-chief executive, said as much in a February 2001 conference call with investors. He called it one of the most cost-effective marketing strategies for bringing new customers into the fold.

"It was either go mass media or (spend ad dollars to) tell people who are already buying other products online," said Kal Raman, drugstore's current CEO. "That's why we chose to market as a tab (on Amazon) with an ungodly amount of dollars attached to it."

After the Internet bust, Amazon renegotiated its partnerships with drugstore and other Internet retailers to reflect lower expectations. Under those new terms, drugstore paid a fee for every customer Amazon sent its way and assumed the cost for shipping the item to the customer, Raman said.

Amazon also refined the way it partnered with other retailers, licensing its powerful e-commerce technology to stores from toysrus.com to Borders.com.

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Under the new partnership, drugstore will sell its products on Amazon alongside items from competitors. The online pharmacy must pick, pack and ship orders in co-branded boxes; it receives a piece of the revenue, plus a fee for shipping the items, in return.

Raman said the Amazon partnership accounted for 3 to 5 percent of its revenue last year. "This deal, on a yearly basis, will be more profitable to us, but I don't think it'll have an impact," he said.

Its most effective sales channels have been word or mouth, followed by paid-search — a popular advertising method in which companies bid for the right to be associated with specific key words from "Adidas" to "shampoo."

When Internet users type a keyword into a search engine, they receive results accompanied by sponsored links along the right side of the page.

The company next year plans to expand its relationships with shopping portals run by Yahoo!, AOL and MSN, Raman said.

"I think it's probably a good example of way the industry, in general, has ... matured," Lanctot said of the deal. "Today you can tell a much more rich message (online) than you could tell three years ago."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Copyright © 2003 The Seattle Times Company

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