E-Commerce Comes to the Supplement Industry

E-Commerce Comes to the Supplement Industry
by Peter Huck

For many casual observers, the enthusiasm greeting Internet companies can beconfounding. Publicly traded Internet companies typically have market values that are upto 30 times their revenues, whereas typical (offline) companies are in the one- tothree-times range. The most well-known e-commerce business, www.Amazon.com, is growing incredibly fast in terms ofrevenues but is making no money. Still, people keep gobbling up its stock. Not only that,but savvy venture capitalists are throwing money at any start-up company with an idea anda promise to be the Amazon.com of this or that category. Never mind that these companieshave yet to turn a profit and likely will not do so in the immediate future. What's goingon here?

One thing at work is the emphatic belief that the Internet is going to change the waythe people conduct business. The foremost priority of these companies is to get"eyeballs" to their site and to build up brand recognition, revenues andcustomer loyalty. An apt metaphor is to think of these companies as staking valuable landthat can be mined for a fortune at a later date. It is not a matter of how Internete-commerce companies are performing at the moment, but what profits they are churning outin the years to come. Internet entrepreneurs, venture-capitalists and stock investors allare operating on the notion that they are riding the wave of the future. It is nosurprise, then, that new e-commerce companies hoping to capitalize on the popularity ofdietary supplements are appearing on almost a monthly basis.

Although many of the current players probably entertain the notion of being theAmazon.com of the supplement industry, the situation between the supplement industry todayand the retail book category of a couple of years ago is significantly different from eachother. Amazon.com had no online competition when it burst onto the scene, and traditionalbrick-and-mortar competition was mostly confined to two national book-selling chains. Thesupplement industry, on the other hand, is much more diverse, with retail sectorsincluding independents, chains, pharmacies, mass market and direct mail. Because of thisfragmentation, competition is stiff in the e-commerce sector for supplements.

"From what's developing so far, I don't think it looks like there is going to be awinner-takes-all, like an Amazon.com," said Skye Lininger, co-founder and chiefexecutive officer of HealthNotes Inc., which has developed scientifically basedinformation on complementary medicine and supplements for a number of e-commerce sites."It looks more like there are going to be a variety of strategies that companies aregoing to employ--creating a half-dozen different niches."

The most ambitious e-commerce sites are those backed by venture capital. These sitesinclude www.Allherb.com, www.eNutrition.com, www.Greentree.com, www.healthshop.comand www.Mothernature.com. In this time ofoptimism about the future of e-commerce, these sites have had a relatively easy timeraising millions of dollars to get their respective sites established on the Internet.While profits have been slow in coming, these e-commerce companies are confident of futuresuccess. Said Bob Purcell, vice president of marketing and business development forhealthshop.com, "The Internet is revolutionizing every retail category, and this willbe no different."

Ken Hakuta, founder and chief executive officer of Allherb.com, said that althoughthere is going to be a lot of activity in this sector and an inevitable thinning-out ofcompanies that sell supplements online, he is not worried about the competition."Actually, I am pleased by it, because it shows how large the potential of the marketis," he said. "People are investing lots of money into sites that sellsupplements and herbs. This is encouraging, especially considering that the past recordsfor these e-commerce companies have been relatively weak." With the level of hopesurrounding these venture-backed sites, it likely will not be long before companies gopublic.

Business opportunities come and go very quickly in the Internet world, however, and thechance to start-up a successful e-commerce site selling supplements may have passed."I think it is late in the game for newcomers," said Hakuta. Already, the sectorappears to be transitioning to a secondary stage in which e-commerce companies areentering into strategic alliances, merging with other companies, or being acquired. Forexample, in June, Warner-Lambert took a minority equity position in healthshop.com. Thepharmaceutical giant views healthshop.com as a platform to accelerate its involvement ine-commerce and enhance its position in the supplement market.

"I think you will not see so much the continuation of additional nutritionalsupplement sites as additional financial backing, partnerships and strategicrelationships," predicted Jay Robinson, director of marketing, SPINS Interactive.Inother words, e-commerce companies are aggressively pos-itioning themselves for theexpected windfall of profits to come in the next couple of years.

Sites solely devoted to natural remedies are not the only venture-backed companiesselling supplements. There are also pharmacy sites such as www.PlanetRx.com, www.Drugstore.comand www.Soma.com (bought in May by CVS Corp. for $30million in stock). Not to be left out of the action, Walgreen Company, Phar-Mor and RiteAid (which together with GNC has recently partnered with Drugstore.com) have each investedin sites to sell pharmaceutical drugs and supplements. Other chain retailers withe-commerce sites are Wild Oats (Shop.wildoats.com)and Whole Foods Market (www.wholefoods.com).

The Internet, particularly when thought of as a consumer-direct channel, is an obviousvehicle for mail-order companies looking to expand their businesses. With a strongdatabase and distribution network, Vitamin Shoppe is well positioned to offer itse-commerce site, www.vitaminshoppe.com. Othercatalogers going online include Amrion with www.HeartSmart.comand NBTY with www.Puritanspride.com.

Although the medium of e-commerce is new, the long-term success of any of theseInternet companies in winning consumers' business will depend on what retail sales havealways largely been based on: trust. "In my opinion, the most significant determinantof success for an e-commerce company for dietary supplements will be the trust that thecompany develops with the consumer," said F. Noel Perry, managing director ofBaccharis Capital, a private venture capital partnership that was the founding investor inhealthshop.com. "This point can not be over-emphasized. Financial resources areimportant, as are the educational approach the company takes and discounting. However, atthe end of the day, the company or companies that will be successful will be those thatdemonstrate, through their product offers and educational information, how genuinelyconcerned and committed they are to the well-being and health of the consumer."