Failures and problems were in the news last week. Greenfield Online
released results of its Digital Drugstore survey. It included a finding
that only one percent of physicians were telling their patients it was
OK to use an online drugstore. That's powerful, because 57% of the
folks Greenfield talked to said they'd use an online drugstore if their
physician said it was OK.
Question: Wouldn't it have been smart to spend some time marketing the
idea of an online drugstore to physicians? Seems like it, but this
isn't the first time the online drugstore folks have looked like they
could use some intelligence-enhancing drugs.
They didn't do much homework on the insurance company impact on drug
sales either, it seems. One report says that up to ninety percent of
the folks who do visit the online drugstores won't buy their
prescriptions there because they can't use their insurance co-payment.
Don't you think they should have checked that out way back when they
were crafting the business plan?
Oh, yeah. They missed something on the competitive playing field, too.
Pharmacy-benefit management (PBM) companies are real important in
prescription drug sales. They manage and control pharmaceutical costs
for HMOs and insurance companies. But the PBMs think they ought to get
a piece of the online trade themselves, so they've gotten reluctant to
deal with the online drug stores.
This looks really important when you run the numbers on the pharmacy
business. Estimates are that it totals out at $165 billion or so a
year. Prescription drugs count for $101 billion of that or about 61%.
To make money in the big drug store marketplace, you have to make money
on prescriptions. It's as simple as that.
To some extent this looks like business failures have always looked,
mostly about bad planning and bad execution. But there's more here
because all of these online folks seem to be making the same kinds of
mistakes.
Some, like the online pharmacies, were launched with great fanfare about
how they would "amazon" those stodgy old pharmacy chains. Nope. Turns
out the stores and the distribution networks and years of brand building
do have value after all. So the online folks begin hooking up with the
folks they originally were going to stomp into powder.
Right now there's almost a fire sale mentality out there as once
over-hyped and over-valued dot-coms get snapped up by other, older,
old-economy companies. Bertelsmann is buying CDNow at 80% the original
valuation. Interested in a financial services "bargain?" Schwab is
grabbing up E-Loan at 70% off.
It's really bad, folks. Webvan just snapped up HomeGrocer and now there
are signs that it's running out or money, too. Didn't they know that a
few weeks ago? What were they going to use to pay for HomeGrocer?
These dot-coms seem to have a whiff of something special about their
failures. It's made up of some things that aren't part of the old-time
business failure. These are two key fallacies that lead to a special
dot-com problem and dot-com destruction.
First, there's the "Mommy and Daddy Will Pay" fallacy. This is where you
figure that the venture capitalists and the markets will just keep
shelling out money. When then stop, disaster strikes.
The second fallacy is the "New Economy" fallacy. This is the one where
you think that basic rules of economics and human nature don't apply any
more. They do. You may avoid facing the music for a while if you dance
really, really, really fast. But eventually the piper shows up with his
hand out.
Those two fallacies lead to Hallucinogenic Optimism. The company
believes that it's magic. It plays the business game with its eyes on
the stock market instead of on the marketplace.
To witness all this in action let's look closer at Webvan which seems as
good a case study as any.
The grocery business operates on microscopically thin margins. That, in
turn, means that the only way you can make lots of profit is to sell
lots and lots and lots of stuff - food in this case. So it's not an
easy business to be in.
It looked attractive to some folks as an online business from very early
on. Peapod (who just recently slipped beneath the economic waves) was
the first in. Their original business concept was to be the delivery
service for supermarkets doing online business. But that changed to
becoming the company that would change the way folks buy groceries which
is what they, and most everybody else tried to do.
Webvan appeared on the business radar last year. It had excitement and
good people and news releases stuffed with promise. It was started by
Louise Borders of Borders Books fame. Not a grocery person, but that
didn't seem to matter. Then George Shaheen shocked the consulting world
by giving up his post as boss at Andersen Consulting to be CEO. Things
looked good. These were smart, successful people.
The plans were grandiose, too. Webvan would roll out to 28 key markets
in the US, building 300,000 plus square foot warehouses, buying up vans
and training warehouse folks and drivers.
The technology was impressive. Those distribution centers were
automated to the max and very expensive. The contract with Bechtel to
build the things was said to run to a billion bucks.
Oh yeah, Webvan was great at raising money, too. In fact, in 1999, they
got more venture funding than anyone. And went public. Big time.
What no one seemed to notice were the reviews of the service. Many
seemed to say that "the service didn't actually work right, but it will
some day." Others were less flattering. Here's a quote from one of
those less flattering reviews.
"In the time that elapsed since I placed the order, I could have crawled
on all fours to my neighborhood supermarket, which is three blocks away,
spent less money for the exact items I wanted, crawled back home,
prepared and eaten my own meatloaf, followed by ice cream and coffee,
washed the dishes, had a good night's sleep and clocked in a full day at
work."
Shaheen and others always had an answer for this. But no one seemed to
pay attention to the operational and conceptual problems. Instead they
talked and hyped stock price. That's like playing a game with your eye
on the scoreboard instead of the playing field.
By early 2000, there were signs that things might not turn out OK.
Kevin Czinger, Webvan Group Inc.'s senior vice president for finance and
operations jumped over to Benchmark Capital to be entrepreneur in
residence. His claim to fame at Webvan? Mr. Czinger helped the company
raise more than $600 million and recruit more than a dozen vice
presidents. The news was about finance, not operations.
The stock market started devaluing the online grocery folks early in
2000. Even so, Homegrocer went public in March, and then was "bought"
by Webvan shortly afterward.
This kind of failure is a special kind of failure. It isn't just about
poor planning and lousy execution of a good plan. It's also about
hubris, that special pride that goes before a fall
What can we learn from the pharmacies and the groceries?
The fundamental things apply. Business is still business and the
natural laws have yet to be repealed. Business is still about
delivering value and making a profit. And that will be true in the
Digital Age, just like it's always been.
This feature appeared on 24 July 2000
