Why Did Drugstore.com Shut Down? The Rise and Fall of an E-Commerce Pioneer
Introduction
Remember drugstore.com? That blue-and-white website where you could order everything from vitamins to makeup to cold medicine? It was one of the internet’s first big online pharmacies. Then, one day in 2016, it simply vanished from our screens. Poof! Gone.
As someone who has built startups and now invests in them, I’ve seen businesses boom and bust. The story of drugstore.com fascinates me because it teaches us so many lessons about e-commerce, timing, and business strategy.
In this post, we’ll dive into why this early internet giant collapsed despite having big backers like Amazon and Walgreens. We’ll look at what went right, what went wrong, and what today’s entrepreneurs can learn from its journey.
Table of Contents
- The Drugstore.com Story
- The Early Days: E-Commerce Pioneers
- The Business Model: Why It Seemed Perfect
- Key Challenges That Led to Failure
- The Walgreens Acquisition
- The Final Decision to Shut Down
- Legacy and Impact on E-Commerce
- Lessons for Today’s Entrepreneurs
- TL;DR
- Q&A
- Quiz: Would Your E-Commerce Business Survive?
The Drugstore.com Story
Drugstore.com burst onto the scene in February 1999, riding the dot-com boom wave. Started by Peter Neupert, a former Microsoft executive, the company aimed to revolutionize how people bought personal care products, over-the-counter medications, and health items.
Imagine a world before Amazon sold everything. That’s when drugstore.com launched. The internet was new and exciting. Getting toiletries delivered to your door? Mind-blowing!
The company went public just months after launch in July 1999. Its stock price shot up to $65 on the first day of trading. People were excited! This was the future!
The Early Days: E-Commerce Pioneers
When drugstore.com started, only 38% of American adults used the internet. Online shopping was still novel. The company had to educate consumers about the benefits of buying health products online.
Their early investors included Amazon.com and Kleiner Perkins (a famous venture capital firm). Even Rite Aid jumped in with a $7.6 million investment. With such strong backing, success seemed certain.
By 2000, drugstore.com had:
- Over 1.6 million customers
- More than 17,000 products
- Partnerships with major brands
- Integration with Amazon’s platform
But the timing wasn’t perfect. The dot-com bubble burst hit in March 2000, and suddenly the whole world looked at internet businesses differently.
The Business Model: Why It Seemed Perfect
On paper, drugstore.com’s model made perfect sense:
- Convenience factor: Shop from home, skip trips to physical stores
- Wide selection: More products than a typical brick-and-mortar store
- Competitive pricing: Lower overhead than physical retailers
- Recurring purchases: Health and beauty products need regular restocking
- Data collection: Learn customer habits and recommend products
Here’s how their revenue channels compared to traditional drugstores:
| Revenue Source | Drugstore.com | Traditional Drugstore |
|---|---|---|
| Prescription drugs | 25% | 65% |
| OTC medications | 20% | 10% |
| Beauty products | 30% | 15% |
| Wellness products | 15% | 5% |
| Other | 10% | 5% |
The biggest challenge? That first item. Prescription drugs drive foot traffic to physical pharmacies, where people then buy other products. Drugstore.com struggled to build this core business due to regulations and competition.
Key Challenges That Led to Failure
1. Never Turned a Profit
Despite growing sales, drugstore.com never achieved profitability in its 17-year run. Not once! The company lost money every single quarter of its existence.
Why? Several factors:
- High customer acquisition costs: They spent $45 to acquire each customer but made only $29 per order
- Logistics challenges: Shipping small, low-cost items is expensive
- Inventory management: Health products have expiration dates and complex storage needs
- Return rates: Health and beauty products often get returned, adding costs
2. Fierce Competition
The online pharmacy space got crowded fast:
- Amazon expanded into health and personal care
- Traditional pharmacies like CVS and Walgreens built their own websites
- Specialty retailers like Sephora captured beauty customers
- Discount chains like Walmart and Target added online shopping
Each competitor had advantages. Amazon had better logistics. CVS had physical pickup locations. Sephora offered a better beauty shopping experience.
3. Regulatory Hurdles
Selling medication online isn’t like selling books. The pharmacy business faces strict regulations:
- Different state laws for prescription fulfillment
- Complex insurance processing systems
- Privacy requirements for health information
- Licensing requirements in multiple jurisdictions
These regulations created barriers that online-only players struggled to overcome.
4. Integration Problems with Beauty.com
In 2000, drugstore.com acquired Beauty.com to boost its cosmetics business. The idea was smart: capture more female shoppers and increase average order values.
But running two separate sites created challenges:
- Divided marketing budgets
- Separate checkouts confusing customers
- Duplicate warehousing and shipping costs
- Brand identity confusion
These integration issues prevented the company from achieving economies of scale.
The Walgreens Acquisition
In 2011, drugstore.com seemed to find its happy ending when Walgreens acquired it for $429 million. At the time, this looked like a win for both sides:
- Drugstore.com got the backing of a major pharmacy chain
- Walgreens gained e-commerce expertise and online customers
Walgreens CEO Greg Wasson said: “Our acquisition of drugstore.com today significantly accelerates our online strategy.”
For a while, things seemed to work. Walgreens kept the drugstore.com and Beauty.com brands running separately from Walgreens.com.
The Final Decision to Shut Down
Then came the surprise. In July 2016, Walgreens announced it would shut down drugstore.com and Beauty.com by September 30, 2016. After 17 years, these pioneering websites would disappear.
Why did Walgreens make this decision? Their official statement cited a desire to “focus on the development of walgreens.com.”
Reading between the lines, several factors likely contributed:
- Redundant platforms cost money to maintain
- Brand confusion between multiple websites
- Mobile shopping trends favored simplified experiences
- Tax benefits of writing off the acquisition
- Amazon’s dominance made competing as a specialty site harder
According to retail analysts, Walgreens realized running multiple online brands didn’t make financial sense. By 2016, Walgreens had invested heavily in its main website and mobile app, making the separate drugstore.com platform unnecessary.
Legacy and Impact on E-Commerce
Though drugstore.com shut down, its impact on e-commerce remains significant:
- It pioneered online sales of health and beauty products
- It helped normalize the idea of buying personal care items online
- It developed early solutions for prescription management via the internet
- Many of its innovations now appear on other pharmacy websites
The company also served as a training ground for e-commerce talent. Former drugstore.com employees went on to work at Amazon, Walgreens, and other digital retailers, spreading their knowledge throughout the industry.
Lessons for Today’s Entrepreneurs
As an angel investor who has seen many startups come and go, I find several valuable lessons in drugstore.com’s story:
1. Profitability Matters More Than Growth
Drugstore.com grew its customer base and revenues year after year. But without profitability, this growth only burned through investor cash faster.
Key lesson: A business model must show a path to profitability, not just scale.
2. Differentiation Is Essential
By selling the same products available everywhere else, drugstore.com struggled to stand out. Without unique offerings, price competition squeezed margins.
Key lesson: Create meaningful differences customers value enough to pay for.
3. Regulatory Industries Have Higher Barriers
Healthcare, including pharmacies, faces regulations that make disruption harder than in other industries.
Key lesson: When entering regulated markets, budget more time and money for compliance.
4. Acquisition Isn’t Always Salvation
Being acquired by Walgreens didn’t save drugstore.com in the long run. Sometimes acquirers buy companies for assets or talent, not to grow the acquired brand.
Key lesson: An exit through acquisition may not ensure your company’s long-term survival.
5. Timing Matters
Drugstore.com launched when internet adoption was still growing. The infrastructure for efficient e-commerce fulfillment wasn’t fully developed.
Key lesson: Even great ideas can fail if the market isn’t ready.
TL;DR
Drugstore.com was an e-commerce pioneer that launched in 1999 during the dot-com boom. Despite strong backing from investors like Amazon and eventually being acquired by Walgreens for $429 million in 2011, the company never achieved profitability. It faced challenges including high customer acquisition costs, regulatory hurdles in the pharmacy industry, fierce competition, and integration issues with its Beauty.com acquisition. In 2016, Walgreens shut down the site to focus on its main brand. Drugstore.com’s legacy lives on in today’s online pharmacy practices, but its failure offers important lessons about the need for profitability, differentiation, and understanding timing in building successful e-commerce businesses.
Q&A
Q: Why didn’t Amazon just buy drugstore.com since they were early investors?
A: Amazon actually owned about 14% of drugstore.com in its early days but chose to build its own health and personal care category instead of acquiring the company outright. By the mid-2000s, Amazon was already selling many of the same products directly, making an acquisition unnecessary from their perspective.
Q: Could drugstore.com have survived as an independent company?
A: Probably not. The company never achieved profitability in 17 years of operation. Without the Walgreens acquisition, it might have run out of investor funding sooner. The online pharmacy space required either integration with physical locations (like CVS and Walgreens had) or the logistics efficiency of Amazon to make the economics work.
Q: What happened to drugstore.com’s customers after shutdown?
A: When drugstore.com shut down, Walgreens transferred customer accounts to Walgreens.com. Prescription records moved to Walgreens pharmacies, and customers received emails with instructions for accessing their information on the Walgreens platform.
Q: Did any other online-only pharmacies succeed where drugstore.com failed?
A: Most successful online pharmacies today are either connected to physical stores (like CVS.com) or focus on specific niches like mail-order prescriptions (Express Scripts) or affordable medications (GoodRx). Pure-play online pharmacies similar to drugstore.com’s model have largely disappeared.
Q: What’s the biggest lesson from drugstore.com’s failure?
A: The biggest lesson is that convenience alone isn’t enough to build a sustainable business. Despite offering a convenient service that customers liked, drugstore.com couldn’t make the economics work. Any business model needs to not just attract customers but do so at a cost that allows for profitability.
Quiz: Would Your E-Commerce Business Survive?
Answer these questions to see if your e-commerce concept has what it takes to avoid drugstore.com’s fate:
1. Does your business have a clear path to profitability within 3 years?
- Yes (1 point)
- No (0 points)
2. Can you acquire customers for less than their first-year value?
- Yes (1 point)
- No (0 points)
3. Does your business offer something customers can’t easily get elsewhere?
- Yes (1 point)
- No (0 points)
4. Is your industry free from heavy regulations that favor established players?
- Yes (1 point)
- No (0 points)
5. Can you compete effectively against Amazon in your category?
- Yes (1 point)
- No (0 points)
Scoring:
- 4-5 points: Strong potential! Your business model appears to avoid the major pitfalls that affected drugstore.com.
- 2-3 points: Caution needed. You have some strengths but also significant challenges to address.
- 0-1 points: High risk. Your current model shares too many similarities with failed e-commerce ventures.
Remember: Even the most promising business models need exceptional execution to succeed!
Sources:
- Internet usage statistics from Pew Research Center: https://www.pewresearch.org/internet/fact-sheet/internet-broadband/
- Walgreens acquisition details from CNBC: https://www.cnbc.com/2011/03/24/walgreen-to-buy-drugstorecom-for-429-million.html
- E-commerce growth data from U.S. Census Bureau: https://www.census.gov/retail/index.html
