Get the Right Mix of Bricks and Clicks by Ranjay Gulati and Jason Garino

by Ranjay Gulati and Jason Garino

In "Get the Right Mix of Bricks and Clicks," Ranjay Gulati and Jason Garino draw on the experience of three established retailers to illlustrate the divergent strategies possible along the clicks-and-mortar integration spectrum. "By thinking carefully about which aspects of a business to integrate and which to keep distinct," they write, "companies can tailor their clicks-and-mortar strategy to their own particular market and competitive situation, dramatically increasing the odds of e-business success.

"As a useful starting point," they continue, "we recommend examining four business dimensions—brand, management, operations, and equity—and determining the degree of integration that makes sense along each." The exhibit "Clicks-And-Mortar Strategies" shows how Office Depot, KB Toys and Rite Aid have positioned themselves in each of these four dimensions.

The following excerpt examines, in more detail, one approach to integration: that of Rite Aid and its "virtual partnership" with Drugstore.com. [Note: This article appeared in the Harvard Business Review prior to the announcement earlier this month of new troubles at Rite Aid and the sale of the company's pharmacy benefits management unit, PCS Health Systems, to Advanced Paradigm Inc. See CNNfn's report on Rite Aid for more.]

Rite Aid's Virtual Partnership

The drugstore industry has seen the rise of a variety of clicks-and-mortar strategies. Walgreens.com, for example, is fully owned and operated by its bricks-and-mortar parent. Last June, CVS acquired Soma.com, which it promptly renamed CVS.com in order to "leverage the brand recognition, customer satisfaction, and reputation of CVS," according to Tom Pigott, president and CEO of CVS.com. Although CVS.com is fully owned by CVS, it maintains a separate management team in Washington—across the country from CVS's Rhode Island headquarters. Drugstore giant Rite Aid took a different approach, one centered on partnership rather than ownership.

Because Rite Aid assumed that only a small fraction of its sales would come through the Internet, its initial in-house efforts to launch an on-line channel were tentative. Four months after Soma.com was up and running, Rite Aid's site only let customers schedule an in-store prescription pickup; they couldn't buy a thing on-line. When it became clear that the Net would be a critical retail channel, Rite Aid needed a real Web presence—fast. So in June 1999, Rite Aid bought a 25.3% equity stake in Drugstore.com for a mere $7.6 million (plus additional noncash considerations). As former Rite Aid chairman and CEO Martin Grass explained in a press release, a strategic partnership with Drugstore.com "makes a lot more economic sense...than spending the money and time it would take away from our core businesses to develop, own, and manage our own site." Drugstore.com was an ideal partner because it brought Internet capabilities and strong investors, thus limiting Rite Aid's investment risk in e-commerce.

Like CVS, Rite Aid opted to import Internet expertise, but that's where the similarity ends. Rite Aid and Drugstore.com are separately owned and managed, and although both brands are promoted in both channels, they remain distinct. For instance, Rite Aid hasn't pushed to rename Drugstore.com "RiteAid.com." To do so would be a mistake: after all, venues like Drugstore.com cropped up because the traditional bricks-and-mortar stores weren't delivering an ideal customer experience. (Kids love running through toy stores, but hardly anyone looks forward to browsing through drugstore aisles.)

Even though the companies maintain their individual brands, they want the pharmacies to appear integrated to consumers. To that end, Drugstore.com has launched several initiatives to build its brand among Rite Aid customers. "From a branding perspective, all Rite Aid prescription bottle caps, shopping bags, and payment receipts contain the Drugstore.com logo," says Jackie Erickson, business manager at Drugstore.com. "From a merchandising perspective, we're working with Rite Aid to make in-store offers and calendar-related activities complement each other." During the holiday season, for example, Rite Aid put $15 Drugstore.com coupons in customers' bags. Keeping separate names while promoting the partnership accomplishes two things, explains Debby Fry Wilson, PR director at Drugstore.com: it protects the trust and recognition associated with the Rite Aid name and at the same time establishes a "clean brand that fits on-line expectations."

Rite Aid and Drugstore.com have also integrated many of their business functions, including fulfillment. The operational integration was crucial to Drugstore.com because it gave the company access to PCS Health Systems, Rite Aid's pharmacy benefits management (PBM) subsidiary that serves more than 50 million people. Earlier, the leading PBMs were reluctant to do business with Drugstore.com because they considered the company a threat to their own Internet strategies. Since prescription sales are an important revenue stream for Drugstore.com—and since 80% of Americans are covered by a PBM—losing that business would have been disastrous. But now, since its fulfillment operations are integrated with Rite Aid's, customers who can make a copayment at Rite Aid can also do so at Drugstore.com. Rite Aid benefits as well because its PBM gains increased business. The integrated fulfillment functions give both companies greater buying power, providing significant cost savings.

The Rite Aid-Drugstore.com partnership benefits consumers as well as the two businesses. Customers can elect to pick up their Drugstore.com prescriptions at their local Rite Aid rather than wait for them to be shipped—a huge advantage since 30% of all prescriptions are needed immediately. Because people who choose that option complete the entire transaction on-line, they still pay the Drugstore.com price. This arrangement lets Drugstore.com serve the acute-needs market for same-day prescriptions and allows the two companies to capture a larger share of the customer's wallet. Rite Aid also enjoys increased store traffic.

To get the most value out of their partnership, Rite Aid and Drugstore.com have even established an integration team. Although the two companies are managed separately, the team gives executives a forum for regularly sharing ideas about their businesses. More formally, Mary Sammons, Rite Aid's president and COO, sits on Drugstore.com's board of directors. Drugstore.com reaps the advantages of her experience and connections, but its strategic decisions are made autonomously. Ultimately, the partnership between Rite Aid and Drugstore.com lets each company take advantage of the other's expertise without sacrificing flexibility. Although Rite Aid's traditional business has had its share of problems recently, its innovative partnership with Drugstore.com remains a bright spot for the company—and a useful model for others.

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Excerpted from the article "Get the Right Mix of Bricks and Clicks" in the Harvard Business Review, May-June 2000.

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Ranjay Gulati (HBS PhD '93) is an associate professor at Northwestern University's J.L. Kellogg School of Management in Evanston, Illinois, and a member of its Technology and E-Commerce Group.

A student at Northwestern, Jason Garino will join the Chicago office of the Boston Consulting Group this fall.