Toiletries (.com)

June 4, 2010 in Economics,Internet

The NYT reports on soap.com, which aims to provide drugstore items over the internet. I'm having a hard time seeing how this is really interesting news.

“Nobody is really buying toilet paper online,” Mr. Bharara said. “We’re trying to shift in a big way consumer behavior over all, and take share from offline.”

Merely being online isn't a magic bullet. Consumers are more likely to migrate their behavior if the item is better suited to online delivery than off. The nature of a drugstore's goods (typically necessities) and drugstores themselves (situated on almost every corner) have already evolved into an optimal balance of proximity and immediacy. In NYC, we laugh when we see two Starbucks on opposite corners but we complain when we have to walk more than a block to the 24-hour Duane Reade (or CVS, or the bodega...). So there isn't as clear a motivation to adopt delivery as there is for electronics, clothing, books or even food, as those industries are otherwise impeded by inconveniences like distance and time.

(And yes, I'm assuming that the target  consumer is urban or suburban. Rural consumers are 1) predisposed to purchasing home items in large quantity - witness the success of Wal-Mart - and at regular intervals and 2) are rarely the focus of online businesses due to more idiosyncratic needs.)

The physical layout of locations like convenience stores and dry cleaners demonstrate that the industry is focused on a hyperlocal experience. One establishment serves only the houses or apartments immediately surrounding it; if two businesses are sufficient distance apart, a third will open to capture the middle share. As such, the online model represents a radical departure from the business norm - as long as we consider every franchise independent. As soon as we look at every DR as an extension of the same overarching business, we're more in line.

But that speaks directly to another issue: just because people aren't buying toiletries online doesn't mean they can't. Indeed, the drugstore.com market is well saturated by big players like DR, CVS, Wal-Mart and Amazon. They may only account for $8B of a $125B market, but I don't think it's for a lack of brand awareness. Rather, it's that the marginal benefit of shopping online is simply not as great for these types of products.

The one big advantage an online store has, of course, is serving the long tail: e-retailers can stock products which brick-and-mortar can't afford to give up shelf space for. Again, however, I'm not convinced that such a long tail exists in drugstore items (since their size is infrequently prohibitive) or that it is sufficient motivation to drive consumers online (since this is hardly a new e-market).

So far I've only discussed hurdles for a consumer migration to line, and most have centered on the status-quo effect: the industry has stabilized around a hyperlocal but physical layout, and there isn't a major benefit to moving online. In fact, there might be a cost to moving online: how many people buy toiletries in advance? I would imagine that people buy toilet paper, toothpaste, floss, shampoo etc. as they need it, which means waiting a day or two for shipping is out of the question.

The real hurdle for online drugstores is not enticing consumers to use the internet for commerce (that path was pioneered long ago), but getting them to anticipate their drugstore needs so that the delivery period is not an impediment. One way to do that is to offer bulk discounts, a la Costco. I'm not going to buy two bottles of shampoo right now, because I'll just buy the second one on my corner the night I need it. But if that second bottle were cheaper... now you're talking.

If I may break the statistician's code and use a personal anecdote, I've been buying toiletries from Amazon ever since they introduced Prime two-day shipping. The equation's fairly straightforward: free shipping + volume discounts > my perceived cost of walking to the store + hassle of ordering in advance.

So I'm not quite as excited as the NYT about soap.com's prospects. It's not because I think it's a bad idea, it's because I think the fundamental shift in consumer behavior that they need isn't the one they seem to have targeted. You don't need to convince people to buy online, you need them to buy in advance! It's psychological, not economical. And perhaps most importantly, I don't think this is a new idea by any means. But perhaps soap.com can push it to the forefront and help people migrate across the digital divide.


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