InformationWeek

Three weeks later, CVS, the second-largest U.S. drug retailer, leaped into the online drug business by acquiring Soma.com, an upstart Internet pharmacy, in a stock transaction valued at $30 million. The deal shows how pressure to get to market fast is compelling some brick-and-mortar companies to buy rather than build their way onto the Web. It also demonstrates how E-commerce and old-fashioned retailing can complement each other, rather than compete.

Because of the deal, CVS is halting work on a four-month-old internal effort to develop an Internet pharmacy. The company will combine its Internet project with Soma.com and launch a CVS-branded Internet pharmacy next month-about four months earlier than planned.

By late summer, CVS plans to integrate its Internet and conventional drugstore businesses. Customers will be able to order prescription drugs on the Web and pick them up at stores or receive them by mail. If all goes smoothly, CVS will be the first drugstore chain with such a converged business, gaining an edge over competitors Walgreen Co. and Rite Aid Corp.

"This move is of strategic importance to the future of our company," Ryan said last week. "This was an excellent opportunity to buy the entire company at an attractive price and therefore control how we go to market."

Getting CVS to market online was Zigerelli's job. He joined the company as executive VP of corporate development in February from Procter & Gamble Co., where he worked in marketing and operations for 19 years. His priorities at CVS were to jump-start development of an Internet pharmacy and seek alliances with Internet businesses. In March, his search led him to Soma.com, the first Web-only pharmacy, which had launched its online operation only two months earlier.

At first, Zigerelli explored a strategic alliance with Soma.com. Under such an arrangement, CVS would use its 4,100 stores and part of its $2 million annual marketing communications budget to drive customers to a combined Soma.com and CVS online store. But gaining sales for the online store would mean diverting sales from CVS's conventional stores, and CVS would have to split online sales 50-50 with its partner. "You'd get into issues around cannibalization," Zigerelli says. He quickly realized an acquisition made more sense.

The meeting between Ryan andPigott was pivotal. According to Zigerelli, Ryan and Pigott found they shared the same basic philosophy: Focus on the core pharmacy business and on serving customers. Moreover, the CEOs were quick to see how their distribution systems were complementary and could give them a head start on competitors.

Soma.com owns a prescription fulfillment center in West Chester, Ohio, near CVS's mail-order distribution center, which fills orders for prescription drugs purchased though insurance plans. Unlike CVS's other distribution centers, which ship pallets of products to stores, the mail-order center is the company's only facility that ships single items direct to consumers. CVS will explore integrating its mail-order operations with Soma.com's distribution center.

CVS and Soma.com expect to have little trouble integrating their distribution systems, since both companies use a pharmaceutical distribution software package from SI/ Baker Inc. By linking their systems, the companies can fulfill Web orders through conventional stores and let customers use the Web to check the status of orders placed in stores. "As a standalone E-pharmacy, the best we could do was next-day delivery," says Soma.com's Pigott. "That's not good enough for a large portion of the population. This allows us to give the complete story."

Easier Said Than Done
But pulling it off might not be so easy. "When you take orders centrally, there's always the risk that you tell people you have things in stock that you don't have," says Ken Cassar, an analyst at Jupiter Communications. "It's difficult to manage." Nevertheless, Cassar says that combining online and conventional stores is the future of Internet retailing for established companies.

Through the acquisition, CVS gains the expertise of Soma.com's management team and Web developers. Soma.com will remain in Seattle to attract local technical talent and maintain a relationship with its key software supplier, Microsoft. Soma.com uses Microsoft's Windows NT, Site Server Commerce Edition, and SQL Server database. IT personnel who worked on CVS's internal Internet project will be reassigned

to other high-priority initiatives-namely, improvements to CVS's RX Delivery prescription workflow system and deployment of a merchandising transaction system for stores. CVS estimates it would have spent about $30 million to launch its own online pharmacy-the same amount it paid for Soma.com. Its internal Internet project had already reached the prototype stage when CVS pulled the plug.

Some observers question the move. "If you want to incorporate your Web retail business with your internal business, you absolutely have to have internal IT buy-in," says Seema Williams, an analyst at Forrester Research. But Williams adds that IT organizations are less competent at running other critical parts of a Web business, such as marketing.

Through CVS, Soma.com will gain a lot of marketing muscle. CVS will advertise its Web site in its 4,100 stores, on more than 750 million bags distributed to store customers, in newspaper circulars that reach 33 million consumers, and on TV commercials broadcast to 86 million households. The company is in talks with several Web portals to have its site become a permanent fixture on their pages, and says that being the first combined Internet and conventional drugstore will help it close the deals.

Soma.com gains other benefits. CVS will immediately boost Soma. com's over-the-counter drug offerings from 3,000 to 10,000 items. It will expand Soma.com's vitamin, health, and beauty-aid inventory and add CVS's private-label products and photo finishing service to Soma. com's offerings. Soma.com will become part of CVS's network of pharmacies, letting it take advantage of CVS's contracts with thousands of insurance providers that fill prescriptions through CVS pharmacies.

As for CVS, it gains several steps on its competitors. Says Zigerelli: "We didn't want to be last with a significant move."