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Amazon tests shopping-portal strategy

The bookseller will send users off its site to buy pharmaceuticals from Drugstore.com in a major trial of Amazon's plans to become an e-commerce hub.

    When online shoppers think of books, they invariably think of Amazon.com. Now Amazon is hoping that brand recognition will push its customers to Drugstore.com, which launched yesterday.

    The holiday boom in e-commerce put the spotlight on shopping portals, the Internet hubs that allow consumers to shop for a variety of goods and services from one site. The Christmas season was also particularly lucrative for Amazon, which by then had begun selling videos and music CDs alongside books. Music sales grew 130 percent from the third quarter to the fourth quarter, serving as initial confirmation that consumers saw Amazon as more than a bookstore.

    Amazon yesterday announced it took a 46 percent stake in Drugstore.com. Now, a link to the online pharmacy sends Amazon users off its site entirely--if they so choose. "The real test isn't whether drugs are the next hot item on the Net, but if Amazon will be successful in moving customers to another store," said Steve Weinstein of Pacific Crest Capital.

    At the very least, the Amazon arrangement gives Drugstore.com a leg up and the resulting traffic could be what differentiates Drugstore.com from other online pharmacies. However, Drugstore.com isn't counting on Amazon entirely: It has also signed deals with America Online, whose subscribers spent $1.2 billion with its merchant partners in the fourth quarter, and Excite.

    Consumers and investors alike have been waiting for Amazon to announce where it's going to begin selling next. Last month, the company raised $1.25 billion in a debt offering, and the company has said that expansion plans are likely to lead to higher losses during the first half of this year.

    Amazon's investment in Drugstore.com, which is hoping to get a piece of a $150 billion market for prescription and off-the-shelf drugs, was enough for analysts Keith Benjamin and Lauren Cooks-Levitan of BancBoston Robertson Stephens to raise their rating on the stock to "strong buy" from "buy."

    "We believe Amazon's announcement points to a big opportunity to generate lead-fee revenues," the two said in a statement.

    Amazon has already been experimenting with a comparison-shopping service, called Shop the Web, that links to other merchant sites. The company has said little about the results of that experiment so far, and the Drugstore.com investment may be a better indication of things to come.

    E-commerce sites must use a blend of commerce, community and targeted value, according to venture capitalist Jim Breyer of Accel Partners, something Amazon has done well. Success lies in providing something the brick-and-mortar stores can't do, like send consumers information about the latest book from their favorite author or a reminder to refill a prescription.

    Amazon has also managed to avoid the trap of promising the lowest prices, although it does sell at a discount. "They need to be price competitive, but they don't have to have the lowest price on the Web," said Breyer. "They're building extraordinary brand loyalty on the Web."

    So far, Amazon is the site that comes closest to being a shopping destination on the Web, said Weinstein. If it can drive significant traffic to Drugstore.com, "that's great for the stock."