Online grocer Peapod said on Tuesday it plans to branch out into the drugstore business by selling goods from Walgreens, the largest drugstore chain in the United States.
Under the agreement, Peapod customers would be able to order over-the-counter drugs and beauty products through Peapod's Web catalog. A Peapod employee would then take the product off the shelf and deliver it to the customer.
It's a harbinger for Web upstarts like Drugstore.com that competition from traditional drug retailers is about to heat up.
"Peapod, though unprofitable, knows a lot about e-commerce," said Kate Delhagen, an analyst with Forrester Research. "Maybe they can help Walgreens catch up."
Starting this spring, Peapod (PPOD) will begin selling Walgreens products in the San Francisco Bay Area. Walgreens will help Peapod manage inventory and deliver health and beauty products, general household goods, and small appliances.
Depending on the success of the San Francisco shop, the companies may roll out service across the country.
Peapod's San Francisco drugstore will have an immediate leg up on rivals like Drugstore.com, because Peapod would be able to deliver the goods by the next day. Depending on how much Drugstore.com customers are willing to spend, they may have to wait several days for UPS or Fedex to get their shampoo and soap.
"That's a significant advantage in convenience," said Peapod CEO Andrew Parkinson.
The sale of health and beauty aids could be a huge boost to Peapod. The company has consistently lost money on the sale and delivery of groceries, which have gross margins as low as 10 percent. Health and beauty aids, by contrast, have gross margins of nearly 40 percent.
"Generally, you can't find a more profitable retail category than drugstores," said Michael LeConey, an analyst at Security Capital.
For Walgreens, the Peapod partnership will serve as an e-commerce tutorial, and a way to play the market short-term while it develops its own online store. The company will roll out a "full e-commerce site" in the fall, a spokesman said.
"It's an interesting way for them to hedge their bets," said Delhagen.
The joint Peapod-Walgreens store won't offer prescription medications.
Peapod's stock jumped 72 cents, or 9 percent, to $8.72.
