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  • A Home-Grown War Over Herbs

    By Leslie Walker
    Washington Post Staff Writer
    Thursday, September 9, 1999; Page E1

    Who'd have thought it Washington is the global capital of Internet vitamin sales, with not one but three men vying to be the electronic vitamin kingpin.

    And what a cast of characters they are, each a flamboyant offline retailer who is testing how much retailing really changes when it moves online. Each has taken up a different position along what I call the "continuum of virtuality" in electronic commerce, with totally electronic companies at one end (no brick-and-mortar assets) and "land-based" firms (owning warehouses and stores as well as Web sites) at the other.

    The two best-known local players are Herbert and Robert Haft, the father and son whose nasty public spat helped drag down the family's Crown Books and Dart Drug empire. They haven't spoken much since a federal court ordered Herbert to fork over a $38 million judgment to his son five years ago. In the past four months, the Hafts have launched competing Web sites at Vitamins.com and HealthQuick.com.

    The third local player is Ken Hakuta, with his AllHerb.com. He funded it with more than $3 million of the $20 million in profit he made in the 1980s selling "Wacky Wallwalker" rubber octopus toys that crawled down walls. No sloucher on marketing ideas, Hakuta this week brought to the United States a shaman, or tribal healer, who from an Amazon rain forest dispenses e-mail advice on AllHerb.com.

    Through a translator, shaman Don Antonio Montero Pisco, who had never left his native Peru before, said that the most exciting part of his first day here was seeing herbs "encapsulated in little containers" and "seeing myself inside a machine." Until he saw Hakuta's herbal

    warehouse in Laurel and his own face on the Web, Antonio explained, he didn't really understand why he had been answering all those questions trekked to him in the jungle.

    Of the three local Web sites, Hakuta's is the most focused on the mystique of herbalism, offering weekly features, columns and tips from two dozen herbalists. It has plans to add video from expeditions to the Amazon. AllHerb.com also is the only one that has raised no venture capital and is spending little on advertising.

    While all say they offer competitive pricing (each Haft claims his prices are the absolute lowest), they are probing other Internet unknowns as well, such as how much having original content on a site matters, the degree to which consumers want information embedded on virtual shelves and the breadth of product selection they want from a single Web store.

    But perhaps the biggest question is the right amount of virtuality. Herbert's Healthquick.com is at the fully virtual end of the continuum. It has just eight employees, a feat it accomplishes by contracting out packing and shipping to a mail-order firm. It is focused primarily on order-taking and low prices, which means it needs high sales volumes, so it spends lavishly to advertise on Web portal sites.

    In addition to inking deals with Yahoo Inc. and others, HealthQuick.com recently promised to pay America Online Inc. $10 million over two years and gave AOL 5 percent of the company in return for links to HealthQuick.com in AOL's electronic properties.

    Robert Haft's Vitamins.com is at the other end of the scale, pursuing a more costly "clicks and mortar" blend of Internet, mail-order and real-world store retailing. Robert is relying on customers and advisers of his 10 Vitamin Superstores in the Washington region to help drive traffic to his Web site.

    To handle distribution, he recently bought a vitamin cataloguer that owns a 60,000-square-foot warehouse. He is also putting Web kiosks in his stores so people can do research, and he has signed up 10,000 customers for a frequent-buyer discount card that applies both in stores and on the Web.

    "We think Internet is a fascinating [sales] channel but not the only channel," he said.

    Father scoffs openly at son and other Internet players who are racking up costs for warehouses and stores. "I had a whole series of bricks-and-mortar businesses, and I know brick and mortar is very expensive," he said. "It adds 30 to 40 percent to the cost of doing business."

    Both are raising megabucks. Herbert has taken in $10 million in venture capital and Robert $20 million, putting each on track for likely initial public stock offerings next year. But they are spending so heavily on advertising that Ken Hakuta calls it the "IPO or bust" syndrome. He means that their monthly "burn rate" the difference between expenses and revenues is so great they may not survive without a stock offering.

    AllHerb is steering a middle course, building a small warehouse in Laurel where it keeps inventory and packs orders with a total of 15 employees. Hakuta said his independence from venture capitalists has allowed him to grow slowly, more at the speed of a traditional offline company than the typical Internet commerce site that tries to lose money fast to grab market share.

    Hakuta hopes to raise $3 million to $5 million in venture capital soon because he, too, wants to go public next year (at which point he says he'll give the shaman and his other advisers stock options).

    The Hafts won't disclose their Internet sales, although Robert Haft projected that his stores and Web site combined would collect $28 million this year; Herbert Haft insisted he would reach profitability first.

    Hakuta does talk about his finances. With no portal distribution deals and little advertising, AllHerb.com is generating sales of about $100,000 a month and spending a little more than twice that, for a monthly "burn rate" $120,000 and annual losses of about $1.4 million.

    His sales are not dramatically lower than what national leader MotherNature.com, based in Massachusetts, is reporting: monthly sales of about $250,000 during the second quarter of this year. But MotherNature's losses are more than 10 times Hakuta's: over $2 million a month in the first half of this year.

    In addition to MotherNature, the local players face competition from general online drug stores such as giant Drugstore.com that's backed by Rite Aid and Amazon.com.

    Everyone agrees a shakeout in the vitamin business is inevitable. In the end, I fear small Internet independents like AllHerb.com may face the same crushing fate that independent stores offline have faced for two decades.


    Leslie Walker's e-mail address is walkerl@washpost.com.

    © 1999 The Washington Post Company

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