Retail

Hijacking Commerce – One Marketplace At A Time

Invisibility is a funny thing, particularly when it comes to retail.

Generally speaking, there are all kinds of moving parts in a retail transaction that merchants prefer to remain as invisible as possible — payments, inventory management, shipping logistics — because if consumers can see them, odds are it means they aren’t working right.

But for the retail business itself, whether one is selling shoes, food, hats or parsnips delivered on demand, being invisible is not just bad news — it can more or less be the kiss of death. No matter how solid the product, if consumers don’t know a brand is there, they aren’t going to patronize it.

It is almost the universal desire of brands and and retailers to be visible to the mind’s eye of consumers and to be a household name. For the big boys, the road is usually lined with full court presses into consumer consciousness through the magical power of multi-channel marketing and advertising campaigns. Anyone who has over found themselves pulling a Peyton and humming a commercial jingle in their day-to-day life can attest to the power of this method.

However, that is a costly way to get to the target. Smaller players generally opt to be a bit more tactical and trade off on mastery of the new media advertising channels in an effort to build the sort of buzz that allows the sort of expansion that creates a budget for more formally and expensive marketing efforts.

But for a upstart firm like Pharmapacks — operating out of an unassuming warehouse in Queens, selling products that one would find in most neighborhood pharmacies — becoming a household name is both unlikely, and besides the point. Instead of hoping to be “visible” in general, Pharmapacks only wants to be visible to customers at one moment: the moment when they are actually primed to buy something specific, and at that moment being the best deal on offer for that particular good.

And Pharmapacks has gotten particularly good at mastering that moment — so good in fact that this small firm that grew out of a neighborhood drug store is now projecting $140 million-$160 million in revenue in 2016.

So what’s their secret? According to CEO and co-founder Andrew Vagenas, the shrewd use of various eCommerce marketplaces that populate the Internet (most specifically Amazon’s, from which 40 percent of their revenue comes) and “the Colombian cocaine of algorithms.”

Throw on top of that some very favorable (if somewhat legally suspect) pricing in their supply chain, and Pharmapacks is offering savings to customers who patronize them over and over, possible without any awareness that they’re doing it. And while it may seem a strange path, it is unquestionably one that is working for Pharmapacks — and working well enough that it seems at least worth wondering if we’re getting a glimpse of eCommerce’s future.

The Magic Of “The Buy Box”

In 2014, Pharmapacks brought in $31.5 million in revenue — less than half of the $70 million they brought in last year, but still representing a three-year growth rate (the firm was founded three years ago) of 3,035 percent.

“When we started out online, we were trying to run the business like a store. We got a warehouse so we could stay stocked up and ready to fill orders. Then we realized that this was the wrong way to do it, that we could use the marketplaces to streamline our operations and make a lot more money.”

Which, in essence, is how Pharmapacks works. Instead of selling what their customers “want,” they sell what their suppliers have, at the very best price.

The team built an online database that scraped their supplier listings for product information. In the early days, when one of their customers ordered the product, they put in an order to their supplier, grabbed it, packed it and shipped it out. As the business has grown, Pharmapacks began to move toward buying in bulk based on sales projections, but even bulk orders are meant to live a limited life in the warehouse. Mostly, goods only sit in house for a few hours before being reshipped right out — the name of the game is running up the transactions and turning a tiny profit on each one.

To run up those transactions, Pharmapacks has mastered the Amazon “Buy Box.” The Buy Box is the listing or two that shows up to the right of the screen on every Amazon product page. Those listings contain the same good the consumer is shopping for – and the Top 3 marketplace providers of the good. Pharmapacks only goes after the listings for which it can beat Amazon on price (they also offer free shipping on all goods) and make money on the good.

“The buy box is tricky. If you price too high you don’t make those listings, customers don’t see the goods — and it’s a waste. You price too low, you lose money on the goods — and we don’t do that. We make money on every sale, soap, vitamins, you name it.”

And we checked, Pharmapack does make the buy box on soap, vitamins, perfume and various hemorrhoid creams. Vagenas’ theory is that people start out buying online goods that they might find embarrassing to pick up in person.

“I always joke our bread and butter is anal cream,” Vagenas said. “Our top sellers are things nobody wants to buy at a store. But from there, people buy everything else.”

The Master Brain

Perfecting the Buy Box was complicated, and while at first Pharmapacks used the collective wisdom of its founders — three high school friends with a long history in selling pharmacy goods — it eventually hired a developer to code their various esoteric tactics tactics into algorithms, and baked them right into their proprietary software.

That allows their software (lovingly called The Master Brain) to build optimized listings that always hit in the low buy price, but are profitable for Pharmapack.

How does the software work? A good question that outsiders will likely never know the answer to, as the secrets of their in-house software are guarded as closely as the recipes for Coke or KFC chicken.

The only thing they’ll say for sure is that it works — better than anything else out there, and that since the Master Brain took over, orders have increased sixfold and orders began coming in in a “never-ending stream.”

The Right Supply Conditions

Of course, getting those right prices is still a matter of suppliers, which is where the “fell off the back of a truck” portion of this tale begins.

Not on the part of Pharmapacks, which buys from the same established, law-abiding distributors that sell to national chains like Walmart, Costco, and CVS, a fact reported by INC and confirmed by Vagenas.

However, when one takes a closer look at those suppliers — one in particular — the picture gets a little more colorful.

While some suppliers deal directly with manufacturers for their goods, others procure them in the secondary resale market in a way that is less than totally transparent — and usually prone to accusations about things falling off of trucks. These secondary market players are called “diverters” and they are less than beloved by manufacturers.

Quality King, a Ronkonkoma, New York based supplier, is widely regarded as the largest and most successful diverter in the world. They have been sued — a lot. All in, the firm has been named in 50 lawsuits because of its business practices and four times under the RICO Act Time Quality King, however, it has won every time. Courts have ruled that as long as Quality King is selling non-counterfeit goods that it acquired legally, they can resell them as they please.

That is despite the fact that some of those goods have been acquired in creative ways, like buying shiploads of cargo that have done a circuitous world tour before being snapped up by Quality King for pennies on the dollar and selling them at an extreme discount.

Pharmapacks is one of Quality King’s better customers — and though Vagenas insists that they are only one of the many firms the company works with, he did note that they work hard as a company to protect their suppliers from manufacturers queries.

“We don’t have to tell brands anything, and we don’t want to. And, hypothetically, say a distributor cuts us off from a particular item. We’ll just go find it somewhere else. You know who it works out for?” asked Vagenas. “The consumer. The consumer’s no longer getting gouged.”

And it works out pretty well for Pharmapacks as well, which has grown remarkably, and is focused on growing even more, possibly beyond the marketplace platforms it has relied on till now.

As 2015 came to a close, the firm installed robotics and conveyor belts to help package goods, and it can now prepare 50 orders per minute. Pharmapacks has also recently signed a lease on a new 142,000-square-foot headquarters and is in negotiations with Fresh Direct to sell and fulfill orders for health and beauty products on its site. If that deal goes through, it will match a similar deal Pharmapacks already has with Walmart.com.

Vagenas also noted it is working with two of its (yet unnamed) distributors to bring a white-label version of its site to mom-and-pop brick-and-mortar drugstores — access that, if it takes off, will allow Pharmapacks an even quicker delivery path for customers nationwide.

Pharmapacks is an all but invisible firm that has been quietly growing to become big and profitable, because it learned to hone in on the actual moment of purchase on eCommerce platforms — and found a way to steal the conversion time and time and again. They may not be flashy, and perhaps no one has ever heard of them, but if they can build their own eCommerce platform as well as they have ridden others so far, they might just end up a household name after all.

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