(Business 2.0) – Joshua Michels could easily get toothpaste at the Walgreens near his San Francisco apartment. Instead, he usually buys it at Pharmaca, an alternative drugstore where shoppers can get their Lipitor with a side of linden tea. A 35-year-old graphic designer, Michels says he shops at Pharmaca because the dominant fragrance is lavender, not rubbing alcohol; because the floors are covered in recycled carpet, not linoleum; and because the staff is just as happy to teach him about homeopathic remedies as it is to sell him Alka-Seltzer. "Pharmaca is not a faceless corporate store," he says, "but it's not too hippie either."

A few years ago, it seemed that all drugstores in the United States would soon be discounters like Walgreens and Rite Aid. Indeed, the number of independent pharmacies dwindled 28 percent during the decade that ended in 2004, thanks largely to the enormous purchasing power of the big chains. But Pharmaca and a like-minded retailer called Elephant Pharmacy are proving that no matter how huge market leaders become, there are ways to thrive in their shadows, even on a national scale. How? By catering exclusively to an emerging consumer niche: According to a 2004 survey conducted by the Centers for Disease Control and Prevention, more than a third of American adults use some form of nontraditional medicine, spending more than $20 billion annually. "Pharmaca and Elephant are bringing the wellness aspect into their stores as a business advantage," says John Rand, an analyst with retail consultancy Management Ventures.

Pharmaca's 10 stores--plus three more opening this year--are expected to top $50 million in revenue in 2006, according to Pharmaca CEO and co-founder Barry Perzow. Just as high-end stores like Whole Foods Market created lifestyle retail brands in the grocery business, Pharmaca targets people who want more from a drugstore than a prescription counter flanked by shelves of cheap staples. In fact, prescriptions account for 70 percent of revenue at big discounters but only 50 percent at Pharmaca. Instead, its stores employ naturopaths and aestheticians and offer classes (most of them free) on everything from herbal aphrodisiacs to flower essences. Kiosks let Pharmaca customers tap into a massive database of natural remedies, complete with information on potentially harmful interactions with prescription drugs. "I want to bring together the best of alternative and traditional medicines under one roof," Perzow says.

It's no accident that the chain's strategy is similar to that of natural supermarkets. Before he got into the drugstore business, Perzow co-founded a health-food chain called Capers in British Columbia. It merged with Alfalfa's, based in Boulder, Colo., and the combined business was sold to Wild Oats Markets in 1997. With more than $18 million in outside financing, Perzow opened the first Pharmaca in November 2000 in Boulder, where the company is also headquartered.

Of course, not every American can spring for $13 "probiotic" pearls to promote healthy digestion, so like Whole Foods, Pharmaca caters to affluent shoppers. Perzow says all of his stores are profitable, in part because he chooses locations where annual household incomes average $85,000 or more. At Pharmaca's store in Santa Fe, N.M., 75 percent of the shoppers have university degrees, according to a company survey.

Elephant, which promotes itself as "the drugstore that prescribes yoga," takes the lifestyle approach even further. Founded by serial entrepreneur Stuart Skorman, the chain opened its first store in 2002 in Berkeley, and its third Northern California location is scheduled to open in October. Whereas Pharmaca's outlets often inhabit small storefronts formerly occupied by independent pharmacies, Elephant's shops are expansive--about 11,000 square feet--and house yoga studios, produce counters, and wine and book sections. CEO Kathi Lentzsch says that Elephant shoppers spend an average of 40 minutes per visit browsing the aisles and that the Berkeley store was profitable on $12 million in revenue in 2005.

Mainstream chains are taking note. Of the $24 million in total financing that Elephant has received since its launch, $5 million came from CVS, the second-largest U.S. drugstore chain. Rite Aid, through an alliance with GNC, has set up mini stores offering vitamins and supplements in more than 1,100 of its 3,350 outlets. Electronics giant Best Buy has even jumped into the pharmacy category with Eq-life, a chain that sells health-related electronics such as heart-rate monitors and defibrillators alongside prescription drugs. At the two Eq-life stores, both in Minnesota, yoga classes, spas, and Caribou coffee bars round out the concept. (Best Buy recently shuttered one underperforming Eq-life location.)

None of this means, however, that the big-box drugstores are in trouble: Last year Walgreens booked its 31st straight year of record revenue ($42.2 billion) and net profit ($1.6 billion), while annual sales at CVS rose by 21 percent to $37 billion. But Pharmaca and Elephant have pioneered a thriving niche that could support several alternative-therapy chains with "a couple thousand stores," according to analyst Rand. That might not seem like a lot to Walgreens, but for some innovative entrepreneurs, it would be a healthy dose of profit.

Two thriving concepts ...

[*] Projected for 2006

... for a healthy trend.

U.S. consumer spending on natural health goods (in billions)

Natural health and beauty aids

Dietary supplements

Source: Nutrition Business Journal

Siri Schubert is a contributing writer for Business 2.0 and is based in San Francisco.