SINK OR SWIM?

The future of B2B exchanges will sink or swim based on how effective they are at achieving the desired results of reducing costs and inventory, while increasing product availability and turns.That is the thinking of some supermarket executives and experts who follow the trends in this industry.When exchanges like GlobalNetXchange and the World Wide Retail Exchange, Alexandria, Va., were founded in

The future of B2B exchanges will sink or swim based on how effective they are at achieving the desired results of reducing costs and inventory, while increasing product availability and turns.

That is the thinking of some supermarket executives and experts who follow the trends in this industry.

When exchanges like GlobalNetXchange and the World Wide Retail Exchange, Alexandria, Va., were founded in early 1999, the thinking was eventually they would become effective tools for cutting procurement costs and increasing product availability and turns. These exchanges were expected to slash excess inventory and lower costs, as well.

This was a tall order on the retail supermarket landscape, no doubt.

Harrison Lewis, director and general manager of B2B commerce for H.E. Butt Grocery Co., San Antonio, feels the future of these types of exchanges depends on how proficient supermarkets become at actually accomplishing these goals.

"You have to ask yourself whether this way of doing business is sustainable," Lewis said. "Companies do need to make a profit. We believe that the success of this service will depend on organizations developing the discipline to determine product requirements, then communicating them to a broad base of suppliers. And finally, using the bid technology to allow suppliers to bid against those requirements."

Lewis assumed his current position at the 275-store chain early in 1999.

"Really living it, actually being involved in the evolution, has become comfortable," Lewis said. "But, more than that, to look ahead both toward the next year and years ahead is very exciting. The possibilities for so many benefits seems endless."

Lewis said H-E-B plans to continue on in its present exchange relationships and build others this year.

H-E-B is a charter member of WWRE and a trading member in two smaller exchanges, INC2inc and Tradelink.

Lewis acknowledges that many exchanges open up for business with the auction or reverse auction function because it is an easy first step that doesn't require a level of integration.

"But the purpose of using auctions to get lower costs from existing suppliers will not work in the long run," Lewis said.

In the past, H-E-B may have included three suppliers to select from to purchase an item. Currently, with the use of the exchanges, it uses 20 or more.

"It is amazing. We are able to source more product than we thought possible, and of course this is a gold mine for new, smaller suppliers. If you know what you are doing, this environment can really level the playing field for buyers and sellers alike," Lewis said.

One of the most valuable benefits, when all the technologies have been set in place, will be the ease, efficiency, economy and accuracy of purchasing," Lewis said.

"We still have a lot of paper that gets passed back and forth," Lewis said. "The number of hand-offs increases the possibilities for error and misunderstanding. A great opportunity in the exchange environment is to operate off of a 'data of record.'

"This will provide a single representation of the truth, thereby eliminating the chance for discrepancies or different interpretations between the buyer's database and that of the seller," Lewis said.

Absolutely critical to the smooth operation of these exchanges is the UCCnet, Lawrenceville, N.J., effort to standardize the protocol for using data, Lewis said.

"Obviously, there will continue to be more than one exchange, so we must have interoperability. The interoperability will be the glue that holds everything together. Without UCCnet, none of this will be possible," he said.

The exchange of information and the ability to work together to take costs out of the supply chain, making transactions more efficient and economical, is the real value of B2B, experts said.

Today's large exchanges still have a lot of work to do to get the technology and the functionality all worked out. This allows room on the playing field for niche players, the specialists with access to more suppliers in their vertical categories.

Early December saw the surprising demise of Chemdex, a large chemical industry exchange, but analysts in the food business do not see this as indicator for the grocery segment.

Thomas Murphy, president of Peak Tech Consulting in Colorado Springs, Colo., said change is on the horizon for the exchange industry.

"The exchange industry is governed by the same economics as all other industries. When the supply of alternatives is greater than the demand, the result will be consolidation via merger and acquisition and/or bankruptcies," Murphy said.

"To be a successful exchange, you must have a critical mass of customers, both on the buy and sell sides," he adds. "As either a buyer or seller, you want as few exchange relationships as possible, for this maximizes your productivity. Therefore, there are a limited number of exchanges that can supply a market."

Murphy thinks that in most areas, the supply is much greater than the demand. Therefore, we should expect to see continued shakeouts.

"As the market contracts, the remaining exchanges are impacted in at least two ways," Murphy said. "First, survivors live to pick up potential new customers, thus sustaining their growth. Second, the market becomes restless and anxious due to the failure of exchanges."

Murphy feels the overall exchange market will contract until demand approximates supply. For the grocery industry, he thinks this means fewer sites.

"It can probably only support two industry sites and a handful of pure-play exchanges," Murphy said.

Debra Levin, a retail analyst at Morgan Stanley Dean Witter, New York, said the B2B exchanges won't go away.

"These exchanges need to be built. Companies are still ordering product and supplies with their own systems," Levin said.

"Although some auctions have occurred and have had positive effects, the major portion of the benefits is likely to be years away," Levin added. "Ultimately, the exchanges should facilitate improved information exchange with both suppliers and vendors, lower transaction costs, and improve inventory management.

"Potential drawbacks include taking management's time and attention initially with the payback coming longer-term," Levin added. "Also, given the competitive intensity of the industry, savings could end up needing to be reinvested in lower prices with no significant benefit if all participants do this."

Many small retail chains and independents are sitting back, waiting to see what happens, said Ken Fobes, chairman of Strategy Partners Group, Ponte Vedre Beach, Fla. "They have read about the problems in the dot.com industry and are only putting one toe in the water by starting to do some business with a niche player.

"They are not at the forefront of the action, but they are finding out what the future may hold," Fobes added.

That future is working together and interfacing via the Internet.

In 1999, exchanges in the food and beverage industry did about $35 billion in transactions, according to Jupiter Communications, New York.

GNX has reportedly done about $300 million since it launched. By 2005, GNX projects it could grow to $850 billion a year.

According to analyst Chuck Cerankosky of McDonald & Co., Cleveland, the exchanges will grow slowly.

"There is an interest in allowing them to evolve slowly as a business model that will provide value to customers and not necessarily profits for shareholders. The idea is to say we are creating something to reduce transaction costs, and later down the road to actually reduce those costs. There is a reason for them to exist. People just have to get comfortable with purchasing in the new form," Cerankosky said.

The two largest retailer exchanges were both founded early in 1999.

In February, Sears, Hoffman Estates, Ill., joined with Oracle, Redwood Shores, Calif., and the Paris-based Carrefour to open GNX as a for-profit venture.

Later that year, GNX admitted five more equity partners, including Kroger, Cincinnati.

None of the retailers are direct competitors. The combined annual sales of partners is $200 billion. The plan is for partners to put a majority of purchasing volume through GNX over the next three years. Soon GNX will admit non-equity partners who will pay undisclosed fees for membership and transactions.

One month later, on March 11, retailers from the United States and Europe officially formed WWRE, which included Albertson's, Boise, Idaho, and Safeway, Pleasanton, Calif., as founding members.

Soon, six more signed on as founders, and by the end of the third quarter, 24 more retailers, including H-E-B, joined as charter members.

Lewis said his company chose WWRE over GNX because there were more partners that had similar businesses to its own. With 53 members, the combined annual sales is $722 billion.

A third large exchange called Transora, Chicago, is comprised of 54 suppliers, including Proctor & Gamble, Cincinnati, and the Netherlands-based Unilever.

The combined sales of members is $500 billion. Their aim is to become an intermediary between retailers and the raw goods end of the supply chain.