In B2B Marketplace, Reality Bites

FRAMINGHAM (05/01/2000) - The promises being made about Web-based business-to-business exchanges bring new meaning to the word hyperbole.

Consider the WorldWide Retail Exchange. It touts itself as the retail industry's largest business-to-business Internet exchange, with 14 founding members whose collective annual purchases total about $400 billion.

No matter that it has yet to process a single transaction or even select a technology platform - or that Bentonville, Arkansas-based Wal-Mart Stores Inc., the world's biggest retailer, is conspicuously absent. The exchange, whose members do include Kmart Corp. in Troy, Michigan, and Target Corp. in Minneapolis, was announced March 31.

Or take, which with just over $1 million in revenue in 1999 - much of it from advertising - is ranked as the leading independent Web-based exchange in the plastics industry. Yet some of the industry's largest players, notably $7 billion GE Plastics in Pittsfield, Massachusetts, are nowhere to be found in the electronic marketplace.

A reality check seems to be in order.

Analysts estimate that as many as 1,000 Internet exchanges had been announced or launched by the end of last year. The exchanges' promise is largely the same across all the industries they cover: to cut costs and create supply-chain efficiencies by bringing together buyers and sellers.

In addition, these Internet marketplaces plan to offer a wide range of value-added services to their participants, such as shipping and demand planning and logistics, all in a seamless electronic environment.

But despite the hype, less than 15% of exchanges are actually delivering value-added services or end-to-end electronic transactions, according to Bruce Klassen, a vice president at New York-based A.T. Kearney Inc., which recently conducted a study of 85 exchanges serving 10 industries.

"Exchanges are still in their infancy," said Carl Lenz, an analyst at Gartner Group Inc. in Stamford, Connecticut. "They're primarily a third-party mechanism to push purchase orders, and that's it for now."

Lenz predicted that it will be at least another 18 to 24 months before electronic markets begin to deliver value-added services, "and that's being pretty positive," he added.

Of the 600 independent exchanges tracked by Boston-based AMR Research Inc., "only two or three have strong support for supply-chain integration," said AMR analyst Scott Latham.

To survive a widely expected cross-industry shakeout over the next several years, the vast majority of exchanges are instead preoccupied with building what's known in business-to-business jargon as "liquidity" - a critical mass of buyers and sellers - analysts said.

But the going is slow. Cambridge, Massachusetts-based Forrester Research Inc. estimates that only about 1% of business-to-business trade will be conducted through online marketplaces this year. A separate Forrester survey of 80 executives at large U.S. companies also found that 77% had yet to execute a single transaction through an online exchange.

Meanwhile, there's a growing trend among companies - particularly suppliers - to spurn industry marketplaces in favor of conducting business through their own private exchanges.

"Those companies don't want to pay a commission for the privilege of selling," or they're reluctant to share planning and inventory information on a public exchange, noted Latham.

They also want to remain close to their customers.

"We have no intention of turning over our connection to our customers to a third party, which is how we would view any exchange," said Gerry Podesta, general manager of electronic business at GE Plastics.

This year, said Podesta, GE Plastics expects to transact $1 billion in sales over its own GE Polymerland exchange.

Another company that has turned its back on exchanges is Wilson Supply, a $3.5 billion oil-industry equipment and services company in Houston.

Mark Chellis, Wilson's vice president of online business and marketing, said several oil industry exchanges have approached him. But so far, none has been able to come close to providing the value-added services that Wilson already provides directly to its business customers, including 200 distribution locations, next-day delivery of goods and free order and sales summary reports.

Like Podesta, Chellis said he has a difficult time seeing the value of paying a third party to insert itself between Wilson and its customers.

Jerry Storch, president of financial services and new businesses at Target and a founding member of the WorldWide Retail Exchange, said such skepticism is premature in the business-to-business arena.

He noted that the founding 14 companies involved in the retail industry effort are pouring massive financial and professional resources into the exchange, though he declined to quantify those investments.

The WorldWide Retail Exchange "is just starting. It doesn't mean it's not going to happen," he said.

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