The Next State Of E-Commerce

The hottest area on Wall Street right now is the business-to-business Internet sector. That is to say, the companies that propose to use the Internet to sell or broker products and services to businesses. What seems to have happened is that last year’s hot area – which was e-commerce companies, such as, selling direct to consumers – has been falling out of favor as few of the enterprises have managed to make any money and, for that matter, their losses don’t even seem to go down as volume increases.

But business-to-business is another matter entirely. Higher average sales, fewer customers to reach – translating into lower advertising costs to build business and a universe with virtually 100% penetration of computers and Internet access – all add up to a juicy prospect.

What about the specialty food business? Is it likely that procurement of specialty foods will be principally handled over the Internet? Or is the nature of the product inimical to doing business in this manner?

It already is common for a business to be done today, via e-mail, for example, which a year or two ago would have been handled via phone and fax. In this sense, the Internet is a tool that is being used and will be used, as an adjunct to make procurement easier and more efficient, but it will not substantively change the nature of the beast.

Specialty food marketers were one of the early adopters of the Internet as a tool to sell their products both direct to consumers and to trade buyers. With so many small marketers, it made sense to set up websites and hope to attract business.

These sites are fine as far as they go, but their inefficiency as a procurement tool for a store is obvious since each site is autonomous. A buyer has to search out a website for each product, order individually, pay bills individually, get deliveries individually, and so on.

These difficulties are daunting, but they also point out the opportunities in a specialty food business-to-business procurement site. The opportunity is not with giant chains. They have their own buying systems and have or will have Internet functionality built into these systems; they are unlikely to want to adopt some e-commerce site’s buying system in lieu of their chain-wide technology.

When observers talk about the boom in business-to-business e-commerce they are talking about two things: In part, they talk of proprietary systems, such as a large supermarket chain operating its own Internet site for its own procurement. Electronic Data Interface (EDI) and continuous replenishment systems aren’t new terms, but the Internet offers the promise of easier-to-access systems. This is very important in the specialty food industry where even large manufacturers are small compared to behemoths like P&G and thus less likely to have either the capital or expertise to work with a variety of totally different systems, one from each retailer.

Whatever the future of big chain Internet procurement practices, Wall Street is excited about something different: specialized business-to-business e-commerce sites. If a buyer can go to one site, do virtually all of his or her procurement, which means accessing a very large range of products, getting information on each product category – everything from variety offerings to nutritional data and price points – and be getting one invoice that can be paid electronically, then these sites are appealing.

The opportunity in specialty food e-commerce sites is in serving the many small buyers who have most everything shipped UPS. Here a great e-commerce site could ease the job of ordering and, by providing proper information, allow buyers to procure more suitable products.

The problem is that most of the existing business-to-business sites aren’t doing the job. Most of the existing specialty food e-commerce sites are scarce on information and carry only the most limited of selections. Most are undercapitalized bootstrapping operations, and the dilemma here is that the systems only become useful if they are large scale.

The truth is that these e-commerce sites are trying to recreate the wheel. The business function of an e-commerce site is very similar to that of a traditional specialty food distributor. A distributor buys from many suppliers to offer a full range of product to the distributor’s customers. Instead of trying to amalgamate thousands of marketers through a website and impose on these marketers all the burdens of shipping in small quantities, the sensible e-commerce site in the specialty food industry would be an online face of a specialty food distributor. They have the range of products, they are used to invoicing one shot and, because they have all the product in one place, ready to ship at one time, they can probably get better freight rates and reduce the number of deliveries stores have to deal with.

The transition won’t be easy. There are territorial exclusivities to resolve, and distributors have to seize the opportunity most likely by partnering with one of the e-commerce experts. In the last few years, consolidation brought into focus the challenges faced by specialty food distributors. In the age of the Internet, maybe we should start looking at the opportunities.