CHARTING THE EXCHANGES 2004-02-23 (2)

LIZ PARKS

It's been four years since the business-to-business exchanges, at the height of the Internet bubble, burst upon the scene. So where are they today, and what uses are retailers making of them?

As with other Web-related activities, such as online grocery sales, B2B exchanges followed an initial burst of enthusiasm in the industry with a leveling off of expectations. Now, they seem to be gradually finding their particular niches.

In food retailing, the three largest exchanges are WorldWide Retail Exchange, GlobalNetXchange and Transora, but other entities like EC Markets also facilitate online activities such as reverse auctions.

In assessing the big three, some members of the exchanges as well as analysts say each has found its own path, carving out suites of solutions that have been, to varying degrees, effective. All three exchanges say this is the year they will become profitable.

At first, the exchanges "created a huge amount of confusion in the marketplace, but I think now that's all gone away because their roles are more defined," said Kara Romanow, research director/CPG specialist for Boston-based AMR Research.

Andrew White, research director, supply chain management for Stamford, Conn.-based The Gartner Group, said the B2B consortiums today are "vastly different" from what they were at the outset. "The expectations of what the consortiums can do," said White, "have been scaled back over time because of the simple reality that e-marketplaces don't work the way many people initially thought they would. Head-to-head competitors simply haven't come together in one central group and become good chaps."

White also observed that retailers might want to join GNX because there would be fewer major U.S. competitors, and "because you might get a rate of return different than you would get from WWRE."

However, Nick Parnaby, WWRE's global director of member engagement and marketing, disagreed with the notion that competitors can't work together. "We have operating committees every other month where members share best practices and experiences, and we have internal industry events quarterly in each region around procurement and collaboration," he said.

Joseph Laughlin, GNX's chief executive officer, also cited examples of successful collaborations and shared learning, but he and Parnaby agreed "the exchanges have evolved, morphing into organizations that outsource IT and development services."

As Romanow put it, the exchanges are able to connect multiple parties in multiple formats in multiple countries. "That's part of e-commerce that individual companies don't want to manage themselves," she said. "It would be an administrative nightmare with a lot of overhead trying to manage, maintain and keep track of that many connections and formats."

Auctions Abound at WWRE

Among WWRE's 64 members and participants, 59 are retailers, including such U.S. food retailers as Albertsons, H.E. Butt Grocery, Hy-Vee, Publix, Safeway, Supervalu, Wegmans and Winn-Dixie.

About 40 of WWRE's members, Parnaby said, are "highly active" with many typically using at least some WWRE solutions "regularly and continuously, some weekly, some daily, and some even hourly." Among the most active participants, Parnaby said, are Royal Ahold, Delhaize, Albertsons, Safeway, Best Buy, Target, Walgreens, CVS, Eckerd and JCPenney.

Some member organizations, Parnaby said, have 250 to 1,000 "active users" connected to WWRE. Other organizations may have just five to 10 users connected. WWRE currently has five full manufacturer members as well as over 50 participating supplier members using some of its services.

Parnaby said WWRE will be profitable by the end of this year, but as Gartner's White noted, WWRE's management said the same thing last year and it did not happen.

Walgreens has seen "a lot of tangible results from our membership, and we've seen more results as the exchange has grown," said spokesman Michael Polzin. "We make quite a bit of use out of it, and we're always looking for additional ways to participate."

Since its inception in March 2000, WWRE has saved its members about $1.5 billion, according to Parnaby. It has done this through two primary functionalities: product procurement through individual (one-buyer) online auctions; and online collaborative (also called aggregated) auctions, whereby WWRE combines the spending power of its members. Auctions account for about 90% of WWRE's transaction volume, which was $3.4 billion last year, up 6% from the prior year.

Although collaborative auctions now account for about 14% of WWRE's auction volume, Parnaby said that segment is expected to grow substantially and could end the year generating 25% of auction volume. "Last year, we did 15 collaborative auctions," he said. "This year, we already have over 50 scheduled on the buying calendar." Also, a third of the savings garnered though WWRE is attributed to collaborative auctions.

About 80% of WWRE's auctions, and GNX's as well, are for direct goods purchased for resale to consumers. However, nearly all direct-for-resale products are private label rather than branded goods.

At WWRE and GNX, retailers and manufacturers are also invited to participate in collaborative auctions for indirect goods that are not for resale, but are business necessities such as ocean freight, forklift trucks, forklift truck batteries or pallet jacks. WWRE is currently researching a collaborative opportunity to buy RFID (radio frequency identification) tags.

WWRE started a CPFR (collaborative planning, forecasting and replenishment) initiative in February 2001 as a "sandbox" for learning, said Parnaby. To date, he said, WWRE has done more than 30 CPFR implementations. About 14 retail members, including Albertsons, Safeway, Best Buy and Walgreens, use WWRE's CPFR services regularly, Parnaby said. On the manufacturer side, about 16 are doing CPFR with WWRE, including Wyeth, Kimberly-Clark, Kraft and Schering-Plough.

About 75% of WWRE users have chosen WWRE exclusively for CPFR, Parnaby said, and the rest blend their own internal CPFR solutions with WWRE's CPFR solution. This year, Parnaby said, WWRE retailers using CPFR will be rolling it out to additional trading partners to generate further economies of scale.

Some manufacturers who are doing CPFR on multiple extranet platforms, such as Wal-Mart's RetailLink, are using WWRE to consolidate them into a single platform, "so there are a minimum number of trading partner interfaces," Parnaby said

Collaborating at GNX

In contrast with WWRE, GNX has built its operation around retailers outside of North America, including Carrefour (France), Coles Myer (Australia), Metro Group (Germany), Pinault Printemps-Redoute (France), Karstadt Quelle (Germany) and Sainsbury's (United Kingdom). U.S. retail partners include Sainsbury's subsidiary, Shaw's, Kroger, Sears and Federated Department Stores.

None of the exchanges will reveal their revenue dollars, although GNX achieved a positive cash flow and became profitable for the first time on a run-rate basis last November, according to Laughlin, who said GNX expects to show a profit at the end of this year.

In terms of transaction volume, last year GNX procured over $8 billion in goods and services for its members, up from $5 billion in 2002, and up from $2.5 billion in 2001, said Laughlin.

GNX currently has eight "hub" customers engaged with 35 "spoke" trading partners on its collaborative replenishment solution for more than 5,700 stockkeeping units, said Laughlin. GNX partners Sainsbury's, Metro Group, Sears, Karstadt Quelle and Coles Myer are the retail hub companies, while wine and spirits manufacturer Diageo and computer printer manufacturer Lexmark are hubs for their respective trading partners.

On the online auction side, over 20,000 suppliers have participated in auctions on GNX, but suppliers are not charged for this participation and, therefore, are not considered customers; supplier companies and GNX members participating in collaboration and best practice programs are paying customers.

Laughlin said savings per auction vary widely by category. It can be as high as 15% to 25% in the apparel category, but as low as 1% to 5% in the food category. On average, he said, it exceeds 10%.

GNX's newest solution, Performance Management, is one example of how GNX leverages its retail community to develop best practice solutions, Laughlin said. Several of GNX's retailer customers identified a need for a retail-specific supplier performance management solution, he noted, but found nothing existing on the market. So GNX built a solution to retail specifications, working very closely with Sainsbury's, Carrefour and others in the retailer community.

Last May, Sainsbury's became the first GNX member to implement Performance Management, a Web-based application that automates the process of tracking key business performance metrics and collaboration with trading partners. Sainsbury's ended 2003 using the system with more than 70 suppliers, with plans to roll out to 200 suppliers this year. The tool is also being implemented with two other GNX retail members, and will ultimately connect to about 4,000 suppliers.

Performance Management complements Sainsbury's other tools, "enabling us to have a consistent dialogue with suppliers, and measurable actions for improvement," said Diane Carter, director of central supply chain operations for Sainsbury's. "Early piloting demonstrated a benefit from the structured workflow process and a disciplined approach to task completion and business improvements."

Another example of a best practice solution is the GNX Product Development solution, a private-label management/development application that currently has two member food retailers as users, one of them Sainsbury's.

Sainsbury's, working with 750 suppliers, is using this tool to manage product development for its 1,200-plus SKU private-label brand, which accounts for more than 55% of its food store sales.

Transora's Changing Role

Transora, which is owned by a federated group of manufacturers, started out as a standard e-marketplace exchange with activities like reverse auctions and CPFR. However, about 18 months ago it began to follow one course of activity: data synchronization.

"Basically, Transora is now a true, bona fide software provider of data synchronization services," said Jennifer Bentley, a Transora spokeswoman.

"They have conceded that the idea of everybody coming together to share strategic initiatives doesn't work, and they are now doing the one thing their members say they really want, which is data synchronization," said Andrew White, research director, supply chain management for Stamford, Conn.-based The Gartner Group.

Like the WorldWide Retail Exchange and GlobalNetXchange, Transora has told analysts that it expects to be profitable this year.

In what analysts view as a potentially positive move, Transora has come close to merging several times with WWRE. The last time was in early 2003, when they got so close that sources said, "They were practically walking down the aisle"; then the merger fell apart.

Both Kara Romanow, research director/CPG specialist for Boston-based AMR Research, and White believe the merger could still happen, primarily because WWRE would be in a stronger business position if it could assimilate Transora's data synchronization services.

Also, Transora, while it has "good momentum in the data synchronization space, needs to figure out now what the next big thing is and how to leverage it," said Romanow.

Yet, Nick Parnaby, WWRE's global director of member engagement and marketing, suggested that it might make more sense for the WWRE and GNX to merge. "We have been in discussions with them as well," he said. "GNX does not have a source/recipient data pool, and neither does Transora. We believe a merger with GNX to be more of a possibility in the future since we are currently in line to interoperate with Transora."

"The future," said White, "might be there are two or three companies servicing the same constituents. One might be doing the outsourced IT services such as co-developing a promotional planning system for several members, or developing an analytics system for another group of members; one company could do data synchronization for the entire community; and a third might offer a public extranet for small to mid-sized companies who can't afford to develop electronic supply chain solutions by themselves."

However, until there is some form of consolidation, suppliers trying to decide which of the three exchanges to join still have some difficult choices to make. Should they join Transora, the exchange owned by their fellow manufacturers?

Should they join GNX, whose members include Carrefour, Sears and Kroger? Or do they sign up with WWRE, whose members include Albertsons, Walgreens and CVS?

"The answer is obvious," said White. "You join the exchange that has those companies that are your predominant customers. If you are a supplier, you have to figure out where your revenue is going, which site has the largest community of your customers."

Yet, there is also the option, as Parnaby noted, for suppliers to join more than one. "Why should companies join just one?" he asked. "SCA Hygiene joined both GNX and the WWRE, and they have seen benefits from both."