NO BULL FOR B2B?

Ed Zwirn

It's the economy, stupid. Bill Clinton got himself elected with that mantra. Now, researchers and analysts are using it to revise previously rosy outlooks for projections on just how much business-to-business Internet commerce will occur over the next few years.

For supermarket operators and food distributors, it's not only the economy -- it's also the industry's inability, thus far, to come up with a set of standards to be used to identify items in electronic on-line catalogs (where a lot of the purchasing was supposed to be happening) that has slowed things down.

One high-profile food distributor told SN that vendor discrepancies are currently a problem on traditional hard copy. Until it's proven that this situation won't be made worse by trying to identify ordered items electronically, a lot of retailers are happy just waiting in the wings, he said.

But first the economy.

Most experts and consultants agree that with the tech sector meltdown that began last year reaching a crescendo on the stock market recently, downwardly revised assessments of e-commerce in general and B-to-B exchanges in particular are either frightening would-be participants and investors or injecting a healthy dose of realism into their decision-making process.

For the food industry, that might mean retailers will take more of a wait-and-see attitude when it comes to making a decision on joining one of the three major on-line trading exchanges, Transora, GlobalNetXchange or the World Wide Retail Exchange.

"These (B-to-B) forecasts were a work of fantasy in the first place, driven as much by emotion as by hard numbers," said Mark Husson, an analyst at Merrill Lynch, New York, specializing in food retailing.

"The stock market has given everybody this much more realistic view," he said.

Evidence of this latest paradigm shift received significant play recently, with the release of a Gartner Group report shifting downward projections for worldwide Internet commerce volume to a measly $6 trillion by 2004.

This is a reduction of $1.3 trillion, or nearly 18%, from the lofty $7.3 trillion figure bandied about by the same group in January 2000, when optimism still surrounded dot-com land.

Gartner Group, Stamford, Conn., is a consulting firm known for its expertise in the business-to-business realm.

Moreover, at the recently held SN/Executive Technology Summit on Internet Commerce in Pasadena, Calif., Douglas Rossiter, president, the Advantage Group/U.S. Markets, Worthington Ohio, was singing the same tune.

"With all the hype and all the energy of last year -- just in the number of press releases alone -- you would have thought this was clearly a revolution," Rossiter said. "But the answer came back, 'No, it is really much more moderate than that."'

Advantage is an international research group. An Advantage Group report on B-to-B -- "Coming of Age: Are We Ready?" -- was based on responses from 54 executives from large companies.

About 75% of the retailer and wholesaler respondents said the pace of progress in this area has been deliberate.

"Technology drove the initial high level of interest, but now comes the hard part: making it work for us," Rossiter said.

While Husson estimates that some 80% of supermarket B-to-B transactions are handled to some extent electronically, the proportion of purchasing that actually uses B-to-B exchanges is more likely in the area 1%, leaving plenty of room for growth.

"For supermarkets, it's not an 'either-or' proposition, it's an 'as well as,"' he argued.

On the one hand, if you put an order out for electronic tender, "you're going to save money," he said.

But, when dealing with suppliers, especially those of regional brands, there is often "no substitution for negotiations," he adds.

For the supplier, there is also some concern over limitations by the exchanges on the ability to offer special arrangements or deals to special customers, Husson said.

However, an encouraging note on the B-to-B issue is that the Gartner Group research seems to indicate that the food industry may be more ripe than others when it comes to adopting e-commerce models.

The consulting group, which said it will soon release more specific breakdowns of its overall top-line estimates of e-commerce going forward over the next several years, said the statistics it has been getting so far indicate the shopping aisle is one of the stronger potential areas for growth of the technology.

Lauren Shu, the firm's research director who oversaw a team of some 20 analysts who crunched the latest numbers, told SN her project involved the analysis of "verticals" in 22 different industries.

"We looked at them and analyzed how quickly they're moving [toward e-commerce]," she said.

Of these, food and beverage retailers such as supermarkets are apparently moving "pretty aggressively" toward adoption of Internet technology, she said.

"They're definitely tier two, not the type A early Internet adopters that early tech companies themselves were, but they're right up there," she said.

But, even here, it's obvious some of the early B-to-B euphoria, especially regarding exchanges, has been overplayed.

"There've been a lot of exchanges, and some of them have been very specific, 'For Shrimp Only,' for example, so there's obviously going to be some consolidation," she said.

Gail Daikoku, one of Shu's senior analysts, also offers a guarded assessment of the potential for exchanges and points out the recent upsurge in tech sector bearishness is proving to be in fact more than a psychological barrier to their more widespread use.

From the retailer point of view, the argument runs like this:

Sure, there is potential for huge savings when putting out orders over the Internet: Imagine the windfall you'll reap in stocking your housewares aisle when you have three major light bulb manufacturers, for example, scrambling to outbid each other and get your business.

But, to take a step back, retailers need to absorb certain costs and take risks before achieving this vision.

"At the end of the day, in a downturn, everybody's looking to save costs," said Daikoku, adding that full-fledged participation in a B-to-B exchange beyond the experimental stage would require up-front outlays either in the form of equity investments or subscription fees.

Then there's the software, "which is not really cheap" as far as Collaborative Planning Forecasting and Replenishment (CPFR) goes, both in terms of purchasing the necessary programs and taking the often wrenching steps involved in integrating them to your ordering processes, she said.

But the real kicker here, at least as far as deciding whether to go B-to-B given the worries of the current business environment, is with the immaturity of these exchanges, there may be no guarantee of payback times as markets may be thinly traded and offer lesser benefit, at least until more participants come on board.

"The downturn in tech definitely affects the willingness to go with it because [both retailers and suppliers] wonder 'hey, are these guys going to go anywhere?"' she said.

In addition, she said, there are downsides more specific to the supplier.

Many suppliers, who enjoy the often clubby relationships they have with retailers, are afraid to forfeit ways of doing business that have served them well for decades.

Replacing negotiating and social interaction with bidding and keystrokes will not only take much of the fun out of both buying and selling, it would also put the sellers themselves at a disadvantage.

The ironic upshot: The very reason many supermarket retailers see as the prime reason for joining B-to-B exchanges, i.e., putting suppliers at a disadvantage, may in fact be slowing down progress toward the liquidity of the exchanges themselves.

"Many suppliers are afraid to join in because they are afraid of becoming commoditized," said Daikoku. With manufacturers and suppliers tending to lose every advantage other than price in this situation, progress toward e-marketplaces will continue to be delayed.

"Let's say your retailer said 'I need you guys to bid on toothpaste,"' she said. "The bids go out and in effect only the buyer knows who's doing the bidding."

Next week: the retailers and wholesalers speak.