The electronic bazaar

Electronic marketplaces were once seen as clever and cheap ways for organisations to sell their wares and buy their supplies. Malcolm Hutchinson finds out what went wrong, who e-marketplaces best serve and how to make them work for your organisation.

Electronic marketplaces were once seen as clever and cheap ways for organisations to sell their wares and buy their supplies. What could be more appealing than conducting a huge chunk of your day-to-day business online?

Wide internet access, a rush of New Zealand businesses online and readily available packaged application software meant the e-business infrastructure was in place. But the ensuing global explosion of e-marketplaces in every area of business was followed in turn by failures, consolidation and the inevitable reappraisal of the business model.

Malcolm Hutchinson finds out what went wrong, who e-marketplaces best serve and how to make them work for your organisation.

E-marketplaces are like digital broking stations. They often concentrate on one industry, or group of complimentary industries. They attempt to offer a neutral online facilitation service, a place where buyers and sellers can match offers, shop around and deal with each other in confidence.

Some e-markets charge membership fees, some “clip the ticket” at a percentage rate on transactions conducted through their facility.

An example of an industry-specific e-marketplace is Christchurch-based Lignus, a trading exchange for logs and lumber. Membership is free but is restricted to commercial players in the timber industry, with approximately 300 members from 20 countries signing up so far. Revenue is derived from a 1% fee charged to sellers, and the average trade is about $10,000.

The marketplace, which was developed by Jade and is operated by Jade’s hosting arm Jade Direct, allows sellers to list product on the exchange and negotiate in private with multiple buyers. Buyers can list requests and deal in private with multiple sellers. Registered companies include forest owners, sawmills, panel mills, plywood/veneer mills, re-manufacturers, wholesalers and etailers.

Further industry backing has come in the form of the support of the New Zealand Timber Industry Federation and the Australian Forest Products Association. Industry confidence in the exchange would have been aided by the fact that Lignus was founded by fourth-generation forestry and timber processors John and Rodney McVicar.

E-marketplaces provide a real-time trading space in a format within reach of most small to medium-sized enterprises (SMEs). They can also facilitate the smooth flow of trade, and put buyers in quick contact with a wider range of suppliers.

“The timber industry is highly fragmented,” says John McVicar. “Most suppliers have stock they wish to move and Lignus provides another channel to market. There are obvious benefits in having a real-time marketplace and network where buyers can see what supply is available.”

Online communities

Carl Mitchell-Turner of SupplyNet defines an e-marketplace as a technology that assists a select group of buyers and suppliers to work together collaboratively. It enables a many-to-many relationship amongst communities of interest.

SupplyNet has been in business since midway through last year and has been concentrating on building systems and implementing the B2B e-commerce package CommerceOne. It launched the marketplace online on September 3.

SupplyNet offers its tenants a four-step supplier option service, culminating in a seller being able to launch a full trading-capable website from inside the e-market site. Together with G-Connect consortium partners SAP, Compaq, Microsoft and KPMG, SupplyNet is preparing to bid for an upcoming government e-procurement RFP (request for proposal).

Mitchell-Turner says the company will be concentrating on offering services to “three vertical communities”, but will not disclose more information due to an imminent product launch.

Vetservice.co.nz is another vertical e-marketplace, launched on March 14, 2001. Chief executive and founder James Coddington says there is a three-fold function to the site. A business to consumer (B2C) area includes the public website and individual websites within the main one for vet clients.

Services include tools to send out newsletters, build online databases, and open up e-shops. The public members are able to log on to Vetservice and ask a vet a question, buy products from the vet and surf the vets’ websites. The vet business pays a fee for their website to be involved.

The B2B section Coddington likens to a virtual warehouse, with Vetservice acting as landlord. They lease space to suppliers for a monthly fee and commission on sales, and don’t get involved in the trading.

The third section is a marketing function. “We offer our existing vet members the opportunity to be involved in our marketing body, which offer value to their vet businesses at a local level,” says Coddington. “We also offer in-practice education for the vet business staff. The vet business pays a fee to be involved with this.”

A web development team called NZOnline built Vetservice, under Coddington’s direction. Again, a tight industry focus and cultivation of the community are primary tactical approaches to entering business as an e-marketplace. Starting from the right foundation is critical.

“The main goal of Vetservice was to form a strong web community based around pet, animal and farm owners,” says Coddington. “Once the community was growing the goal was to launch a B2B platform for the veterinary profession, which would bring economies of scale into the supply chain. It would allow vets to purchase their products from suppliers direct, and in the process save on administration and product costs.”

Mitchell-Turner’s approach is to give particular attention to the needs of the sellers.

“Most e-markets seem to concentrate on the needs of the buyers and assume the sellers will just arrive,” he says. A sort-of “if you build it, they will come”, approach. “We concentrate on meeting suppliers needs as well. That way you actually complete the story, the promise of the e-marketplace.”

Cultivating the needs of your stakeholders sometimes involves educating them first.

“Without doubt the biggest challenge is the vets themselves. They are inherently very sceptical individuals, who are historically not the fastest in adopting change. Our challenge has been to change their behaviour and make them more welcoming to the internet as a tool for business,” says Coddington.

The benefits arrive

As well as easing costs and risks for SMEs, e-marketplaces have other obvious benefits too, for New Zealand companies wanting to crack overseas markets. E-marketplaces, at least in theory, allow Kiwi companies to compete on an equal footing with international players.

Not only can the international trend towards electronic marketplaces help Kiwi companies tap into foreign buyers, but New Zealand-hosted e-marketplaces can also bring in the foreign currency.

Lignus.com, for example, attracts timber buyers from all over the world. “Lignus is continually attracting offshore buyers that are thoroughly checked out. With the emerging wall of wood, Lignus will provide a great marketing and sales tool,” says John McVicar.

The Trade Development Board is pushing e-marketplaces hard, encouraging Kiwi companies to investigate the idea. Trade New Zealand’s technology and services team and e-marketservices analysts aim to help, with their research base, established overseas connections and staff watching regional developments.

Trade New Zealand has joined emarketservices.com, a collaboration of trade councils that provides information and links to B2B e-marketplaces around the world.

Started by the Swedish Trade Council in July 1999, emarketservices.com is now run in conjunction with the trade councils of New Zealand, Australia, Denmark, Iceland, Italy, The Netherlands and Norway. It aims to provide independent information about electronic marketplaces and to help exporters find online markets suitable to their businesses. The website lists nearly 900 e-marketplaces, including several which either operate from or have links to New Zealand.

Trade New Zealand’s Brigitte Reed says international e-marketplaces offer unique opportunities for Kiwi companies, and that we can leverage overseas experience to our advantage.

“E-marketplaces have been operating successfully in Europe and the US for some time and New Zealand companies are now in a strong position to get involved,” says Reed.

“We can use the lessons learned from those who have gone before us and adapt our business models with the benefit of hindsight.”

“E-marketplaces are a very low cost and effective channel for buyers and sellers,” says Lignus’ McVicar. And in New Zealand at least, there are still plenty of opportunities to set up in the trade, because the e-marketplace industry here is so young.

“We do not have competition in what we are delivering to the vets,” says Coddington.

“There has been marketing groups involved in the veterinary profession in the past, but certainly not what we are offering the vets.”

Advice for young players

But watch out. Although research company Gartner Group identifies over 14,000 e-marketplaces around the world today, it predicts many of these companies will collapse into each other, or go bust, leaving only 300 or so in the long term. These 300 e-markets will together share a global business to business e-commerce revenue flow of $US3.6 trillion.

Now that’s a lot of e-markets that aren’t going to survive, and how do you tell one that’s going to fall over from one that’s going to stick around for the long haul?

The answer, of course, is research. First, understand the e-marketplace model and how it might benefit your business. Find out what e-marketplaces there are in your industry, and who is operating them. Look very carefully what value the e-market has to offer your business. What return on investment is likely? How easily can the return be measured? What other suppliers are involved? What are the costs weighed against the benefits?

“The most important piece of advice I can give anyone is to do your homework,” says Trade New Zealand’s Reed. “Make sure you have a clear understanding of the opportunities and risks that exist within your potential e-market.”

Sentiments echoed by Vetservice’s James Coddington, who spent six months researching the animal health industry, including vet businesses, animal health companies, other supplier companies and agri-business providers.

“The advice I would give is to do your homework in the industry you want to enter,” he says. “Talk with your potential customers and listen to what they have to say. Trust your gut feeling and once you have a strategy worked out, bring onboard your customers as stakeholders, and work tirelessly until you have achieved your first goal. Then keep setting goals to achieve.”

Mitchell-Turner has a more entrepreneurial take on the Gartner vision of imploding e-markets. “SupplyNet concentrates on enabling communities,” he says. “Other e-markets are really our customers, too. We would agree with Gartner, and SupplyNet would be looking to talk with those e-markets.”

With the kind of figures Gartner are kicking around, at the end of the day you’re still going to have to take a punt. But after all, isn’t that what business is all about?

“The level of impact that electronic marketplaces will have on the New Zealand economy really depends on the uptake of New Zealand-based companies,” says Reed. “The opportunity does exist for New Zealand companies; however any interested company’s first task is to understand the basics of the e-marketplace industry.”

Sidebar

Analysts bullish on e-markets

Malcolm Hutchinson is a freelance writer from Hamilton.

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