WSJ:
True Success in E-Commerce
Comes From Low-Profile Firms
By MARK BOSLET and JOELLE TESSLER
Dow Jones Newswires
Internet luminaries Amazon.com Inc. and CDNow Inc. are identified with
the new age of Web commerce. But many of the real -- and profitable --
electronic-shopping success stories stand outside the limelight.
These companies provide such items as valves, switches, screws, electric
motors, stationery and pencils: the mundane business products that make
factories and offices go. But the Web has allowed them to link suppliers
and buyers over long distances, and save their customers time and money.
And that has turned these companies into the fastest-growing segment of
electronic commerce.
"Consumers are looking while businesses are buying," said Steven Bell, an
analyst at Forrester Research of Cambridge, Mass. "Businesses are finding
that the Internet is driving cost savings and is more convenient for
customers."
Several of these electronic business-to-business merchants are well known
for their Internet operations. Cisco Systems Inc. gets just under 60% of its
revenue from its Web site, or about 1,000 orders and more than $11
million in sales a day.
Dell Computer Corp. and Compaq Computer
Corp. boast of $5 million or more in daily
Internet sales.
Yet other successful Web salesmen are hardly
identified with the Internet; these include
W.W. Grainger Inc., Viking Office Products
Inc. and Instill Corp., a Palo Alto, Calif.,
electronic food-ordering service for
restaurants.
The promise of electronic commerce is so great to the automotive industry
that the Big Three and their suppliers have come together to develop an
electronic network of business links. The Automotive Network eXchange,
a private network, is in pilot testing, has 33 participating companies and is
envisioned for everything from purchase orders to video conferencing to
the exchange of design drawings.
Already, the business-to-business electronic commerce market
overshadows the business-to-consumer e-marketplace -- by $7.9 billion
to $2.5 billion in 1997, according to Forrester -- and the gap will continue
to widen. This year, analyst Bell projects, business transactions will
outweigh consumer transactions by $17.3 billion to $5 billion. By 2001,
the score will be business $186 billion, consumer $18.4 billion, Forrester
says.
The Yankee Group, a Boston consulting firm, forecasts that
business-to-business commerce will hit $34 billion this year and then
quintuple to $170 billion by 2000, while business-to-consumer sales will
hit $5 billion this year and merely double, to $10 billion, by 2000.
"There is a tremendous amount of business-to-business commerce going
on," said Yankee analyst Chris Gwynn.
Not as Sexy
It isn't as sexy as signing onto the Web to order books from Seattle's
Amazon.com of Seattle or groceries from Skokie, Ill.-based Peapod Inc.
-- but business-to-business commerce is economical. Many corporate
buyers can earn a payback on their investments in under a year, said Carl
Falk, vice president of electronic procurement strategies at Commerce
One Inc., a Walnut Creek, Calif., maker of e-commerce software.
The procedures for filling out requisitions, sending forms and logging
information into the ledger can be automated, saving businesses postage,
labor and processing costs.
An organization with $500 million of purchasing a year can easily save
$7.5 million to $10 million, Falk said. "I think procurement is one of the
last frontiers for business re-engineering," he said.
E-commerce also benefits suppliers. After two years of selling to U.S.
customers over the Web, office products maker Viking of Los Angeles
remains "gung-ho," and is expanding its efforts to handle the numerous
international inquires it gets, said Sean Clough, director of customer
development.
Already Profitable
While Net sales account for only a small share of the company's business,
they turn a profit and should be a significant part of the business in 12
months, Clough said.
Grainger, which has been selling on the Web since 1996, also finds its
electronic operations profitable, analysts say. The producer of 189,000
industrial products, from screws to coils to filters, sells to existing
customers and locates new ones with its Web site, said Deborah
Ramstorf, advertising manager for Internet commerce.
Though only a small portion of its customers presently buy on-line,
Grainger, of Lincolnshire, Ill., finds that on-line purchases are twice the
size of those made other ways, and that on-line customers order more
frequently. Internet commerce is growing quarter-to-quarter at a
"double-digit" pace, which is faster than the company's overall sales, Mr.
Ramstorf said.
Some companies note substantial cost savings from their on-line efforts.
The sources of these savings include automation of inventory,
customer-service, product-distribution, supply-chain and order-fulfillment
functions. The automation is particularly valuable when suppliers have a
broad array of products with fluctuating inventory levels and prices.
Networking-equipment maker Cisco saves about $360 million a year by
automating its sales, marketing and technical support.
"Our product documentation is the size of an encyclopedia, so the cost of
shipping that was enormous," said Todd Elizalde, Cisco's director of
electronic commerce.
Attractive Economics
In general, the economics of business-to-business commerce are more
attractive than business-to-consumer, said NationsBanc Montgomery
Securities analyst Steven R. Horen. Companies such as Amazon.com and
CDNow of Jenkintown, Pa., spend more marketing dollars to rope in a
customer than do on-line merchants catering to the business market,
Horen said.
At the same time, orders from consumers are typically smaller, and buyers
return less frequently, he said.
That is in large part why companies such as Amazon.com, Preview Travel
Inc. of San Francisco and CDNow aren't predicted to turn profitable until
2000 or later.
Electronic-commerce companies addressing the consumer market also
have to deal with what analysts refer to as the social side of shopping.
Many consumers enjoy making a shopping trip an event, and they want to
handle merchandise, such as clothing, before buying.
By contrast, business customers appreciate convenience and self-service,
and typically know what products they want ahead of time. Many value
being able to use a low-cost Internet connection to check whether
products are in stock -- 24 hours a day, seven days a week.
"A lot of it is taking the human out of the loop for mundane things, like
exchanging information," said Forrester's Mr. Bell.
This ease of use is why the Web has quickly attracted more interest than
EDI, electronic data interchange. EDI, a software system for reliably
exchanging information, traditionally has required employing a private
network and learning difficult software. Until recently it was the primary
way businesses conducted electronic commerce, but the high cost of
implementation has kept many small businesses from installing it, said
Arthur Newman, an analyst at Gerard Klauer Mattison.
Volume Up 20% a Month
Instill Corp., which hosts a Web service where 1,500 restaurants order
food and other products from 15 suppliers, illustrates the convenience and
cost savings of Web commerce. With an average order size of more than
$1,000, the private company handled $180 million in transactions in 1997
and is seeing that volume grow 20% a month, said Andy Cohen, vice
president of marketing.
It also has lowered costs at its suppliers. The cost of each transaction at
the food-service distributors has dropped to $2 from $25 because the
suppliers no longer have to type up orders or mail weekly catalogs to their
customers, Cohen said.
And the restaurants find ordering on-line quicker, he added.
These are the reasons "there is more interest in business-to-business"
electronic commerce, said Dahl Gerberick, manager in the resource
protection practice at Coopers & Lybrand. "In the near future, it will
dwarf business-to-consumer." |
