The Internet is fast pervading the furthest reaches of the food industry. Marginal improvements to supply chain efficiency can yield huge returns. New markets can be reached using new technology, but will e-commerce fulfil its full potential? Sarah Mitson highlights e-commerce opportunities in the food industry and gives us a realistic view of the future.

As we entered 2001 – with newspapers full of the crash of the NASDAQ (the stock market on which so many Silicon Valley technology companies floated and soared) and headlines such as ‘demise of the dot-com’ – what did you think? “Another one year wonder seen off?” “I’m glad I didn’t leave my day job in the gold rush?”

Think again. The businesses were overvalued, the hype was premature, but change still rolls on. Sometimes so subtly that we get caught up in it but don’t realise how much. Until we think back five years and can’t believe we lived without daily support tools such as the mobile phone.

Business over the Internet will be a bit like this: first e-mails to colleagues, then to clients; first access to vital company information on your PC, then over the phone into your laptop; first news and research over the Internet, then routine re-ordering of supplies.

Businesses set up to provide solutions for you have to get their product and timing right to survive. Many won’t, but the prize for success is anticipated to be large. The annual global value of inputs to the food manufacturing supply chain is estimated at US$500bn – the value of goods going out to retail and distribution channels even greater. Only marginal improvements to the efficiency of the supply chain are needed to yield huge savings. Goldman Sachs has estimated these could be in the region of 3-5% for the total food industry.

Many companies are experimenting with their own websites to connect to customers, employees and suppliers. This is likely to remain a useful way to give stakeholders easy access to certain parts of company internal systems. It also provides an additional window, showing company goods to those who are prepared to go window shopping. It is not, however, the most efficient way to connect whole communities for dynamic trading or coordination purposes. For this, all the parties need to link into a common hub which can compare, consolidate and route information in real time.

Therefore, to understand the emerging e-commerce landscape, you need to understand the different types of intermediaries that exist to connect your business to other businesses and facilitate e-commerce.

Marketplaces – different types of exchanges and portals

The business to business (B2B) frontier is still open and evolving, with competitors currently developing the most appropriate models for different industry sectors.

“Will smaller food manufacturers be left behind as the giants manoeuvre to link up electronically?”

A large number of online intermediaries have emerged to serve the food industry in the last 18 months. Some serve the downstream supply-chain between manufacturer and retailer/foodservice operations. Some are “horizontals” which provide marketplaces for generic business categories (such as stationery) across many client industries. Others specialise, for example, as perishable online marketplaces auctioning industrial quantities of meat, seafood or produce. Some are little more than online trade directories, at best providing a click-through to a supplier’s website.

Exchanges are sites with software that allows multiple buyers and sellers to trade online in real time. For the food industry, this works best for two types of markets – commodities and reverse auctions. Commodities are uniformly specified and dynamically priced (such as bulk cocoa beans), and the exchange acts as an online version of existing trading floors. Reverse auctions (with buyers specifying their requirements and allowing selected sellers to make offers in a limited time window) have been shown to work well, for example, when Sainsbury’s tendered its annual cheddar cheese contracts.

However, it is a mistake to assume that all a company’s requirements can be met in this way. Efdex was an early casualty – the food portal hoped its customers would trade all their food ingredients as if they were simple commodities through their system, allowing them to skim off a small percentage of the transaction value as commission. In truth, the vast majority of food ingredients trades are complex initial deals followed by routine reordering. Customers are unwilling to replace face-to-face negotiations for the former and reluctant to pay transaction commissions on the latter.

For everyday transactions, it seems likely that the solutions which can connect with company ERP (Enterprise Resource Planning) systems and pass on routine re-orders automatically are the marketplaces which will see the highest volume throughput. But integration to many buyers and sellers is complex, costly and requires a degree of standardization. For this reason, building market share is crucial and the collaborative marketplaces (formed by competing members of an industry who effectively create a guaranteed customer base) are likely to be the winners, at least with respect to building the infrastructure channels through which transactions will pass.

A good example of the implications of this is the recent closure of FoodUSA.com, a well established USA meat exchange, which blamed Commerce Ventures for its collapse, despite the fact that Commerce Ventures was not yet trading. The belief was that customers were waiting to see how Tyson Foods, IBP & Cargill (all founder members in Commerce Ventures) would act before investing in change.

The two largest collaborative marketplaces for the FMCG manufacturing industry are Transora (www.transora.com) and CPGmarket (www.cpgmarket.com). Transora has over 50 multinational companies as founder members, each of which have invested significant sums in Transora. CPGmarket is smaller and focused on European solutions.

The two largest collaborative marketplaces for the FMCG retailing industry are WWRE (www.worldwideretailexchange.org) and GlobalNetXchange (www.gnx.com). Transora and GNX recently announced a joint effort to create a ‘mega-hub’ which B2B exchanges are invited to join. It appears that Transora and GNX hope a collective venture will create universal communications standards. To hook exchanges in, they are offering low cost data routing and translation services. How far these hubs take consolidation has yet to be seen – the Competition Authorities are likely to keep a close eye on developments, judging the balance of benefits of common standards versus the abuse of monopoly powers, much as they must with Microsoft.

Smaller food manufacturers

What of smaller food manufacturers? Will they be left behind as the giants manoeuvre to link up electronically? In fact, smaller food manufacturers – without the complexity of various legacy systems and with the flexibility of

WDG survey of smaller food companies shows that they are very receptive to the potential of the Internet The sample used was 100 food manufacturing companies, turnover £1m – £100m (there are 2,500 such companies in the UK, so 4% total population), balanced across size, region, product type. The interviewee was the “person responsible for selecting and/or buying food ingredients” (57 food technologists, 9 production managers, 16 procurement managers and 10 MD’s). Even 6 months ago, 72% were connected to the Internet at work, with 36% of these using it daily and 72% using it at least once a month. Main uses were visiting supplier websites (57%), for information (54%) and e-mail (39%). Of those not connected, 61% said they were likely to be in the next 12 months.

attitude to encourage innovative working practice – may disproportionately benefit from the Internet and e-commerce.

Information and research previously locked in research labs will become more readily available; professional forums will allow virtual communities to emerge for those previously isolated in smaller companies; online pooling of purchasing power will give smaller companies buying scale.

Research done by WDG (see inset) has shown that smaller food companies are actually very receptive to the potential of the Internet – many expressing frustration that larger suppliers were not providing the information or e-commerce opportunities that would make their professional lives easier.

Emerging services

So what type of services will we be able to get through e-commerce? Not just e-procurement of our stationery and laboratory supply needs.

You can keep up with industry news – just-food.com is an obvious example. You can search for job vacancies. You can download pictures, software and research. You can look up information about competitors and suppliers and, depending on the investment they have made in their website, on their products too. Soon you will be able to share information on factory audits, use logistics sites to optimise delivery routes, use powerful search engines to search through meta-catalogues of ingredients to find the ones that exactly match your product specification.

But expect to pay for these richer services. Building and maintaining database and information services like these costs many millions of pounds, and sponsorship deals alone are unlikely to provide a return for the service provider. The service should, however, end up costing considerably less than a bespoke consultancy service, as the costs are spread over many more customers.

B2B industry consolidation will start within a few years, as there will eventually only be room for a limited number of intermediaries, due to the power of critical mass in the target community. Mergers and acquisitions will start clustering businesses which share the same community and allow businesses to bolt on new technologies and services for their customers. The intermediaries will aim to create common industry standards which facilitate information aggregation and analysis, providing far better analysis of market trends than ever available before.

e-commerce is a label that has sprung up to describe the relatively new world of business done with the facilitation of electronic data. Although over 20 years old (from pioneering computer to computer EDI), the surge of interest has been triggered by the explosive growth enabled by the Internet, cheap and fast networks and the increased ownership of powerful PCs. Soon, this term will become dated as online data exchange is considered just another communication means in the evolving arsenal of business tools. Turn on, plug in and keep experimenting if you want to stay abreast!

Sarah Mitson left United Biscuits in 2000 to set up an e-commerce business for the food industry. She is now working for Kraft Foods International and can be contacted by email at: sarahmitson@psion.net

This article was first published in Food Ingredients and Analysis International [Volume 23 Number 1], published by Turret RAI. For further information please contact: Bill Lavers on b.lavers@turret-rai.co.uk