As a critical part of the technology and dot com boom, e-commerce was predicted to change business paradigms in several industries, lowering costs and providing a more transparent marketplace. Both business to consumer (B2C) and business to business (B2B) environments were going to be seriously affected, and consumers were going to benefit with speed of service and cost reduction. The online marketplace, with product auctions and trades, was supposed to be the business platform of the electronic age.

With initial hype now worn away, there is no doubt that e-business has had an impact, but e-commerce by itself hasn't dramatically altered behaviors or relationships. Where e-commerce solutions have been implemented successfully between trading partners, start up costs have frequently been high, although initial investment in technology will ultimately be recovered.


Examining B2B E-Commerce Programs
The first B2B e-commerce program to appear was the marketplace, designed to support either buyers or sellers, typically not both. In the buy side environment, clients would post their requirements and a reverse auction would occur with qualified suppliers bidding for the opportunity to provide product. On the sell side, product suppliers would offer their goods for sale and trading partners registered to the marketplace would buy them. Software companies, industry consortia and many other groups launched online programs and at one time there were literally thousands of marketplaces, some operating horizontally across a wide range of sectors, others specializing in verticals such as herbs, food, grocery and dairy products.

Late last year, a list of food-related e-commerce sites was published (Nutraceuticals World, November 2001) and of the 30 exchanges and sites listed at that time-a mere eight months ago-half are no longer in operation. Although new exchanges have opened up, they are few in number and their scale of operation is dramatically reduced, as access to capital has become scarce. Looking at those marketplaces still in operation, one can see common elements and possible reasons why only a few marketplaces have survived.


The Product Offering Must Fit the Marketplace
Certain products, especially commodities already traded on exchanges and spot markets, lend themselves very well to online commerce. Frequently, trading partners are already known to each other and the Internet represents a platform or medium change rather than a business process change. Even for commodities though, the commission and fee structure has evolved over the past few years so that business can be enhanced rather than restricted. Commission fees peaked at 5%, but now, (of the marketplaces we examined) commissions fees are less than 1%, or extremely low transaction fees and no commissions are charged.

Other types of products benefiting from marketplace e-commerce include bulk products, off-spec and those with relatively simple transaction terms. From a buy-side standpoint, the net effect of a marketplace is to lower purchasing cost either through process efficiency or through reduction in product cost itself. On the sell side, the marketplace attempts to lower selling and distribution costs and has the potential to increase sales volumes and revenues.


Adding Complementary Resources
An auction or exchange often wasn't enough to drive traffic and revenue. Many marketplace operators realized, to their dismay, that the migration to e-commerce and to a marketplace was slower than anticipated, or was not going to appeal to some of their target client base. Several operators added site functionality and resources to transform their websites into portals, offering a variety of services in addition to the actual exchange of goods or services. In sectors of the nutraceuticals and natural products industries these other resources have become more valuable and well used than the marketplace itself, and have begun leading strategy and operations, while the marketplace itself has become an empty shell in some cases and a secondary offering in others. Both Food Navigator (Nutraingredients) and NPIcenter have evolved as portals offering sourcing resources and industry news and information.


Becoming a Solution Provider
In some cases, companies operating marketplaces developed software and technology to support marketplace operations. Recognizing the value of the technology and the opportunity to connect trading partners directly on a one to one basis, these companies have become solution providers offering catalog management (transora.com), a communication interface (equadis.com), sourcing software (ecfoods.com) or Enterprise Resource Planning integration tools.


The Impact on the Nutraceuticals Market
What does this mean for marketplaces in nutraceuticals? What is the future of e-commerce and e-business for the sector? Where will the Internet make its biggest impact?

In order to answer these questions, one must look closely at industry reaction when marketplaces first appeared. Many companies were wary of technology and using the Internet for business, especially transactions. Even today, many industry leaders are not really considered to be on electronic technology's leading edge. The level of fragmentation in the industry is still significant, and although the industry is changing slowly, long lasting relationships are paramount to business success. Building consumer confidence and reinforcing quality standards is a key issue, so any platform (marketplaces included) that would lower or make less important a commitment to quality ingredients has been dismissed by the industry. To handle this obstacle, several marketplaces developed relationships with organizations such as SGS ( Société Générale de Surveillance SA), one of the world's largest verification, testing and certification organizations, and integrated services such as these directly into the marketplace.

B2C e-commerce has had limited success but is slowly growing, especially where health related products are concerned. More frequently, consumers are using the Internet for information and sourcing-beginning their decision-making based on what they find on the Internet and then going out to physically buy products. This behavior is also evident in business to business purchasing, with sourcing and selection of potential vendors occurring online, and then traditional sales cycles and relationship building taking over. In many cases, portals and marketplaces have established new relationships and introduced trading partners around the world who would otherwise never have found each other.

Companies in this industry are slowly developing internal technology to allow them to interact with trading partners-both suppliers and clients. Alternatives to the prohibitively expensive electronic data interface (EDI) technology has meant that affordable solutions are available to mid-size companies, quickly reaching even smaller organizations. Most companies with catalog offerings can easily connect to customers and are doing so in increasing numbers in both the food and nutraceuticals sectors.

Other business to business solutions are also emerging, particularly in bringing manufactured products to store shelves and streamlining ordering and communication. Companies such as Order Dog and Living Naturally are connecting manufacturers and distributors to stores, each offering thousands of SKUs as they build programs for the stores themselves. On an individual company basis, integrating e-commerce into a company website now costs as little as $1000, so if the product offering lends itself to the catalog model, the Internet can become an effective low cost sales tool.

As far as nutraceutical ingredients are concerned, there is some marketplace activity for repeat purchases, commodities and supplies. One to one e-business connections using off the shelf or custom software have made it possible to communicate order status, reduce cycle times and in general, streamline business processes.

Perhaps the most significant impact of the Internet is being felt in communication, both in speed and efficiency, with implications for purchasing, sales, marketing and customer service. Portals and other online resources have made it possible to communicate announcements, press releases and information almost instantaneously with a dramatic impact on program cost. Processes that not too long ago took days now take minutes, whether it's getting Certificate of Analysis to a client or communicating a back order.

The next wave of development and competitive advantage will involve capturing and using the data and information for future business and process improvement. Companies that integrate the Internet into their operations on multiple levels will be the most successful. Information and knowledge management is already becoming critical on both an inter and intra-company basis. Companies that consider the Internet the domain of 'techies' only, will find themselves missing opportunities, losing ground to competition and finding it increasingly difficult to meet higher customer expectations.

The impact of the Internet is more than e-commerce and marketplaces. The lasting impact will be on business processes. Considering e-business on a corporate strategic level is imperative.


About the author: Len Monheit is president & CEO of NPIcenter (www.npicenter.com) and editor of NPIwatch (www.npicenter.com/newsletter). He can be reached at 416-650-1551; Fax: 416-503-4299; E-mail: lenmon@npicenter.com.