Optimism Reigns for B2B
by Peter Huck

Unfortunately, no job is perfect, including being a buyer or seller ofnutraceutical and food ingredients. Long plane flights in cramped seats. Workingover the weekend. Schmoozing with a client who has honed the full spectrum ofannoying personality traits. But business trips do come with perks as well.Dinner and drinks with a client at a fine restaurant courtesy of the corporatecredit card. A round of "conducting business" on a golf course thatmade Golf Digest's top 20 list. Lying poolside at a plush resort whilesporadically attending a trade show. There are luxuries to be had for thosewhose job description largely consists of meeting with people face-to-face to dobusiness.

But now along comes a technological means that promises to change the waycompanies do business with each other. It's the latest craze of the InternetAge: business-to-business e-companies. Or in technospeak parlance: B2B. Earlierthis year, B2B companies were the hottest stock for investors. A writer forFortune magazine wrote (only half-jokingly) that "if you could brand thewords BUSINESS TO BUSINESS on the back of an armadillo, there would be someoneon Wall Street to sell it--and someone on Main Street to buy it." That wassix months ago, which is approximately a quarter-century in Internet years. Inthe time that has elapsed, share prices of B2B stocks have dropped by as much as80 percent. Does this stock market pounding signal the end of the B2B fad?

On the contrary, optimism reigns for B2B, and projections for online B2Bsales for 2003 range from $1.4 trillion to $3.9 trillion. That's quite aspectacular jump from less than $20 billion in 2000. In the nutraceuticalsindustry, less than one percent of all B2B transactions are currently conductedonline. However, by 2003 that figure could rise to 15 percent and, some project,perhaps even to 40 percent. Instead of spending days on the phone or meeting inperson, an Internet hookup and a computer mouse may become the primary tools ofthe trade for buyers and sellers of ingredients.

Hyping the Benefits

The marketing materials of B2B companies for the nutraceutical and foodingredient industry boast an impressive list of benefits of doing businessonline, including decreased costs, convenience and fostering relationshipsbetween businesses that are far apart geographically. The following is just asampling of the sound-bites touting the advantages of doing business over theirsites: "Offers buyers and sellers significant savings, gains in efficiencyand better use of company resources." "Eliminates 'telephone tag' andsaves time." "Reduce total purchasing costs ... reduce biddingtime." "Choose from a wider selection of products and prices.""Expands your reach to previously inaccessible customers.""Instantly enhance your company's visibility." "Optimize supplierbase ... improve supplier relationships." "Provides up-to-the minuteprices."

These and other purported benefits should only be enhanced by the fact thatcompetition is already stiffening among B2B sites, leading them to actively tryto create points of differentiation from each other. In fact, every B2Bnutraceutical ingredient site has its "different and unique"points--whether real or hyped. For example, Oakland-based www.ifoodnet.comemphasizes that its site gives buyers and sellers a shared, real-timecommunication tool for all of its customers.

"The supplier can provide a very high level of information about theirproducts, inventory, contract negotiation, purchase orders and shipments totheir customer with only a web-browser," said Daniel Reese, chief executiveofficer (CEO) and founder of ifoodnet.com. "The buyer can use the system tomanage and track vendor performance and also see where breakdowns incommunication happen internally that may cause issues in procurement, inventoryand supply to their customers. The key difference [between ifoodnet.com andother B2B sites] is that we are an event-based system and we can create atrackable chain of events. So, as the product is produced, picked up by alogistics company, received into a warehouse/distributor, delivered to amanufacturing facility, anyone given access by the customer can see these eventsand the information behind them."

Denmark-based FoodIT ApS, which launched 'Food Ingredients Trade' at foodit.netin June, also positions itself as different than other B2B companies. "Thee-commerce system 'Food Ingredients Trade' offers a completely new way ofexecuting trading," said Kurt Krogsgaard, CEO and president. "Whereasmost other e-commerce sites are public auctions, 'Food Ingredients Trade' is acomplete software package (installed and executed via the Internet) for you tobe able to communicate with your business partners. So far only the largermultinational food companies have invested in developing such systems. Now asystem is available to everybody, and particularly the small- and middle-sizecompanies will benefit from 'Food Ingredients Trade' having a free registrationand no membership fee."

NutraBuy Inc. specializes in making iteasy for those unfamiliar with the Web to conduct business on it."Retailers are not necessarily Web-savvy," said Dilip Chopra,president of NutraBuy. "This offers a non-Internet-based alternative to theregular B2B out there. Retailers are given a computer with preloaded softwareplus an Internet connection that enables them to connect to the Web. As they getused to the system, it slowly encourages more Web use."

An Easy and Efficient Process

What really happens when one visits a B2B site to conduct business? Each B2Bcompany offers its own unique features; for instance, some sites are auctionsand others use specific requests for proposals. The following is a genericexample of how the process works when a buyer or seller goes online at a B2Bsite.

Step 1: Register (usually free) and choose a password for accessing the site.

Step 2: If you are a buyer, enter a bank reference and contact information.If you are a seller, enter trade references and contact information.

Step 3: If you are a buyer, search products on the database. If interested inplacing a bid (often an anonymous process), enter specific requirements such asdelivery location, shipment date and price. If you are a seller, post productsfor sale by entering all specifications along with prices.

On many sites, a commission cost of one percent to three percent is chargedon each complete transaction, paid for by the selling company. For a companylooking for an obscure ingredient to add to a product formula, B2B offers a moreefficient means than the time-consuming process of making countless phone callsto all ends of the Earth in search of, for example, an exotic herb. Some sites,such as NatureBid.com, have startedadditional measures like receivable management, to allow sellers to use athird-party receivable company to broker the transaction. Notably, B2B savesmoney, which can be more important than saving time. According to one estimate,companies on average spend $100 on paperwork alone each time a purchase is made.Using the Internet could cut such costs by as much as 90 percent, savingbillions of dollars in overhead.

"The amount of time and expense spent by purchasing, R&D and salespersonnel in the inter-company exchange process is unnecessarily high,"said Philip Gentlesk, Jr., executive vice president of Rmbid.com, a B2B site setfor launch this fall. "The price discovery, new product approval and salesprocesses can be streamlined through an electronically enabled system.Traditional sales and purchasing methods (e.g. phones and faxes) are becomingless and less efficient in light of the reduction in size of many companies.Survival in the new economy will depend heavily on being able to identifyopportunities to improve efficiency and the ability to make the necessarychanges to get ahead. While the importance of human interaction cannot beunderestimated, there exists an opportunity for companies to realize great gainsin efficiency through online trading."

Those gains can be particularly important in sourcing ingredients on a globallevel. "On the Internet, barriers such as geography and language can bebroken down in a B2B arena," said Diane Huang, vice president of businessdevelopment with NatureBid.com. As thetrading partners realize savings through one-stop shopping and distribution,most B2B players realize their profit in a transaction fee structure. NutraBid.com,for example, has no registration fee, but does charge a percentage transactionfee. Considering that the company has already completed $7.5 million intransactions, and expects to top $20 million by late fall, that's a certain drawto new players.

Advantages for Big and Small Players

The benefits of a B2B site for locating hard-to-find ingredients seemsobvious. But what about its benefits for those meat-and-potato type ofingredients that appear in countless supplement and food products? In otherwords, is it necessary to have an intermediary via the Internet for purchasingcommonplace ingredients such as vitamin C or wheat? Many buyers and sellersalready have well-established business relationships in place for suchcommodity-type ingredients.

Steven L. Serfling, director of marketing and membership development at theInstitute of Food Technologists (IFT), acknowledges that businesses familiarwith each other may not need B2B sites that act primarily as auctions."Buyers and sellers who know each other will not typically do business viaordinary Internet sites," said Serfling. "If the companies aresophisticated enough, they will establish electronic links to allow them to viewconfidential information about the other to let them anticipate orders, prices,delivery times, specials and so on. The many websites that expect to become richby taking a few percentage points on huge volumes of online transactions havetotally forgotten that once a buyer and seller are introduced, they have amutual interest in conducting their business offline to reduce costs."

IFT's Internet site, WorldFoodNet.com,will eventually add an online marketplace but won't charge any fees based on apercentage of the transactions. Serfling argues that such fees arecounterproductive to efficient transactions. Currently, www.WorldFoodNet.comoffers a large database of companies for buyers and sellers to search throughfor products and services. Rather than being a site for business transactionsonly, WorldFoodNet.com provides information.

Said Serfling: "WorldFoodNet is unique because it is an extension of thetradeshows or supplier memberships of three major food industry associations:the exhibitors at the Institute of Food Technologists' Food Expo, the exhibitorsat the Deutsche Landwirtschafts-Gesellschaft Anuga-FoodTec and members of theInternational Association of Food Industry Suppliers. More than 3,000 companiesalready have 'virtual exhibit booths' on WorldFoodNet; other associations andtradeshows will be added as well. The obvious benefit is being able to quicklyidentify new suppliers and contact them efficiently."

Other B2B Internet sites are tapping into existing business relationships bynoting that they are not simply sites where suppliers and buyers can hook up todo occasional business, but rather offer they services that help companiesbetter streamline buying and selling practices.

"Our system is a continuation of existing business and provides thetools necessary to better manage the way food companies conduct their currentbusiness," explained Blake Neher, supply chain manager for ifoodnet.com."Our focus is not a one-off system where a buyer may come in and purchase aproduct and ride off into the sunset, never to be heard from again. The ifoodnetplatform gives companies a way to better manage their current business processwith their current customers and vendors."

Siobhan McAleer, director of marketing for Dublin-based IngredientsNet.com,contends that its B2B site has a similar approach--it is not trying to replacethe traditional means of conducting business, rather, it endeavors make thatprocess work better.

"The IngredientsNet portal replicates the way that the food manufacturerand food ingredient supplier do business today," explained McAleer."It recognizes the need of buyers and suppliers to have direct contact. TheIngredientsNet trading marketplace does not eliminate this, but facilitates itthrough a query option. In designing the software to allow buyers and suppliersto carry out their business, IngredientsNet had built in a facility for the twoparties to communicate online." McAleer further explained thatIngredientsNet.com allows a manufacturer to communicate with all of itssuppliers at once instead of having to separately contact each supplier torequest a quote.

While B2B sites hold promise as a facilitator for existing businessrelationships, the benefits of B2B may be even greater for suppliers and buyersjust starting out in the nutraceutical industry. The old way of doing businesscan often benefit a veteran backslapper--the person who knows who's who in thebusiness and has ready access to deals. In such a system, a newcomer to theindustry is often left out in the cold. However, B2B sites could alter thislopsided balance of power. Suddenly, the small players in the industry get theopportunity to make bids on ingredients and other products. The networking gameof knowing the right people might be replaced by simply having credit approval.

"B2B sites like Rmbid.com lower barriers to entry for all users,allowing companies of every size and description to compete effectively in afree and open market," said Gentlesk. "This allows buyers access toproducts from around the world from suppliers who may not have been able tocompete effectively in this market before. Conversely, it broadens the marketfor sellers to be able to offer their goods to buyers in previously untappedmarkets, without the challenges and expense associated with travel, languagebarriers, etc."

Bringing parity to the industry raises a question, though. With potentiallyhundreds, if not thousands, of companies completing transactions over B2B sites,what is being done to ensure the quality of the ingredients being bought andsold? Many of the contacted B2B companies have screening processes in place tocheck the legitimacy of companies that engage in business over their respectivesites.

"The members of IngredientsNet are all screened to ensure they are bonafide food manufacturing and food ingredient companies," said McAleer ofIngredients.Net.com. "The onus is on the purchaser to make sure the qualitymeets their requirements. The IngredientsNet trading process enables the buyerto stipulate in detail his/her quality requirements and to request anyguarantees online."

Dr. Toyin Bello of Xcordia.com said hiscompany verifies each company and its owners through a third party. It alsosends contracts to be signed and returned via fax that verify product quality,product claims and advertising.

Wayne Sirmons of Healthwell.com saidit has a standards department in place. "Products go through thisdepartment and Healthwell.com checks the products' advertising and claims,"said Sirmons. "If they have misleading advertising or false health claims,we ask the companies to change it before they go up on the site. If they don'tcomply, their products are ousted."

Many B2B sites noted that, just as it has always been, suppliers carry theresponsibility to provide quality ingredients that have been properly tested andhandled. As Reese of ifoodnet.com put it, blaming a B2B site for poor productquality--instead of the supplier--is similar to blaming the stock market whenyou make a bad investment.

Room for the Middleman

When contemplating which companies are going to strike it rich on theInternet, consider the flip side--existing businesses are going to suffer frome-competition. In the case of B2C (business-to-consumer sites), traditionalbrick-and-mortar retail stores are viewed as vulnerable. With B2B, distributorsand brokers might feel the squeeze from Internet companies. The danger fordistributors and brokers is that B2B sites will allow all levels of the supplychain to communicate directly with each other via the Internet. E-technologycould take the place of the traditional middleman.

However, Frank Tomasino, chairman and founder of Miami-based Foodtrader.com,doesn't believe the Internet spells the end for distributors or sales personnel."There will remain a place for distributors and brokers," Tomasinopredicted. "From a logistic standpoint of moving a product from point A toZ, online services are not going to have a big impact. You're still going toneed someone to handle this aspect of a business deal. Similarly, there is stilla need for salespeople. This may change, but these people disappearing is faraway into the future."

The importance of face to face contact cannot be forgotten. "Manytransactions can be made more efficient and cost effective by using theInternet," said Len Monheit, president of NutraChoice.com."While some transactions depend on the face to face interaction anddynamic, many do not. The best strategy will be combining all available mediafor your transactions. B2B is an extension of the media package; it's anothertool for businesses to use to grow and communicate."

The Impending Shakeout

So does this mean the emergence of B2B sites is good news for everyone? Thepotential benefits for buyers and sellers appear to be immense, and the maincasualties of the B2B frenzy may well turn out to be the B2B companiesthemselves. According to one estimate, there are nearly 150 B2B sites for thefood and agricultural industry. Most B2B players believe that only a handfulwill survive beyond 2004.

Tomasino commented on the inevitable shakeout: "Is a buyer going to goto five or 10 different sites to look for one ingredient? No, a typical buyersimply won't have the patience for that." Others believe that the number ofB2B sites inevitably has to decrease for online B2B to be a viable process."Why can't the market support multiple trading platforms?" saidGentlesk. "Why can't companies develop their own marketplace websites? Theycan, but this would undermine the strides for greater efficiency."

Gentlesk continued: "Suppliers of goods and services can create theirown sites and transact business with buyers; however, they will only be able tooffer the buyers the products that they make themselves. This would be highlyinefficient. No company would benefit in the long run. In order for the industryto realize significant gains, there must be a common place for companies to meetfor all their needs. Consider baking a cake. Do you go to the flour mill to buyflour? A separate place for sugar? Yet another for eggs? Butter? No. Thisprocess would take all day. It is more convenient to go to a supermarket where avast array of ingredients are available, all under one roof."

If B2B online lives up to its promise, an even more apt metaphor for aningredient buyer may be that of a kid in a candy store. Just imagine it: easyand immediate access right at your fingertips to each and every ingredient youcan think of. Now, doesn't that sound better than taking the red-eye to a Mondaymorning meeting in Podunk?

Peter Huck is a freelance writer based in Virginia, and a former associateeditor with Natural Products Industry Insider.