E-commerce's real celebrities: valves, pencils, switches
Last updated 07/13/1998, 12:31 p.m. MT
Editor's note: This article is a Web Edition extra that does not appear in
the printed Deseret News.
By Mark Boslet and Joelle Tessler Dow Jones News Service
PALO ALTO, Calif. � Despite the high profile of companies like the
online bookseller Amazon.com Inc. and music store CDNow Inc., many of the
real success stories of the new age of Internet commerce lie outside the
limelight.
Companies providing valves, switches, screws, electric motors,
stationery and pencils � the mundane business products that make factories
and offices go � have become the fastest-growing segment of electronic
commerce. The reason: the Web enables them to link suppliers and buyers over
long distances, saving customers time and money.
"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 percent 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, 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 said.
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.
E-commerce also benefits suppliers. After two years of selling to U.S.
customers over the Web, office products maker Viking, based in Los Angeles,
remains "gung-ho," and is expanding its efforts to handle the numerous
international inquires it gets, said customer development director Sean
Clough. 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 online,
Grainger, based in Lincolnshire, Ill., finds that online 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,
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 Cisco's electronic-commerce director,
Todd Elizalde.
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
online 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 be 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," Bell said.
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.
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 percent a month, marketing vice-president Andy
Cohen said.
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.
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