Banking on 'Net sales
Distributors have increased Internet usage, but many wonder what lies ahead in the future
By John R. Johnson -- Industrial Distribution, 1/1/2000
The Internet wave is about to crest. And the tidal wave that is approaching in business-to-business e-commerce will change the landscape of distribution forever. Nobody knows just how big B2B will become, although a recent study produced by Forrester Research predicts that business to business sales over the Internet will reach $1.3 trillion in just three short years. The threat -- as well as the opportunity -- of the Internet is being taken seriously, and in some cases to the extreme. In November, for example, tenants of a St. Louis shopping mall were told not to promote e-commerce initiatives within their stores.The thought, according to the mall's management, is that they could possibly lose rental income due to online sales. Indeed, W.W. Grainger, undoubtedly the leader in MRO e-commerce to date, is on record saying that they have seen evidence of online sales cannibalizing branch sales. A recent report from Grainger Consulting Services says that the growth of B2B e-commerce eliminated growth at "traditional" venues, or caused that channel to actually shrink.
However, more and more distributors are flocking to the Web and are offering products over the Internet, according to an exclusive study conducted by INDUSTRIAL DISTRIBUTION in November. The study reveals that 83 percent of distributors now have Web sites, up from 72 percent last year. And while only 20 percent of respondents were selling products from their Web site last year, 31 percent are doing so now.
Anticipating big bucks
Perhaps the most startling aspect of the study is the revenue growth distributors predict will occur over the next two years. In 1999, 57 percent of survey respondents expected online sales of up to $25,000. As e-procurement continues to build momentum, however, that number drops to 42 percent in 2000, and 31 percent in 2001.
By then, doing $25,000 in Web sales should be small potatoes. Clearly, the majority of distributors expect major online sales in the future. While just three percent predicted online sales of between $100,000 and $500,000 in 1999, 21 percent expect sales to reach that level in 2000. Looking out 12 months, 28 percent predict sales of between $100,000 and $500,000 in 2001, while another 31 percent think online sales at their companies will climb to $500,000 or more.
Ed Montgomery, president of North Coast Seal Inc., an industrial seals niche house located in Cleveland, Ohio, doesn't reveal his online revenues, but says they are currently about one percent of sales. He expects that figure to climb to at least 10 to 15 percent within the next three years.
"The growth in e-commerce in our neck of the woods will be from global customers, people outside the normal distribution chain," says Montgomery. "We've done a couple things to position our company in that [online] market. One is to drive down transaction costs. Our costs are grossly less than our competitive partners, and they need to be because I don't think typical Web commerce orders will be in line with brick and mortar customers. We'll get lots of small orders, and if you can't handle them you'll go broke or be very frustrated."
Montgomery isn't alone in anticipating great fortunes from the Internet. A recent study by the University of Texas/Cisco also documents Internet growth, noting that the Internet economy grew 68 percent from the first quarter of 1998 to the first quarter of 1999, pumping an estimated $507 billion into the U.S. economy and employing 2.3 million Americans. The study, conducted by University of Texas economists, found that:
- The Internet economy grew from $64 billion in the first three months of 1998 to $108 billion in the first three months of 1999, an increase of 68 percent.
- The Internet economy, up from $301 billion in calendar year 1998 to an estimated $507 billion for 1999, today generates more annual revenue than such entrenched American industries as telecommunications ($300 billion) and airlines ($355 billion).
- E-commerce, the amount of business conducted directly on the Internet, increased 127 percent from the first quarter of 1998 to the first quarter of 1999.
- Of 3,400 businesses surveyed to measure the size of the Internet economy, more than one third did not exist before 1996. Those new businesses now employ 305,000 people.
"The fact that the Internet Economy rose so much in just one year underscores that companies are embracing the Internet and that an Internet revolution is reshaping the economic landscape," John Chambers, president and CEO of Cisco Systems, said in a release.
The wired fluid power industry
So just how fast is the 'Net being accepted by distribution? Like last year, the Industrial Distribution poll surveyed members of five different associations: The Industrial Distribution Assn.; the Power Transmission Distributors Assn.; the National Assn. of Electrical Distributors; the Fluid Power Distributors Assn.; and the National Assn. of Hose & Accessories Distributors (NAHAD results were inconclusive and are not broken out individually).
When comparing distribution categories, fluid power distributors appear to be leading the way in the Internet/e-commerce race. Ninety percent of FPDA respondents have a Web site, the highest among the five groups. Last year, only 75 percent of FPDA members reported having Web sites. And while only 19 percent of FPDA members reported selling products over the Web last year, that number has risen to 36 percent.
General line distributors also made 'Net improvements, as 78 percent report having a Web site, up from 67 percent last year. However, I.D.A. members still trail the other association members in this category. Of the I.D.A. members who have a Web site, 26 percent report selling products over the 'Net. The number for PTDA distributors was 29 percent, nearly a 100 percent increase from last year's 15 percent. Overall, of the distributors who are not presently selling products over the 'Net, 68 percent plan to do so within the next 12 months.
Aside from growing revenues, distributors are using the Internet to increase their territory as well. The survey indicated that 88 percent of respondents selling products over the Web have sent orders to customers outside of their normal territory. And, 65 percent report having shipped Internet orders internationally. Of those taking orders over the 'Net, nearly three quarters (72 percent) have average orders of less than $500. Just three percent report that average orders are for $50,000 or above. On average, 2.4 percent of customers are ordering online.
Of those ordering online, buyers in the machine shop, construction and automotive industries ranked one through three for online purchasing, followed by government institutions, chemicals and utilities. Just as varied was the size of customers ordering over the 'Net. Although the general belief is that larger firms are more inclined to buy over the Web, the survey reveals a strong Web presence among smaller customers.
For example, one third of distributors say the customers ordering from their site have annual revenues of $100,000 or less, while 13 percent say revenue is between $100,00 and $500,000. Only 12 percent say that their wired customers have sales of $100 million or more.
And while purchasing professionals are using the Web more, so too are distributors. Ninety percent of those polled say they access the Internet at least once a day. Usage is highest among NAED members, at 92 percent. And despite the explosive growth predicted, only 29 percent of distributors offer some form of Internet training. However, distributors seem ahead of their customers when it comes to training. In a recent report by Purchasing magazine, only 21 percent of purchasing professionals said their firms provide Internet training.
New venture capital fund focuses on B2B solutions
If there is any doubt about the substance of the business-to-business Internet market and its pending effect on distribution, take a look at the investment made in November by CMGI Inc. The Internet investment firm announced the launch of the CMGI @Ventures B2B Fund, a new venture fund to be focused exclusively on business-to-business Internet venture capital investments. The fund is expected to reach up to $1 billion in capital.
According to a press release, the new fund will significantly build on the successes of the current @Ventures funds and their strong track record in B2B investments. Nearly two-thirds of the companies in the current @Ventures portfolio operate in the business-to-business arena.
To date, @Ventures has made more than 50 Internet venture capital investments. Its track record includes five successful Internet IPOs (Lycos, GeoCities, Silknet, Chemdex and Critical Path), seven strategic company sales, and three companies currently in the IPO process (MotherNature.com, Furniture.com and Vicinity).
"This is a natural extension of our expertise and allows us the latitude of deeper investment into the B2B arena. We continue to believe that the B2B market will be a major growth sector of the Internet economy," said David Wetherell, CMGI Chairman and CEO.
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