Online uncertainty continues to grow

Mergers in the online marketplace add to the complexity of choosing an e-business option

By -- Industrial Distribution, 12/1/2000

Newton, Mass.-There's no question that e-commerce is here to stay. Industry leader W.W. Grainger wouldn't have poured millions into the 'Net if it didn't expect the investment to pay off. Grainger's online sales reached $100 million in the third quarter, up 233 percent. The firm says Internet sales could total $400 million for 2000, and reach $500 to $600 million next year.

But what's in store for smaller and mid-sized distributors? Many don't have the money required to start up their own storefront on the Internet. That's where the numerous Internet exchanges and buying sites come into play. With a blur of mergers and new exchanges being introduced almost daily, it becomes almost a guessing game when deciding which exchange to hook up with.

"I expect that more than 80 percent of the exchanges in the industrial marketplace will fail," said Adam Fein, principal at Pembroke Consulting. "There are simply too many exchanges pursuing the same product volume. With each business plan predicating financial success on being the premier dominant business in their niche, many will fail to achieve enough volume to break even."

Making things more difficult, Wall Street has turned sour on speculative Internet markets, making cash hard to come by. Eventory.com failed to get financing last summer and recently closed its doors. Internet Capital Group, which maintains a majority stake in the recently formed MROLink, has seen its stock price plunge this year. At press time, it traded near $9 a share, down from the $200 range. The company said it was laying off 50 employees and posted a quarterly loss of $263.9 million. MSC Industrial is also an investor in MROLink.

MROLink resulted from the recent merger of eCatalogs (formerly Howard Sams) and IndustrialAmerica, a B2B marketplace targeting the $1 trillion global industrial supplies industry. IndustrialAmerica was formed early this year.

"A lot of industrial distributors have spent lots of money before the market was ready," said Steve Tomkovicz, owner of S and S Industrial Supplies, which just had a new print catalog designed by MROLink and is considering its e-options with the firm. "If you're an industrial distributor and you don't have the content, but [online ordering] comes to fruition in six months, you'll be left out in the cold."

That questionable "fruition" date was one of the driving factors in IndustrialAmerica's decision to merge with eCatalogs. The move gives MROLink content capability, but also links it with a thriving print catalog business that is already providing a revenue stream and profits, something nobody knows when the exchanges will do. MROLink's online offering includes constructing a distributor online storefront. There is an installment fee of between $20,000 and $50,000, depending on the size of the e-catalog created. MROLink then charges a transaction fee of about three percent for orders that go through the system.

"I think the market is getting ready, but no company has even a small fraction of its [expenditures] online yet," said Chuck Sheridan, president and CEO of MROLink. "The combined offering of our two companies makes us not so dependent on that happening today. We have a product that we can sell industrial distributors, but can also help them evolve [toward e-commerce]."

Another strategic alliance announced this fall involves Prophet 21 and PSDI, who agreed to provide interconnectivity between their two trading networks-P-21's TradingPartnerConnect and MRO.com.

According to Lee Eagen, chief executive officer at Oliver Van Horn, TradingPartnerConnect will allow his medium-sized distributorship to accomplish several things, notably tracking and locating inventory among a national network of distributors. The system is supposed to go live early next year.

"If I don't have the product, I can hit a button to see if the manufacturer-or another distributor-has it, and I can tell the customer in real time when to expect it," said Eagen. "If I choose to buy it, it's just another key stroke to purchase it."

Even if the product is shipped from another distributor, it will be marked with Oliver Van Horn's labeling, making the transaction transparent to the customer.

The network solution also allows distributors to widen product breadth. If one of Eagen's contract accounts includes a minor amount of welding supplies, for example, he can punch in the part numbers and have the order fulfilled by another distributorship within the TradingPartnerConnect network.

The third thing, and according to Eagen maybe the most important, is the ability to track slow-moving inventory. "They say at least 20 percent of inventory is dead or slow moving," he said. "Currently we have no way of seeing who has surplus inventory. Now, I'll be able to take my buddy's dead inventory, and he's able to take mine, because the technology will allow us to track it."

Eagen, along with Pembroke's Fein, offer a few words of advice, however, before rushing to join a relationship that might promise e-commerce capabilities but deliver nothing in return.

"First, look at market share and look at financial statements," said Eagen. "If the company you want to do business with is earning money and has cash and market share, you're in good shape. If they don't, you're running a risk."

"In my opinion, distributors have the real first-mover advantage in e-business," said Fein. "Despite consolidation and e-commerce, well-run small distributors continue to thrive due to their great skill at maintaining high levels of locally delivered customer service and support. These distributors should preserve their advantage by investing in e-business and e-commerce tools that link traditional sales and communication channels with the power of shared information."