Trading Places

This story appears in the November 2000 issue of Entrepreneur. Subscribe »

Combining two of his main interests, wine and technology, Peter Byck, 37, launched a new Internet company, WineryExchange.com, in 1999. The 45-employee firm in Novato, California, created a Web site that gives suppliers of bulk wine, grapes, equipment and services a place online to sell their wares to wine growers, wineries and retailers in a secure, user-friendly environment.

How big is B2B? Check out "From: Business To: Business" to see which way this industry is headed.

These days, business-to-business exchanges like WineryExchange.com seem to be growing in popularity. According to a Jupiter Communications study, the B2B market should account for more than $6.43 trillion in online trade by 2005. A sizable 35 percent of that money will be attributed directly to B2B Net markets.

Also referred to as Net marketplaces, Net markets, B2B auctions or online trading areas, B2B exchanges basically act as virtual marketplaces that lack geographic limits. Some online exchanges allow businesses to search for particular products or suppliers and agree on the terms of transactions online (with actual transactions being conducted offline). Other exchanges allow complete transactions to take place online. Either way, B2B exchanges make it easy for buyers and sellers worldwide to come together on the Web to do business.

The B2B Business Exchange Model

Because most B2B exchanges automate a lot of the paperwork, buyers are often able to reduce their purchasing costs. But there's another benefit that online exchanges provide--introducing buyers to suppliers they probably wouldn't have met going through traditional channels.

The system has certainly worked for WineryExchange.com: The company provides buyers of winery and vineyard supplies with a Web-based procurement system, greater access to a supplier base and lower transaction costs. It also offers sellers extended marketing reach, direct customer feedback, reduced selling costs and up-to-date market data.

For instance, at WineryExchange.com--the only exchange catering to the entire B2B wine market--winegrowers list their grapes and sell them to the highest bidder. But wineries benefit, too: They can negotiate trades in bulk wines and grapes, and purchase supplies, such as bottles, corks, labels, capsules and winery equipment--doing it all online. And thanks to the centralized site, suppliers can keep up on news and information about the wine industry.

WineryExchange.com makes money through commissions of between 2 and 4 percent based on transactions sellers make. But the system takes a lot of participants to work. Says Byck, "Because [of the] nature of the exchange, you're taking a small commission--so you need a lot of players to make a profit."

Experts insist the future lies in the B2B-exchange business model. Because the Internet is secure and open to the worldwide community, companies can work more efficiently via faster and less expensive business processes.

Be A B2B Member

To start your own online exchange, you'll need more than tech savvy--you'll need millions of dollars in financial backing. That's because launching an exchange requires a complex technical platform and a massive marketing effort to bring buyers and sellers together.

But if you don't have megabucks, don't fret--you can still reap some of the benefits by using exchanges as a buyer or supplier. You'll save money on advertising, and you might even be able to forgo launching your own Web site. Just being a member of a B2B exchange could be enough.

Mary Cicalese, a senior analyst at Jupiter Communications, points to another benefit of Net markets, noting that B2B exchanges are getting better at retaining buyers and suppliers. For instance, buyers and suppliers today are charged a 4 percent transaction fee on average, compared to the 12 percent fee that was charged about one year ago.

And Cicalese says that, in the future, transaction fees might disappear altogether. Instead of charging suppliers a fee, B2B exchange owners might ask suppliers for information about their buyers, such as what they buy, why they buy and how they pay for purchases. Then, B2B exchanges could take this information and sell it as a value-added service back to suppliers.

If you want to get involved in an exchange, check the Web, read industry publications and ask your contacts for the names of leading exchanges. Most B2B exchanges will make sure your company is reputable before letting you sign on, and most will seamlessly integrate your product catalog into their site.

Also, check out VerticalNet Inc., a Horsham, Pennsylvania, company that owns and operates 56 industry-specific Web sites designed as B2B communities. These communities provide users with information, interaction and e-commerce, and are grouped by industry sector. Each community includes industry news, a career center, a wide variety of industry resources and a product center, which lets visitors access a buyer's guide and product showcase within that sector.

You can use either one of VerticalNet's services: e-commerce centers (cost per year: $9,400), which allow customers to purchase products from sellers' catalogs on the site with VerticalNet fulfilling the orders, or storefronts (cost per year: $15,000), which allow customers to research companies' products and request additional information online.

What Makes A Successful Company

In the event you want to go ahead and set up a B2B exchange, it's important that you know your target industry like the back of your hand. To succeed, you'll have to be able to get all the suppliers in that industry to sign on with your system--or else buyers will have no reason to keep coming back.

WineryExchange.com has spent between $3 million and $5 million in start-up costs, and that doesn't include ongoing maintenance expenses. It's been so expensive because every supplier has its own product catalog that must be comported to a standard catalog. Because products and prices constantly change, they must be updated on a regular basis.

Such an infrastructure requires sophisticated software and hardware. WineryExchange.com's transaction engine, for example, was built on the Moai platform, a very high-end B2B e-commerce exchange platform. You can get similar platforms from such companies as Commerce One, Ariba and i2technologies. Starting an exchange also requires working with systems integrators to ensure the site functions smoothly.

Another example of an online exchange is e-Steel Corp., a well-known, 140-employee B2B exchange for the steel industry. The company was founded in 1998 by Michael S. Levin, who personally spent more than 30 years in the steel industry running various steel product companies and international manufacturing operations before starting the exchange. Says Levin, "A deep, fundamental understanding of an industry, both in how it works and the people who make it work, is essential to operating a successful B2B vertical exchange."

But that's not all you need. Successful B2B companies also have strong management teams, lots of experience managing businesses and long histories of operating. Levin says that e-Steel's team has more than 300 years of collective steel-industry experience. "The combination of deep domain knowledge and a business track record, wrapped with passionate, entrepreneurial fervor, is our proven formula," he says.

Byck also understands that formula. He grew up in Sonoma County, where his family owns a vineyard and winery. He also graduated from the University of California, Davis, which has a wine school, and spent time in Australia developing corporate strategy for South-corp Winery. "To be the winner in a particular area, you have to be able to form alliances with existing players, which we've done," he says. "And we've been able to do this because we've got a lot of experience, and we know a lot of people in the industry. It's hard to come from the office-supply industry and try to start a wine exchange."

Contact Sources

• e-Steel Corp., (212) 527-9997, www.e-steel.com
• Jupiter Communications, www.jup.com