Was Heinz Inc.’s recent purchase of advertising on a B2B exchange using a reverse auction a seminal event for Madison Avenue? Hardly.
So was it yet another example of Internet hype? Not exactly, either.
While it’s true that B2B exchanges have yet to fulfill all their promise, the fact of the matter is, these exchanges are making inroads into a growing number of markets.
That doesn’t mean that Chuck Lanphear, media director for Heinz, who oversaw the transaction for his company, is ready to say that B2B exchanges will become the venue of choice for buying and selling advertising slots on the networks. But he will say that whether the networks like it or not, more of these deals will migrate to an online format, if for no other reason than it’s simpler, faster, and cheaper.
Do the networks like it? Not always.
One spokesperson familiar with the networks’ advertising sales practices said that most of these deals are highly customized and structured through one-to-one negotiations and can’t be squeezed into the narrow restrictions of a B2B auction.
Lanphear begs to differ. After all, not every 30-second slot is for Letterman, Leno, or “Who Wants to Be a Millionaire.” At the end of the day, whether it’s the Web or the boob tube, “the purpose of advertising is to buy eyeballs,” Lanphear says. “When I put it to them like that, they understood.”
As it turned out, Heinz bought its first quarter 2001 TV advertising for its Bagel Bites frozen snack, and the dollar amount involved, according to Lanphear, was in the medium-to-high six-figure range. In 1999, Heinz spent $2.7 million in TV advertising for the product.
The use of a B2B reverse auction came about through Heinz’s existing relationship with Freemarkets Inc., a provider of E-commerce systems. Heinz had been using Freemarkets for supply procurement, and the contract allowed for test auctions in other areas of the company. Lanphear says he was willing to be a guinea pig, and based on the results of this trial, he’s ready to try B2B for other advertising deals.
Will it fly?
Lanphear says the model still needs a little work. TV networks and other media companies selling airtime and advertising space need to feel that there’s a benefit to them.
“This isn’t going to work if all it’s doing is driving the price down to the advertiser,” Lanphear says. Exactly how he’ll avoid that trap is another matter. Lanphear has some thoughts, but he isn’t ready to share them.
Still, he thinks the whole online market for a broad spectrum of goods and services is on the verge of a huge expansion, and it’s simply inevitable that television advertising will join in.
“Maybe I’m crazy, but almost every business is going to move in this direction. Why should media be any different? “he asks.
The industries that are most likely to adapt first will be those where a centralized purchasing function already exists, predicts Gavin Mlinar, a securities analyst with Sands Brothers & Co. in New York City. In those instances, a B2B auction is largely a matter of converting an existing process to the Web.
But Mlinar adds: “If there’s not a centralized purchasing manager, then you have problems, particularly if you’re trying to change purchasing habits that have been in place for the last 50 years.”
The lab testing business is one example where the resistance might be high. Individual employees are in the habit of ordering lab chemicals and equipment directly and are not accustomed to using a centralized purchasing function.
But Mlinar also feels that the sectors that aren’t ready to adapt are more likely the exception rather than the rule.
Car dealerships may be one of the next frontiers for B2B exchanges, particularly in terms of Webifying the supply-chain management function from the factory floor to the car customer. Car buyers can walk into a dealer showroom, specify the make, model, features, and color. In fact, they don’t even need to leave their homes. The Web makes it possible for car buyers to order a car at any time from anywhere.
But Kaushik Shridharani, an analyst with Bear Stearns, cautions that some B2B systems providers may find themselves shut out if all they provide is a niche solution.
The whole issue of supply-chain management is crucial in most markets: A B2B marketplace needs to do more than just line up the buyers and sellers. After a deal is struck, someone has to make sure that the physical goods involved get to the right place at the right time. That’s not one of Freemarkets’ services, and Shridharani says that this creates an opportunity for a rival that does provide order fulfillment and supply-chain management to move in on its turf.
Still, even though few B2B providers are offering total end-to-end packages, there are instances where the B2B trend is making headway. For example, the major automakers– General Motors, Ford Motor Co. and DaimlerChrysler–formed a joint B2B marketplace called Covisint earlier in the year.
More recently, the major airlines have moved aggressively into setting up a jointly- operated B2B.
Gene Marshall, procurement manager for UPS Air Group, one of the partners in AirNewco, an aerospace B2B exchange formed in April, says an E-marketplace serving the broad aerospace industry should help the major airlines lower their costs.
Along with UPS, the other major shareholders in AirNewco include AMR Corp.’s American Airlines, British Airways, AirFrance, Swissair, Continental and Delta Airlines. In October, the group announced it would merge AirNewco with a rival E-marketplace, MyAircraft Co., set up by Honeywell, B.F. Goodrich, I2 Technologies, and United Technologies.
Marshall says that cost savings will arise as airlines start to compare their customized parts against those of rivals. Many airlines have ordered parts suppliers to make high- priced components uniquely tailored to their aircrafts. But Marshall says that these parts are often not necessarily better than the industry parts that rivals may be using on similar aircraft models, just more expensive.
“An airline that uses gold-plated parts may decide that silver is just fine,” Marshall says.
Over time, the difference between silver and gold may not amount to a huge savings, but Marshall says that perhaps UPS’s annual transaction costs may be cut by $1 million. Where he expects to see the greatest impact is in inventory costs. UPS should realize a one- time saving of $100 million simply through better inventory controls and improved communication with suppliers.
If B2B exchanges do indeed save that much money for UPS, more converts may be ready to catch B2B fever in a hurry.