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Small Business - A Special Advertising Supplement sponsored by Scotiabank - Monday, October 22, 2001

The rise and fall of e-hopes

Monday, October 22, 2001

It is not an exaggeration to say that there is no industry that has produced more disappointments and perhaps ruined more fortunes than e-business. Yet underlying the collapses of such high-profile firms as delivery service are less well-known stories about a part of the industry that has generated good returns: business to business, or B2B, marketing and supply-chain management.

"B2B accounts for 90 per cent of all business transactions on the Web, even though business to consumer, B2C, gets much more attention in the press," says Bill Demers, Canadian director of e-business for Ernst & Young in Toronto. To find real successes in e-business, one has to look to B2B.

Roger Blackwell teaches e-business at Ohio State University in Columbus and is president of consultancy Blackwell Associates. He's also a leading authority on e-commerce. The co-author of Customers Rule! Why the E-Commerce Honeymoon is Over and Where Winning Businesses Go From Here explains that "Web sites run by individual firms as a part of their supply-chain management add value and are profitable."

Selling to business tends to be easy once a personal relationship is established between representatives of the firms. But for retail sales in B2C commerce, some sort of relationship has to be established each time a customer begins to browse a Web site, he says. Moreover, Blackwell adds, there is a favourable scale in B2B. "When a van drives 10 minutes to an office, it can unload 30 packages. If the van goes to a home, it can be a 30-minute drive to unload one package," he says.

B2B firms that are not burdened by having to deliver physical goods are reported to be thriving and growing. Enbridge Petroleum Exchange now moves about 2 per cent of all Canada's daily trade in crude oil, reports Forrester Research, an information-technology consultancy in Toronto. Still, there are B2B dot-coms that have flopped, including FreightWise, an open marketplace for buying and selling truck space that lacked for customers.

It was a marketplace that will soon be put in the shadows by exchanges backed by large firms, says Howard Solomon, assistant editor of E-Business Journal, a trade magazine published in Toronto.

The B2C model had its successes, including Internet and content provider, and digital garage sale, which has thrived on its ability to sell for fees without having to pay inventory costs, and on-line employment agencies. As well, says Don McCartney, director of e-risk strategy for KPMG in Toronto, financial institutions have done a good job of migrating their services to the Web. "They have learned the lesson that to succeed on the Web, it is necessary to have a goal and a purpose for going on the Web."

Although some B2B sites have not worked well, a far larger number of B2C enterprises have produced conspicuous failures, including dog-food purveyor, a firm that committed a cardinal sin in e-business. "The companies that fail are those that can't generate high enough margins to cover their costs. You need margins of 50 per cent or more to thrive on the Net. High-margin retail clothiers like L.L. Bean can get those markups." Yet as Demers points out, 10 to 15 per cent of Web business is low margin and hasn't the capacity to generate either a large profit or to pay back investors for the risks they have taken.

Some firms have shown that they are destined to fail, others have shown they can succeed on the Web.

Low-margin convenience goods that are cheap, easy to find anywhere and not well defined or protected by brand name are not likely to be profitable. In contrast, high-margin specialty goods that have high prices, are difficult to find, are defended by brand name or characteristic and are possibly inconvenient to shop for in person tend to do well in on-line selling, Blackwell says.

E-business was supposed to erase national borders. After all, there are no customs posts in virtual space.

Yet e-business has not worked out quite that way. Bob Tattersall, president of Howson Tattersall Investment Counsel in Toronto and manager of the Saxon Small Cap Fund, notes that a falling dollar has kept domestic small business, including e-business, from having to compete with world e-business that prices goods in U.S. dollars. A lack of international competition has therefore been good for struggling Canadian e-commerce companies.

Finally, and perhaps most important of all, is the goal of the business model. "The market was misshapen by attitudes toward money," Demers says. "Investors bought into firms without sound fundamental business strategies. Today, the most important rule of all is configuring a firm to make money as soon as possible. The market does not want to hear about how losses can produce gains one day."

Today, the rule is to "get the money." And that's the new law of the e-jungle. Firms that can produce cash should succeed. Those that can't are likely to fail, Demers adds.

And that is the bottom line, quite literally. The new and now-discredited metrics of the Web measured site hits and counted them as important as cash flow. Equity investors assumed risks exaggerated by unsound business models. And in the end, failed e-firms showed that though the concept of doing business in virtual space was novel, the tests of business were never changed, Demers says.

"It is all about cash now."

"The new metrics are the old metrics," says Steve Masson, vice-president of equities for Altamira Investment Services Inc. "They are about old business models and being able to generate revenue profitably.

"We are seeing it not just in dot-coms, but in other areas, too. If you are in a viable business, you have to be able to generate free cash flow."

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