February, 2000

Fruits of Thought

Dotcoms And IPOs

E-commerce companies actually may resolve the difficulties of produce trading, but in an unexpected way. At the rate produce industry workers are bailing to join e-commerce firms, there will only be one buyer and one seller left…which, indeed, will reduce transaction costs. OK, I’m exaggerating, but with Greg Flood leaving Grimmway, Bruce Knobeloch leaving Schnuck’s, Robert Verloop leaving the California Avocado Commission and Minos Athanassiadis leaving Underwood Ranches – all to join the e-commerce wars and all in just a few days’ time – clearly something big is happening.

The rules have certainly changed. A migration of top employees to a new business once would have symbolized the success of that new business. Today, in the age of the Internet and, relatedly but more importantly, the age of sky-high market valuations, the migration of employees symbolizes not that a successful business has yet been created but only that venture capitalists see sufficient opportunity for IPOs to invest money.

It is really simple, and to produce people well-versed in supply and demand, easily explainable: if the stock market so demands e-commerce companies that it is willing to pay high valuations, then the world will create lots of e-commerce companies.

Currently the hot segment on Wall Street is the business-to-business marketplace. Thus venture capital money is pouring into business-to-business projects, and smart people are trying to ride the bandwagon to IPO riches.

This makes perfect sense for the very high quality people that have joined the e-commerce sites. The upside is tremendous: Most are getting stock options that, potentially, could make them multi-millionaires many times over. The downside is minimal: if these companies don’t find a way to make money and they can’t get new financing, these individuals will be able to go back in the produce industry stronger for having gotten a better grasp on new age technology.

Indeed the produce industry is particularly vulnerable to losing good managerial talent because, on the shipping end, so many of the management jobs are in family firms where many top managers feel frustrated that they will never make CEO of the family business. On the retail side, the family business issue enters the equation, but even with the largest retailers, produce is still an unusual route to the top spot.

So these dot-coms in produce are creating upward mobility for good managers. Of course, this doesn’t mean that they will actually work.

There is no doubt that the Internet will change the way produce is bought and sold. So did the fax, the telephone, and the cable in an earlier day. What is very unclear is how the Internet will change things.

When television was just about to change the world, the sages of Wall Street encouraged investors to sell movie production companies and buy TV manufacturing companies. After all, everyone would need to buy television sets, and nobody would pay good money to see the movies when they could see programs on TV for free.

Well, of course, this was exactly the opposite of the correct advice. As it turned out, most of the TV manufacturers went broke as manufacturing moved overseas, and movie producers made fortunes as they learned to resell movies on television and later on cable, video cassette, etc.

So the future is always a leap into the unknown, and the best and brightest are bound to be wrong.

I’m wowed by the technology of some of the new e-commerce companies. But this type of technology is coming down in price very quickly. What today is a customized site costing millions will likely be available off the shelf in two years for $20,000.

This points out a dilemma for the e-commerce companies. Although many initially thought of themselves as online auction sites for produce, market research led them to change their focus to facilitating private transactions over the web. There is a place for this, but if the sites wind up merely being technology facilitators, they will never justify transaction fees and other costs.

The big bucks have to come from added value, and where that will come from is unclear. To some extent, simply creating a high-tech office operating system – with instantaneous access to all sources of information – may be worth a pretty penny. That is what Bloomberg did with its famous Wall Street Terminals. Even more impressive will be if the sites can lock in buyers. Let’s face it, attracting sellers to these sites is a cinch – let them know that buyers are waiting and the suppliers will show.

Attracting the buyers is the tough part, especially since large buyers may feel they can build their own e-commerce infrastructure and avoid the transaction fees these sites hope to garner. What would I do if I owned an e-commerce portal? Go to Wal-Mart, Kroger, Safeway or any of the big buyers and offer them loads of stock options in exchange for agreeing to buy a big chunk of produce via the system.

Priceline.com offered Delta Airlines loads of options to get Delta to work with the system; the options reached values in the billions for Delta. The lesson won’t be lost on the big retailers.

And to my friends in the e-commerce startups, best of luck and no charge for my idea. But hey, can I get on the friends and family list when the IPO time comes around?  pb