BtoB

Retailer hubs wage war on Wal-Mart

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Major retailers, facing thin margins and the upheaval caused by globalization and increasingly finicky consumer demand, are counting on b-to-b exchanges to help them take on industry behemoth Wal-Mart Stores Inc.

The companies, or in some cases the coalitions of companies, that best execute their b-to-b strategies could become the retail success stories of the 21st century.

Two massive industry exchanges, the WorldWide Retail Exchange and GlobalNetXchange, are ramping into full production mode this month. Meanwhile, a handful of smaller, independent exchanges are scrambling to find a healthy market niche.

Wal-Mart's long shadow

At the same time, Wal-Mart-whose marketing and technology decisions have cast a shadow over the industry for more than a decade-last week set the stage for the next evolution of its own b-to-b strategy with a major technology upgrade for its private Retail Link e-hub. Wal-Mart has not joined any public exchange, opting instead to run its own private marketplace.

Over the years, no retailer has wielded its b-to-b power as mightily as Wal-Mart, using its heft to hammer suppliers for the best prices and first-shot access to the best products.

Quipped one WWRE executive in discussing Wal-Mart, "We almost consider them their own industry."

That's why a more even playing field is so crucial. And though Wal-Mart's competitors downplay it, together they might have finally found a way to trump the Bentonville, Ark.-based juggernaut.

"Wal-Mart is bigger and badder than ever," said Kenneth S. Frieze, president-CEO of RetailExchange.com. "If you make polo shirts and sell them to Wal-Mart, you better have more in reserve, because if you don't, you won't be their supplier next year." Frieze's marketplace helps retailers, including Wal-Mart competitor Ames Department Stores, buy and sell excess inventory, a key cog in the discount retailing engine.

"I think the opportunity is there to combine the purchasing power of some of the smaller players," said Rolando deAguiar, president ofe-commerce and senior VP for Ames. "Wal-Mart has a significant amount of clout over their vendors that we don't have."

Gunning for Wal-Mart

Even larger players can't help but keep Wal-Mart in their sights-even if they're loath to admit it.

"This is not about beating Wal-Mart, per se," said Gerald Storch, president of financial services and new businesses at Target Corp., Minneapolis, and a founding executive of the WWRE.

Yet in the same breath, Storch can't help but point out that the WWRE's 40-plus members have combined market power, in the form of joint sales, of almost $600 billion, or about 31/2 times that of Wal-Mart. "It's important that we operate on an equivalent or greater scale now than Wal-Mart."

Storch emphasizes that in six trial auctions conducted last month, including a joint purchase of copier paper, WWRE members have been able to squeeze out considerable savings. "Suppliers view our exchange as an important market," he said.

In addition to the paper buy, U.K. retailer Tesco held an auction with seven suppliers for corned beef, and Netherlands-based Royal Ahold held a 24-hour auction to procure tiger shrimp.

Other WWRE members include Albertson's, Best Buy, CVS, JCPenney, Kmart Corp., Rite Aid, Safeway Inc. and Walgreen Co.

Not to be outdone is the GlobalNetExchange, led by Sears, Roebuck & Co. and France's Carrefour. Sears alone will eventually move between $5 billion and $7 billion in annual spending to the exchange, representing about 75% of its procurement, said Jerry Miller, senior VP-CIO of Sears and a board member of GNX.

Since its founding last February, GNX has completed more than 70 transactions representing about $150 million in purchase volume.

GNX passed another milestone late last month, naming former Sears senior VP Joseph Laughlin as the exchange's CEO. WWRE named its own CEO about a month earlier, tapping Colin Dyer, former CEO of international clothier Courtaulds Textiles plc.

Now both exchanges are gearing up to move beyond simple auctions into more sophisticated supply chain management and collaboration.

Full-scale auctions

The WWRE this week will go into full production with its auction capability, said Pat Steele, VP of IS and technology for grocer Albertson's, and a lead executive on the WWRE's technology team. That means any member can launch a full-scale auction on its own, Steele said.

Up next is basic e-procurement functionality, followed early next year by initial attempts at managing supply chain functionality, in particular so-called CPFR, or collaboration, planning, forecasting and replenishment. Better forecasts will cut right to retailers' bottom lines, Steele said.

GNX will also move beyond auctions this month, bringing up its supply chain hub and little by little helping its retailers move electronic data interchange transactions over to the new Internet-based exchange. Late last month, GNX inked a deal with vendor Cyclone Commerce to provide an easy EDI-to-XML on-ramp to the exchange for its more than 50,000 vendors.

Wal-Mart goes it alone

While the WWRE and GNX aim to centralize these incredibly strategic supply chain functions, Wal-Mart last week sent word of its intent to keep its b-to-b dealings to itself. The company tapped supply chain vendor Atlas Commerce to add new global sourcing and collaboration capabilities to Retail Link. Wal-Mart executives declined to comment on the deal.

The technology will let Wal-Mart do its own aggregation, using Retail Link and the Atlas software to build joint supplier requests for proposals based on input from Wal-Mart buyers around the globe, said Atlas Chief Marketing Officer John Hanger. "They can do that forecast aggregation now on a negotiated exchange," he said. "Until now, they've done it via phone, fax and e-mail."

Wal-Mart isn't alone in pursuing a private marketplace strategy. Kmart, also a WWRE member, inked a deal earlier this month with supply chain kingpin i2 Technologies Inc. to build a private supply chain marketplace to overhaul how it deals with suppliers online. The project will set Kmart back $2 billion over the next two years.

Even WWRE leader Target has its own private supplier network, but that doesn't mean private is better, Target's Storch said.

"As far as the notion that companies believe they need to maintain some sort of secret expertise in their systems, I don't buy that," he said, adding he'd prefer Target focus on its core strengths of merchandising and guest services rather than technology.

Public or private

Analysts say the retail industry offers proof that the deployment of public and private exchanges is an either/or decision. Private exchanges help companies keep their best trading partners even closer; public exchanges offer opportunities to forge new relationships.

"Let's say, for example, that there is a shortage on the hottest toy, like the new scooters, this holiday season and that Wal-Mart needs to find additional suppliers to ensure that it can keep its shelves stocked with these items. The company will likely need to go beyond its existing supplier base and identify a new source for scooters via a public exchange," said Tim Minahan, an analyst with the Aberdeen Group Inc. "Likewise, the public exchanges could serve as a key channel for the larger retailers to disburse or auction off excess stock of slow-selling items."

Indeed, the exchange revolution is just kicking off in the retail sector.

"We're very open to seeing where this is all going to end up," said Steele. "I think the whole exchange world will be different than even we can imagine it today."

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