Building A Full-Bodied Exchange

Since online exchanges have discovered that important value-adds include dynamic pricing and online negotiations, one wine exchange's multiple auction formats supplement or replace long-term contracts with a forward market.

[From iSource Business, April 2001] Given the fact that California produces 95 percent of the country's wine grapes, when the Glassy-winged Sharpshooter, a bug that produces a bacteria that kills the grape vine, trekked north from Mexico and infected vineyards in 13 counties it became the bug from hell. Such are the vicissitudes of nature that have always plagued farmers; now they pose interesting challenges, and opportunities, to the creators of e-business solutions. Last August, WineryExchange hosted its first online auction as a charity event. Bien Nacido Vineyards donated three tons of Pinot Noir grapes, Foxen Vineyards donated its options on the grapes, and Florida distributor Bacchus Wine Corp. placed the winning bid of $13,000. The proceeds went to the non profit American Vineyard Foundation to fund research on the Sharpshooter.

While doing its part to save the industry on which it depends, WineryExchange also tested its Web-based dynamic pricing and negotiating software. The event came off without a hitch, an equally happy moment for Moai Technologies, developer of LiveExchange, the auction platform that powers the exchange. However, the scions of California wine-making families and industry professionals who founded WineryExchange and form its executive team understand that there are some things e-commerce technology can't do. Staving off crummy weather and Biblical pestilence are two. Completely eliminating the middleman, upon whom the wine industry is heavily dependent, is another.

A Smooth Marketplace

Farmers fantasize about a life without brokers, distributors and other intermediaries taking their cut of the $200 billion U.S. agriculture industry, to which the wine industry contributes approximately $25 billion. The Net has the potential to radically transform the agricultural economy, and none too soon since U.S. farm income has plummeted almost 50 percent since 1996. Facing highly fragmented markets and few other options, farmers have long been quick to adopt cutting-edge production and management technologies in order to squeeze more efficiencies out of their operations. Eighty-five percent of young farmers age 25 to 40, an aggregate figure that includes grape growers, have moved at least some part of their business online. The number of ag-related Net markets is increasing and is expected to handle $2 billion worth of crop input purchases by 2002, including seed, fertilizer and chemicals. Total worldwide agriculture  and food-related e-commerce  is projected to exceed $3 trillion within three years.

WineryExchange is ready to jump into the fray. While it prepares its 700 worldwide members to trade online, the company has developed its portal into a one-stop shop for wine grapes, bulk wines, case goods, new and used equipment, supplies and services. From the dirt to the bottle, as the company likes to say. It's partnered with ICG Commerce to offer MRO catalogs; Gomberg, Fredrikson & Associates for industry analysis; and Wines and Vines magazine for an industry directory of wineries and suppliers. The company also purchased to provide the Web site's daily news coverage.

The company's founders share the fantasy of a frictionless marketplace, but the reality in the wine industry is that certain middlemen are to the buyer-supplier relationship what noble rot is to fine wine: essential. The Joseph W. Ciatti Co., the world's largest bulk wine brokerage, has partnered with the exchange to help manage its relationships with growers, wineries and wholesale distributors. One of the services Ciatti performs is to provide samples because wineries purchase varietal and bulk wines for bottling, along with other categories of wine that buyers need to taste before they purchase. A reputation for producing quality wines is critical, but, in the tradition of the wine business, the rule is taste but verify. The grape's ineffable qualities require something more than a text description on a static Web page.

In the short span of a year, the builders of Net markets have come to realize that disintermediation, the elimination of the middleman, isn't always possible or even desirable. Jin Whang, associate director of the Stanford Global Supply Chain Management Forum, writes in the forum's fall 2000 newsletter that reintermediation recognizes the need to combine information technology with the specialized information that makes traditional middlemen valuable.

Old Traditions, New Rules

The wine industry has no choice but to follow this path. Congress last year upheld legislation that allows state attorneys general to continue to restrict the interstate shipment of alcoholic beverages to consumers, which, in effect, preserves the status quo. For the foreseeable future, the wine industry's three-tiered supply chain of wineries, wholesale distributors and retailers will remain intact. As a result, relationships built over generations are as valuable as ever, particularly in such a close-knit, family-oriented business. It's no coincidence that WineryExchange's roots run deep in the California wine country. CEO Peter Byck was raised in Sonoma County, and his family owns Paradise Ridge Winery. Bill Narlock, managing director for Asia, is still actively involved in his family's winery, which was founded by his great-grandfather Anton Nichelini, a California wine industry pioneer. Joe Ciatti's grandfather, Giuseppe Bagnani, started Geyser Peak in 1937, a heritage that links the exchange to the wineries that supply Ciatti with 110 million gallons of bulk wine and other wine grape products a year.

Mei-lin Cheng, chief technology officer for WineryExchange, readily admits that she's not a Farmer. The Stanford graduate is a 25 year veteran of Hewlett-Packard, where she managed the re-engineering of the HP supply chain for order fulfillment. To Cheng, the job of balancing technology and the wine industry's high-touch tradition is a change management process. Any time you introduce a new technology that can be taken advantage of in a business that's age-old you're always going to have an adoption rate hurdle, she says. I would hope that, further down the road, folks who are steeped in the traditional way of doing things seize the Net and realize the advantages.

One of the advantages is the information. If you provide relevant content, it's a way to get folks to adopt your site as an integral part of their daily life. I think companies can succeed if they stay closer to what their customers want, Cheng says. The information they get at the portal is substantial  daily market price reports, grape tonnage and availability, Gomberg's top-flight analysis, import/export statistics, and a forum in which users ask questions of the company's wine experts and join discussions.

The most important advantage, however, is improved price discovery. LiveExchange's multiple auction formats supplement or replace long-term contracts with a forward market, which WineryExchange expects will reduce price volatility, increase annual sales transactions, and give both growers and wineries more flexibility in contract management. The auction software can be customized to incorporate all the necessary contract parameters into participants' auction sites in order to work with one or many trading partners. Says Arnold Waldstein, Moai's vice president of marketing and strategic alliances, WineryExchange must deal with a whole level of things that go beyond price  availability at certain times, the cost of shipping, the quality [and variety] of the grapes, transportation, batch inspections. After buyers have hammered out detailed quotes they can then track contract amendments through each of stage of a negotiation.

The wine industry has zero tolerance for mistakes; grapes are perishable and wine has to be bottled on time. Supplier relationships often trump price and will provide much of the knowledge that will fuel the auctions and the subsequent contract negotiations. Fortunately, collaboration technologies, online contract negotiation and management among them, may outlive their hype and prove to be the killer apps that will help growers, wineries and distributors identify and remedy mistakes quickly, if not head them off completely. Companies are advised to be wary of B2C solutions that masquerade as brilliant B2B technologies. However, many of the strides made by consumer dot-coms in developing better back-end information and communications technologies are just what B2B companies need. For example, ZuluNet, a B2B transportation exchange, has incorporated instant messaging into the ZuluForum, a chat room buyers and suppliers can enter to work out contract details. DiCarta's software facilitates threaded negotiations that allow suppliers to amend contracts and buyers to track changes in real time. One of the next steps in improving collaborative processes is to add better video conferencing capability to both B2B e-commerce software and Net market platforms.

Cheng's transition from re-engineering HP's supply chain to herding wineries to the Net has been eye-opening. What I've found personally satisfying is that wineries are very open to new ways of thinking about improving the supply chain and new ways to work. The challenge is that they're not easily won over. What will it take? The delicate act of balancing technology, close business and family ties; the changing role of the middleman; and the dynamics of one segment of an industry that's poised for dramatic change.