Web Technology Forces Innovation

Market capitalization for some of the new Web, or “dot com,” companies exceeds not only every food company on the planet, but some of the biggest auto makers and other old-line Blue Chips. Initial public stock offerings for these companies that are months old and run by recent Stanford and Berkeley graduates runs into the billions. Yet, by design, none of them make any money.

The Web companies may not make money, but they control a lot of it. America Online has a market cap of $118 billion, Philip Morris is $81.2 billion, Yahoo is $45.4 billion, and General Motors is $40 billion. HomeStore.com, which lists—but doesn’t actually sell— homes, went public last summer and currently has a market cap of $2.8 billion, a billion more than venerable Dean Foods.

The World Wide Web is gearing up to become the marketplace of the 21^st Century, and the millions spent now to gain dominance will mean billions in revenue tomorrow. The value of goods and services sold online could soar to $900 billion in 2003 from $40 billion in 1998 as the number of Internet users rises to 500 million from 150 million, according to Frank Gens, a senior Internet analyst at International Data Corporation. “We’re about to enter a period of growth where just the scale of Internet commerce and Internet usage is going to dwarf what happened in the last four years,” Gens told the Bloomberg Forum earlier this year.

This tidal wave is already reshaping the food industry from procurement to distribution. Kraft Foods recently announced the creation of a new E-Commerce Division. According to company president and CEO Robert Eckert, “The time is right for Kraft to capture more of the abundant business opportunities available through e-commerce. We have gotten a taste of Internet possibilities through our Kraft Interactive Kitchen, but that is just the beginning. With the creation of our new division, we’re dedicating the resources necessary to leverage this channel effectively for future growth.” Kraft’s new head of global procurement, Alene Korby, will oversee more than $10 billion in goods and services purchasing. While the company did not specify just how much of it would be transacted through the Internet, it is likely that the percentage will increase dramatically over the next few years. Internet business-to-business purchasing streamlines processes, eliminates waste, cuts paperwork and can reap considerable savings. Pepsi-Cola General Bottlers, for instance, just implemented a massive program based on a software system called eProcurement, developed by PeopleSoft. The Internet also has changed the way companies view brand strategy. Upstart companies like Yahoo and eBay have created enormous brand strength in a very short time span. In addition, the Web has empowered consumers and procurement departments alike to become far more demanding and value-conscious.

How the wealth of information on the Web regarding precisely what consumers want can affect product development is still not totally clear. But the scope of products will surely change, as consumers become more insistent on having products designed with their individual needs in mind. The individualization of products is a sea-change that occurs with Web interaction. Food companies will have to rethink their manufacturing lines, packaging systems, and ingredient purchases to accommodate the many, varied wants of consumers. The Web may make companies of different sizes feasible, and possibly change the ways that companies do business with each other.

Pricing also will change. For the moment, the Web may change the slotting-fee, advertising budget model of new product shelving. Instead of a supermarket buying committee, the Web and individual consumers may decide which products are successes and which ones are not.

Soon, online software will allow shoppers, both business and consumer, to search for the best pricing across an entire category of Web sites. “Changing demographics ensure that an ever-growing proportion of future markets will be composed of experienced buyers who are more self-assured, more willing to accept responsibility for judging the relationship between quality and price, more skeptical of superficial blandishments, and more capable of choosing from among a multitude of sellers. Much better attuned to what value is, they will seek it out tenaciously, using technology,” the Sloan report concludes.

Web grocers such as Peapod.com, based in Skokie, Ill., are seeking to adapt the Amazon.com concept—products, reviews and comments both directions—to food. Peapod has more than 100,000 customers in several markets across the country. According to Jupiter Communications, a new-media research firm, Web-based retail food sales could hit $3.5 billion by 2002. The number is significant because food, unlike books, is a far greater logistical challenge. Interestingly, Amazon.com is backing HomeGrocer.com, of Bellevue, Wash., to the tune of $42.5 million in initial venture capital. The new Web grocers are making big investments in super-warehouses and sophisticated inventory management and distribution. One company, Webvan Group, Inc., is spending $1 billion for new warehouses in 26 markets across the U.S., according to a feature in the Oct. 1, 1999 Chicago Tribune.

Most striking is the fact that Web technology, from bandwidth to devices to use it, is still in the Model T phase. Bandwidth, low cost Web browsing tools, and cheap wireless communications will serve to grow applications exponentially. Not only will the Web affect the way consumers shop and buy, but by changing their perceptions and access to information, it will change their expectations. This will reshape virtually every aspect of the food business from research and development to purchasing. The time to anticipate, adapt, and innovate is now.

by PIERCE HOLLINGSWORTH
Contributing Editor