by Tom Kaneshige, Line56.com

Sunday, July 01, 2001

Two years ago, Rob Bonavito, CEO of iTradeNetwork, waltzed into the South San Francisco offices of Lucky Strike Farms, an agricultural broker. He felt confident that he could sell memberships to his budding electronic farmers' market. But Bonavito ran smack into Lucky Strike Farms' gruff CEO Gib Papazian, son of a produce tycoon-and Papazian wasn't in the mood for foolish ideas. "I f-g laughed him out of my office," he quips. "These guys have no idea how my industry works."

Receptions not unlike the one that greeted Bonavito have led to the demise of many e-markets, in agriculture as well as other vertical markets. But the produce business in particular is chock full of cuss and grit, where salty veterans shun newcomers and change. More than 30 new-economy companies pitched Papazian, and only a handful are still in the market today. But has the death knell sounded for B2B e-commerce in produce? Not quite.

A more humble Bonavito crawled back to Lucky Strike Farms. He pleaded with Papazian to teach him about the business, so that they might jointly develop an e-commerce solution that incorporated real industry insight.

Impressed with Bonavito's openness and new-found respect for old-line executives, Papazian agreed to sign on with iTradeNetwork (formerly tradingproduce.com). Thus begins the story of how the seeds of e-business have begun taking root in the produce industry.

In 1999, B2B companies in produce looked promising. For starters, the U.S. produce market generates around $120 billion annually, according to the U.S. Department of Agriculture. The supply chain landscape is highly fragmented, consisting of big suppliers like Dole Foods and Del Monte, millions of small farming operations, thousands of brokers, and a plethora of spot-market specialists, wholesalers, giant retailing chains, restaurants, and mom-and-pop shops and greengrocers.

Like most fragmented markets, the produce industry is saddled with a poor communications system-in this case, for getting fresh vegetables from the field to a nationwide network of stores and restaurants, transiting a fractured distribution network in between. Clunky fax machines and telephones are the primary devices of trade. Brokers like Papazian often hand-write purchase orders and trucking manifests, and then give them to assistants to key into a financial application. The whole process is fraught with inefficiencies. Bonavito, an engineer-turned-entrepreneur, wanted to revolutionize the industry. In 1999, he founded iTradeNetwork, whose mission is to bring buyers and sellers of produce, meat, seafood, flowers and other perishables together over the Web. Such an e-market promised to cut costs by up to 30 percent, thanks to streamlining order and procurement functions with integrated technology. Lucky Strike Farms, on the other hand, has been around for decades and posts more than $145 million in annual sales. Many of the company's employees value a handshake and fear technology. Even adoption of the fax machine took years. But Papazian, despite his curt dismissal of hastily conceived, first-generation initiatives, knows that e-commerce will eventually make its way into the produce industry-and he wants to be a part of it."Right now, there's a lot of unproductive time," says Papazian, abruptly stopping the interview to take a telephone call from one of his cross-country trucks. The truck showed up in New York two pallets short, meaning purchase orders and invoices would have to be readjusted and some East Coast buyers might need to be assuaged. "We do so many things," he says. "We have to streamline it somehow or else we'll pull out our f-g hair."

Through a relationship with iTradeNetwork, Papazian could influence e-commerce's role in the produce industry. He decided to work closely with the development team to build an Internet-based transaction engine with built-in domain knowledge. To date, iTradeNetwork has spent more than $20 million in development. The company's major private investors include: Rabobank, a European food and agricultural bank; Bay Isle Financial Corp., an investment fund in San Francisco; and Veronis, a merchant bank in New York.

The most important aspect of iTradeNetwork was that it had to be flexible-that is, it needed to handle price changes, update invoices in real time, and consolidate trucking manifests for many parties. It also had to be fast: Papazian told iTradeNetwork to reduce the number of clicks it takes to do a trade from eight to two. "The engineers hated me," he says. "They'd work on something for a month, and I'd tell them it's no good."

For his part, Bonavito values the input. "Sure Gib's obnoxious, but he's also a really bright guy," says Bonavito. "In terms of development, Gib wanted speed, speed, speed."

Gradually, iTradeNetwork's focus shifted from being a radical e-market touting visibility along the supply chain to an online workflow automation and accounting tool. With e-market adoption slow to materialize in most verticals, it's the kind of pattern seen in many business sectors.

Gunning For The Big Boys

But even as iTradeNetwork began to realize the need to rework its high-tech role, it continued to think big. A year ago, Bonavito was one of several e-commerce enablers who set their sights on the big boys-namely Dole Fresh Vegetables, a division of multibillion-dollar food producer Dole Foods.

Last summer, the B2B buzz was hitting a crescendo. E-markets claimed they could transform industries overnight with their Web-based transaction systems. For their service, they'd charge a percentage that would be shouldered by the supplier. Produce e-market Agribuys claimed the lowest price-half a point, with a cap on fees.

The arrogance of it all still makes Colleen Dunn, senior vice president and CIO at Dole Fresh Vegetables, shake her head. "Many of these B2B folks jumped in, assuming there was all this money laying around," she says. "I guess they figured we were just waiting for God to show up and solve all our problems."

The idea of transaction fees in particular raised Dole's ire. If an e-market did take off in the produce industry, such a fee would cut sharply into Dole's profits. "We don't have a lot of margin in this business, so the fee was ridiculous," says Dunn. "That's why we decided to get out there and influence the direction that this was going."

Dole's response was not an isolated one. "A lot of companies go into investments in the private exchanges as a defensive strategy," says Jennifer Kemmeter, research associate covering e-business strategies in food and other sectors at AMR Research. "They don't want to get left behind."

Dole formed a 10-person e-commerce team and sent out a request for proposals. The team eliminated auction sites because they didn't understand the produce business. Eight e-markets were asked to present their business strategies.

Many of these e-markets received strikes for having venture capital funding, as opposed to angel investors. The thinking was that VC-backed companies were probably looking for the fast buck, says Dunn, and were not in it for the long haul. On the other hand, iTradeNetwork received kudos for dropping transaction-based fees in favor of cheap subscription rates. (Members pay subscription rates of $99 per month to use iTradeNetwork services.)

Agribuys didn't make the cut. "When we last spoke to Colleen a year ago, we were in a completely different space regarding pricing," admits Minos Athanassiadis, vice president of global produce at Agribuys and former director of sales for the fresh-cut division at Dole Fresh Vegetables. "We've been listening to our users, and they're saying that a flat fee per transaction or subscription fee would be more appropriate."

Only three remained for the second round, and Dole began evaluating their high-tech prowess. Dole knew e-markets were in the early stages of development, and thus wanted a company whose technology was flexible and could react quickly to change. To this end, "iTradeNetwork really emerged as the leader," Dunn says, adding, "Three months later, we chose to go with them."

One of the benefits of iTradeNetwork's technology is that it connects to existing EDI links. This means that for companies already using EDI, integration is a snap. "The EDI files that you would send to your translation software are exactly the same files that you would send to iTradeNetwork," says Dunn. "A lot of the dot-coms wanted to bolt you to their systems, but I don't want any bolting-I want Velcro."

Dole has an EDI link with Kroger, a major buyer, that reaches back into Dole's mainframe. With iTradeNetwork, EDI functionality can be migrated to the Web. So when Kroger and Dole salespeople make a trade over the telephone, the Dole salesperson simply visits iTradeNetwork's site, logs on to Dole's virtual private e-market, and confirms Kroger's order. All orders and prices are synchronized, changes are made in real time, and nothing is sent until both sides accept the purchase order.

The result may translate into huge savings. Dunn says many traditional paper invoices aren't accurate because changes to the purchase order aren't recorded in a timely fashion. For every inaccurate invoice, Dole spends up to 90 days researching the trade before a sales allowance is granted. "If you keep the two systems connected and the data synchronized, then invoices are a match-and-pay," Dunn says. "This saves an incredible amount of time and effort on the back end."

Bitter Pickings

Of course, nothing is as easy as it sounds. Earlier this year, The Wall Street Journal ran a damning story about B2B e-commerce and the produce industry. One of the companies getting battered was Agribuys. Complaints about the e-market surfaced in the article, including that it was hard to use and even failed in real-world trades. The bottom line: Immature e-commerce systems were causing a burden for produce companies rather than saving anyone money or time.

"The Wall Street Journal article was September information in a February article," says Athanassiadis. "We're in an industry where things change and functionality improves quickly ... and we've solved many of those problems."

In the tech providers' eyes, the Journal story was a setback to their hard-won efforts. But Agribuys, among others, has enjoyed some success worth noting. Retailing giant Safeway endorsed the e-market earlier this year. And Agribuys claims to have thousands of suppliers and hundreds of customers using its technology every day.

Unlike iTradeNetwork's offering, Agribuys enables participants to share information along the supply chain. "The Internet allows the small and large shippers, brokers, wholesalers-everybody who participates in the supply chain-to become involved and be more efficient," says Athanassiadis. "It's an absolute sea change."

Not everyone, though, shares Agribuys' grand vision for revolutionizing the way produce is bought and sold. Just ask Sean Parker, a produce broker at C.H. Robinson and a 10-year veteran of the trade. At 7 a.m., Parker starts his workday by thumbing through faxed pages of price quotes from more than 20 suppliers. He then spends the next six hours on the phone, cutting deals with buyers and untangling snags, such as quality and quantity problems, from the day before. All tallied, Parker will likely conduct more than 100 trades.

But it's not just "logistical" work better suited to the Internet that occupies Parker's time. He cites a recent incident in which he got a call from an irate buyer who had just received a crate of slimy lettuce. Parker immediately called the grower (also known as a shipper) and asked him to check the field report to see when the lettuce was cut. The grower came back and said that there was "a problem with the rotation."

"The shipper is f--g bulls--g me," Parker says. "I've been in the industry long enough to know that he [intentionally] sold me two-day-old lettuce-and he knows it, too." This sort of sneakiness used to happen more to Parker when he was a greenhorn, before he knew which folks he could-and couldn't-trust. Shedding a little light on the dirt and grime of the produce industry, Parker admits there were some shippers he dealt with earlier in his career that he "wouldn't touch with a 10-foot pole today."

Parker then telephoned the upset buyer and told him, "Just blow it out, get it off your docks, and settle up with me later." Essentially, then, Parker often sells products without a set price, or alternatively, with informal adjustments built in-something that is not easily adaptable to an electronic system. "You'd be surprised how much produce is sold without having negotiated a price upfront," admits Dunn.

On another day, a central California grower called Parker to tell him that he wanted to burn through some excess lettuce quickly-and that he would be willing to sell it to Parker for a few bucks below market value. At the same time, the grower didn't want to publicize this cheap price and bring down the day's lettuce market or upset other brokers and buyers with whom he had existing relationships. Such off-to-the-side dealings can be a challenge to integrate into e-markets, especially when they are meant to offer visibility across the supply chain.

By noon most days, the produce trading game is over. The rest of the afternoon is spent decrypting hand-written notes, consolidating trades on purchase orders and putting together shipping manifests.

Sure, Parker could get price quotes in the morning from iTradeNetwork, if enough of his suppliers subscribed. And the afternoon paperwork could be replaced by an Internet-based system. But will e-commerce really change the produce business?

"A lot of it is about personal relationships and on-the-spot decisions made over the phone," says Parker, adding, "And I can't see how e-commerce will help me do that part of my job better-or even replace it."

The Fruits Of Labor

Nevertheless, B2B e-commerce has gained a foothold in the produce industry. Today, iTradeNetwork touts 1,500 members and claims $300,000 to $500,000 in monthly revenues. Other e-commerce companies targeting the space include Agribuys, World Commerce Online, Buyproduce.com and Global Food Exchange. Each approaches the market differently, and it's difficult to pick a winner. "E-commerce is definitely making inroads in this industry," says AMR's Kemmeter. "There will be a multitude of solutions, not a single answer or exchange."

For its part, iTradeNetwork merged with 15-year-old Data Transmission Network (DTN) in March. Nebraska-based DTN sells satellite information such as weather forecasts, agricultural spot-market data, and earth scans showing nitrogen and water content levels to help farmers plan their crops. More importantly, "DTN brings an established name in the agricultural industry," says Bonavito. "It has real brick-and-mortar in the form of a six-story building and NASA-like satellite operation."

Dole Fresh Vegetables has been up and running on iTradeNetwork since October-and so are 10 of Dole's trading partners. "We've already gone past the $10 million mark of sales flowing through the iTradeNetwork system," says Dunn, the CIO at Dole Fresh Vegetables. Kroger, one of its major trading partners, is expected to move out of beta and get online this June.

Roughly 15 percent of Lucky Strike Farms' trades currently utilize the system. Papazian says a couple of his sales folks no longer make numerous phone calls when handling menial tasks, such as updating orders on fixed-price goods and dispatching trucks. They perform updates quickly using iTradeNetwork's system.

Lucky Strike Farms is in the midst of overhauling its 13-year-old IT infrastructure with a new IBM AS/400. Once that project is completed, Papazian says he'll integrate deeply with iTradeNetwork's system-and usage will spike.

"I see us doing 75 percent of our truck manifests and reconciliation over the Net within a year," Papazian says. "And that's no bulls--t." -- 56

TOM KANESHIGE IS A SENIOR WRITER AT LINE56

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