Implementation of ICT
The web portal, which went "live" in 1999, introduced a new "business model" for Southfresh. Whilst initially fish broking was the mainstay of the business, the company was now faced with not just with bringing together buyers and sellers of fish, but also selling a new way of introducing customers and suppliers. This involved not just selling the concepts of using the web-based ordering system, but also selling the concepts of Southfresh acting as much more than a broker by undertaking agencies for activities typically undertaken within the respective firms. In effect, Southfresh was asking customers and suppliers to "outsource" these functions to the firm. Moreover, in undertaking support of applications within (especially) suppliers, the company was also becoming a supplier of software.
The first challenge for Southfresh was to convince existing brokerage suppliers and customers to participate in the web introduction process. This necessitated parties from both sides of the transaction signing up to become participants. Only registered suppliers and customers could participate. Sign-up to the web system incurred a registration fee, and was accompanied by a physical and online documentation including training modules, a half-hour teaching session in the system's use over the phone, and provision of both online and phone help lines. Additional modules beyond the basic matching of suppliers and customers were fully optional, with software and hardware support provided according to the application. Learning by doing was the method of learning encouraged.
The web ordering model very closely replicated the existing processes, in that suppliers held absolute control over decisions about who they sold to, and Southfresh was paid a fee per successful sale by the supplier, just as in the traditional broker model. Customers were free to continue phoning around to ascertain prices from suppliers and brokers not participating in the Southfresh process, whilst suppliers were free to negotiate deals with customers outside of the Southfresh system. Southfresh's success as a fish exchange thus relied upon the credibility of the brokerage signing up enough suppliers to make the transaction cost savings for buyers large enough to induce them to use the system. Savings for buyers would be greater the larger the number of suppliers enrolled, as the number of phone calls would reduce. More suppliers would also enable buyers to access a larger range of line items (around two hundred in total) in one place. In turn, suppliers would sign up if the transaction costs to them from the Southfresh system were less than those associated with other brokers or the phone orders system, and if they could be ensured that their products would be exposed to a larger number of buyers. This is a classic network effect.
As an "information network", the aim of a brokerage in a competitive market such as Southfresh is to become the biggest in the market, becoming the point of first resort for both suppliers and buyers when they embark upon their search for a trade. If the brokerage has sufficient sign-on from the participants on both sides, it will "tip" the market in its favour. The remaining buyers and sellers forego existing deal-making processes, and flock to sign up with the now dominant brokerage ("marketplace"), making it uneconomic for other brokerages to remain. This is the business model that has seen similar purely information-based brokerages (marketplaces) matching buyers and sellers, but not undertaking the clearing house functions, such as e-Bay and TradeMe, becoming dominant. Other marketplaces become dominant where there is some form of compulsion forcing the bulk of marketplace trades to occur via that mechanism. For example, a large manufacturer may refuse to deal with suppliers using any mechanism other than a specific marketplace, or an industry association may require participants to become compulsory members of the "marketplace".
Whilst Toby Warren says that Southfresh had no difficulty in signing up suppliers to the brokerage/marketplace, he observed significant relunctance at the buyer level. This was despite the fact that the transaction cost savings at the buyer level were significant, and many benefited from the expanded range of products available. Mark Baker, General Manager, Information Management at Foodstuffs Auckland Limited confirms that benefits for customers were real, and extended beyond merely the transaction costs. He says that one supermarket in Auckland using the Southfresh system increased its seafood sales significantly by being able to increase its range and attract customers typically purchasing from a specialist fish seller to buy their fish from the supermarket. For a supermarket, this is especially important, as supermarket shoppers tend to buy items of more than one category during a visit. Increasing foot traffic is vital for supermarket, as increased foot traffic translates into the higher turnover so vital in the low margin supermarket business. By changing fish purchasing habits, the supermarket was able to also influence changes in the purchasing behaviours in other product categories. Fish shoppers were now buying their other grocery items from the Foodstuffs store rather than from a competitor, increasing the market share for that supermarket. Individual supermarket owners who could see these sorts of market share changes became very strong advocates for the system. Over a twelve-month period, sales brokered through Southfresh went from 13 percent to 30 percent of fish purchased by Foodstuffs Auckland stores.
Beyond Fish
Undaunted by the lack of success in inducing fish buyers to join Southfresh, the company management began looking outside the fish business for other products for which the brokerage and transaction cost reduction system would be beneficial. The fish suppliers and buyers who used the system had proved the viability of the web model and reliability of the software and hardware systems that had been developed, so that was not in question. Neither was the knowledge and ability of the company staff, or the culture of the company in question. Most staff at Southfresh were tertiary qualified - according to Toby Warren "staff had an average of 1.3 degrees per person". It had a functional structure where Information Technology personnel, Sales personnel and Accountants all interacted with the customer in their respective areas, but were a cohesive team with a strong commitment to making the company successful.
Household goods, building and hardware supplies, nursery plants, flowers and automotive parts offered a likely opportunity, as like the fish industry, these industries are characterised by the need to bring suppliers of materials together with retailers and wholesalers, and where the traditional model had been the use of the phone and personal relationships to bring together trading parties who then dealt with their own sale and purchase processes. Signing up buyers in this market was less of a problem, with major players Mitre 10, Placemakers, The Building Depot and Palmers signing on. The charging model for these customers became more flexible, with customers having the option of paying a 2.5 percent fee per transaction, as per the fish sales, or paying a monthly subscription. The subscription was negotiated between Southfresh and the client, and varied between participants depending upon the range of services offered. Typically, the subscription was between $2000 and $4000 per month.1 Special terms and conditions could be negotiated. For example, one client concerned that data held by Southfresh could be sold on to third parties negotiated the retention of a property right to all information held by Southfresh that related to that company (the default clause was that all information held was the property of Southfresh, subject to the provisions of the Privacy Act and a standard agreement not to disclose it to other participants).
Southfresh management then looked to signing on other large customers. Existing supermarket buyers also needed to access supplies of many of the new goods handled by the marketplace. Whilst individual supermarkets expressed interest, getting sign-on or endorsement from the larger businesses such as Foodstuffs at the regional co-operative level, and chains such as the Warehouse, was much harder. These businesses tended to hold off from committing to the system, preferring to rely upon their own mechanisms to locate and negotiate with suppliers. Southfresh also considered expanding the product to cater for supermarket management of fresh produce (fruit and vegetables), but this elicited little support from supermarket chains either.
Growing into new markets, however, required the development of additional capacities. New software had to be developed and marketing effort had to be increased. Financing the venture required more capital. Endeavour Ventures, a venture capital firm, bought into Southfresh to fund the growth strategy.2 Unable to extract returns from the portal sufficient to satisfy the returns required by Endeavour Ventures, Southfresh ceased trading in August 2002.
Rebirth as Freshnet
The Southfresh story could easily have ended when the business ceased operating. However, the software applications and associated database technology managed by Southfresh were technically functioning exactly as required. Indeed, the software and operating processes were so reliable that the technology had operated continuously for two and a half years without a single fault. This is rare in computerised marketplaces and brokerages. The system thus had some salvage value for the hardware and software technology alone.
Furthermore, in the original fish marketplace, there were some key buyers who valued the benefits that Southfresh had delivered. In particular, a number of Foodstuffs supermarkets that had used the system to build up their market share saw the removal of the marketplace as a significant threat to their businesses. Using the power of their co-operative association, they pleaded with Foodstuffs national operations to buy the system. After a careful consideration of the costs and benefits, Foodstuffs purchased the Varenti software from Southfresh, hired two of the Southfresh system developers and re-opened the marketplace, rebranded as Freshnet. It retained UNISYS to host the system.
Mark Baker confirms the existence of a positive value to Foodstuffs in owning Freshnet. When Southfresh closed, Foodstuffs was faced with increased costs one way or another. Either the company could buy Southfresh, at the cost of assuming responsibility for owning and operating the software,3 or incur costs from reverting to the manual phone-based process. In trading off the differences, Foodstuffs also had to consider the effect that a change of owner and contractual relationships would have on the number and types of suppliers supporting the system. The purchase also had to be considered in the light of the rest of the group's operations. Fresh fish sales account for only 1 to 2 percent of turnover in a small store to 5 percent in a large one, so the purchase could not create significant additional risks to the business. Although the system had potential uses beyond seafood (for example, software that automates linkages between ordering and accounting operations offers potential in a business that processes thousands of paper invoices a week), immediate returns had to be generated from seafood alone to justify the investment. The cost-benefit trade-off was delicately poised, Mark says, until Foodstuffs management persuaded their largest seafood supplier to participate in the electronic system. This "tipped" the balance in favour of purchasing the software.
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