The dot com shakeout has taught us the need for sound business models and a clear path to profitability. Fortunately in New Zealand, most have been able to avoid the worst of the ‘tech wreck’ by applying these principles. The New Zealand Wool Board is a glaring exception. This article may sound fairly aggressive, but this is a glaring example of a waste of wool-grower levies and one which iStart feels a corporate citizen responsibility to expose.

For years the wool industry has been plagued with an auction-based system of ‘disposing of wool’ and probably the most dysfunctional supply chain in New Zealand’s economy. So much so that it’s costing the economy around $500 million a year in lost potential earnings.

The last thing the rural sector needs is the IT industry heralding Woolnet as the solution to the wool industry’s woes and delaying the eventual restructuring that the industry so desperately needs. We thought it only fair to both the IT and the rural communities to set the record straight.

There are a couple of important lessons here for every industry and every e-business project: A flashy web site will do nothing to save a fundamentally flawed business plan, and secondly, just because something can be done on the Web, doesn’t mean it will necessarily work. The Woolnet site is now on version 7, following $900,000 in software development and 18 months without substantial use.

The Background
In December 1999, the Wool Board, through its subsidiary Woolpro, launched Woolnet, an Internet site allowing farmers to register their wool online in the hope of attracting bids from exporters and preferably foreign mills.

The idea was for Woolnet to function as a 24/7 alternative to the auction system, hooking up sellers with a potentially wider range of buyers, reducing selling costs by cutting out the middle-man, and acting as a "neutral" exchange.

For its cut, the marketplace charges $50 per lot sold plus either 1c or 1.5c per kilogram of wool. It provides a settlement system, but does not guarantee payment. The talk was bullish.

Woolpro managing director Lance Wiggins said Woolnet would "change the way in which our wool industry operates" and called it "the selling system upon which the New Zealand wool industry will build its future".

The background was the dot-com boom. "E-commerce and the Internet are driving the American share market boom," said Wiggins. "They have also transformed the marketing of many products. Who knows what opportunities are out there waiting for wool?"

In our view, that’s woolly thinking and all too easy to do when you’re spending other people’s money - most of whom never had a chance to have their say on the project.

A look at the political landscape in the industry at the time gives a clue to the thinking. The Board is a statutory 'quango' funded by levies - which the Board sets - on grower’s wool sales. Wool’s lacklustre performance during the decade and the Wool Board’s lack of constructive action to abolish the auction system lead to widespread pressure on the Board to dissolve. Around 130 farmers met in one small Southland district alone and passed a vote of no-confidence in the Board. The subsequent reaction was typical of this type of politically oriented organisation: take the heat out of the industry with a long-awaited consultant report (hence the McKinsey Report, at a reported cost of $3.5 million - now largely forgotten) and spend some of the $100 million of grower levies at a flash website.  

Where Woolnet is at today
Woolnet business manager Richard Gardner describes the volume of wool going through Woolnet as "insignificant" in the context of total national wool sales.

Pressed for a figure, he will not be more specific than "less than 5%" of the wool clip. An article in NZ Infotech on 29 July claimed turnover of less than $500,000 a month. By our calculations that's roughly 0.6 percent of the market, nowhere near the 2%-10% of the contestable market claimed in the same article. He adds that Woolnet probably needs between 10% and 15% to be financially viable.

In our view, any privately funded operation would be able to give an exact breakeven figure, but this lack of commercial accountability is to often the case with non-commercial levy-funded organisations. Already $900,000 has been spent on development and $1.3 million on net operating losses, it seems. Add in the share of overheads and the long-suffering woolgrowers have sunk around $3 million into the project to date.

What went wrong? 13 lessons for would-be e-Marketplaces
§                Woolnet needs to be the price-setter in the market to displace auction. If not, sell orders will get generally “picked off” only once they become under-priced, due to market changes.  One trader told us that it was a "great place to pick up underpriced wool."

 Lesson 1: e-Markets need to set the industry price, or it places a high onus on participants to constantly monitor their involvement.

§                The only way to avoid the above scenario is to constantly monitor buy/sell orders vis-à-vis the market price. Show me a farmer with an extra half an hour a day to spend constantly monitoring their wool on Woolnet.

 Lesson 2: e-Markets need to save users time, not waste their time.

§                In order to be the price-setter, Woolnet needs to transact the majority of wool in the industry. However, according to research commissioned by RD1, only 60% of farmers have home Internet access. To succeed, Woolnet would need all 60% to use the system. An impossible ask in an industry not renowned as the most tech-savvy, but especially so when most of that 60% still have extremely slow Internet connections, especially the larger growers at the end of the rural roads - "You turn it on in the morning before you turn on the jug," says one farmer we spoke to. It can take up to 5 minutes to send a one-page fax in many areas, so imagine how much time they could waste on the Web.

 Lesson 3: If your e-Market relies on a certain level of usage, make sure the critical mass of users required can actually access the system.
 

§                This "neutral" marketplace is not seen as neutral. Although Woolnet does not buy or sell wool, the fact that it is owned by the Wool Board colours perceptions within the industry. Others are cynical of it due to the Board's past disruptive involvement in the commercial supply chain. The fact that, with Woolnet, the Board again did not consult widely within the industry generated antagonisms with those whom the Board needed to make Woolnet work.

 Lesson 4: Consult the industry. Neutrality is important in global e-markets - at the very least use a “.com” URL.
 

§                The cash flow factor. Woolnet is seen as a slow alternative to the auction system. One farmer told us he'd rather get the shearers paid, and put some money in the bank, than leave his wool in the shed, waiting for an online buyer to turn up.

 Lesson 5: This one speaks for itself.
 

§                 The confidence factor: fears over wool quality (buyers) and certainty of payment (sellers) when using a fledgling system. Woolnet provides a settlement facility and arbitration for disputes but does not guarantee payment or quality. Woolnet's Gardner says the marketplace looked hard at the idea of standing behind sales as guarantor, but insurance to cover the risk would have been too expensive.

It would be a brave farmer that would send wool to India or China (or even some buyers in Western countries) in the hope of getting paid. Such countries' legal systems are rudimentary. Likewise, mill owners rely on just-in-time delivery of raw material of a known quality. It’s too much for a foreigner to risk his production line efficiency on a farmer in New Zealand describing his wool accurately on Woolnet. At the very least they would need to assign a local logistics agent, and that adds the cost straight back in, so what’s the point?

 Lesson 6: e-Markets need to remove risk, not add risk, if they are to ever replace existing supply chain relationships.

§                Cost: At $50 per lot and a 1.5% transaction fee, the commission on a single 200kg bale lot could amount to 10%. Include the Wool Board levy and you are exposing a cost structure that starts to deter most farmers.

 Lesson 7: Analyse the total cost of involvement.

§                Transaction volume differences between buyer and seller: Farmers will normally sell wool in lot sizes of 200Kg to 2000kg, for any given description of wool. Mill-owners, scours and top-makers on the other hand will look to buy in quantities of 10 to 50 times those quantities at a time. The last thing they need is to handle 10 to 50 transactions to get the same quantity of wool. Once again, a local logistics agent is required.

 Lesson 8: Don’t make it harder for customers to do business through the web - it must be easier.

§                Regularity of transactions: Farmers shear twice a year, on average. They can’t be expected to read up on how to login and use the Woolnet system every six months in order to sell their wool.

 Lesson 9: This is a key factor for any aspiring e-Marketplace. There is a huge educational process required to get users on the system and using it. This is easier done if it is something users do every day and, as successful e-marketplaces have learned, users need to be constantly reminded and supported to use the system until its use becomes part of the daily habit. A task Woolnet will always have difficulty accomplishing with New Zealand’s 15,000-odd wool farmers, let alone the thousands of foreign buyers - especially with a one-person helpdesk! 

§                Awareness: To get the majority of the industry volume going through the system takes a large amount of education and awareness-building, both domestically and internationally. A particularly big ask given the diversity of the buyers of New Zealand wool, and especially so in this case given point 12 below.

Lesson 10: You can’t use what you don’t know about.
 

§                Woolnet is trying to establish itself in a section of the supply chain with very tight margins. In fact, often some ‘traders’ even loss-lead in order to be able to guarantee volume to their scours, top-makers and mills.

 Lesson 11: Check there is a viable margin to be exploited.

§                Relationships, relationships, relationships; A North Otago farmer - one who's never used Woolnet - tells us he sells his wool to a mill. That relationship suits him, and he's not changing it. Farmers have a range of existing relationships - the banker, the stock agent, and so on - and a new and unfamiliar player will not be welcomed as a long-lost friend. Woolnet set up a network of service providers that farmers could contract to do deals on their behalf. "What you run into there, though, is you're asking farmers to establish a new relationship of trust with people they may or may not have dealt with before," says Woolnet's Gardner. This principle applies even more so for foreign users of the system.

Lesson 12: Don’t underestimate the power of human relationships, especially in traditional industries. The Internet won’t easily replace the relationship with the local wool rep that the cocky drinks with every Friday night. 

§               The big picture: Under the present system, mills can play-off traders against each other by forcing them to tender on orders. As the lowest tender bid invariably wins, it’s a wonderful way to force down prices. Exporters owned by mills can exploit the system, to force down prices across the market and to exert pressure on other traders who lack scouring and/or manufacturing margins to hedge their trading risk. Auction is simply where traders go to acquire the wool they need to fill existing orders. Who would allow Woolnet to change such a cosy arrangement?

 Lesson 13: Look out for strong vested interests when trying to re-work decades old trading relationships.    

The bottom line…
The bottom line from the Woolnet experience is that providing an electronic solution does not mean users will come aboard. Asked about what can be learned from Woolnet's experience to date, Richard Gardner says would-be exchanges need "to get inside the heads of your target market and understand what their issues are and really focus on the barriers to entry. Don't let yourself be technology driven."

He says that besides a refocusing on adding value for buyers and sellers, the exchange is looking at other possible changes to its set-up and options including expanding beyond the wool industry. He believes the venture can still succeed. In it’s present form, we disagree.

If you look to the success stories in the wool industry, they have consistently resulted from movement to de-commoditise and niche market wool. Herein lies the possible future of Woolnet. The site would need to be reworked to provide for product ordering and as an international showcase of niche branded wool available from New Zealand, rather than a commercialised trading platform. It wouldn’t be profitable, except as part of a new industry-wide system, but at least it wouldn’t be costing levy-payers millions of dollars in direct and opportunity costs the longer it continues.

Woolnet needs to be the price setter in the market to gain the critical mass needed to succeed. At the same time as funding Woolnet, it’s parent the Wool Board is providing millions in funding in attempts to establish an alternative supply chain system and pricing mechanism. One of the two is bound to be yet a further waste of levy-payer funds.

Update: WoolNet was shut down in July 2004 due to lack of patronage.

Your comments?  marty.verry@istart.co.nz

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November 2002

Written by Marty Verry, with additional research by Paul Pankhurst