The battle heats up for market share among online surplus exchanges

Establishing a global presence, building trust from users who are accustomed to transacting such deals offline and investing in and developing the technology to bring the transactions online all are key components for success. Although all bring buyers and sellers together in previously inaccessible markets or relationships, each has its own plan for standing out from the crowd.

But like the early part of a race, the leader is still hard to pinpoint. “It’s too early to tell who is in the lead,” says Greg Girard, vice president of retail application strategies at AMR Research, who expects the market to consolidate in time. “There’s room for maybe two or three of these exchanges, not eight or 10. They have to satisfy the market expectations, which means there’s a lot they have to get right.”

In fact, getting it all right may be the biggest problem that the surplus exchanges face. Each exchange focuses on a different strength, whether it be technology to link buyers and sellers, strong offline relationships, global expansion plans or a broad range of exchange categories. “A strength in one area will not compensate for a lack of capability in another area,” Girard says. “They know the formula; they are just trying to play the hand they’ve been dealt.”

One challenge that all face, how-ever, is so-called channel management. “The exchanges that will survive must have the ability to drive the transaction through the site, and do it securely to protect the brands,” Girard says. “Protecting the brands from being sold in the wrong places at the wrong times is a big concern with excess consumer goods.” Buyers and sellers are very aware of what goods go where because of price competition and brand integ-rity. Manufacturers and retailers, for example, would not want excess goods competing with full-priced goods being sold into the same geographic area. Finding appropriate places where these goods can be bought and sold is exactly what the exchanges set out to do.

While most retailers already have networks of trading relationships, the exchanges think they can change retailers’ behavior. Most of them employ direct sales forces with an average of a dozen salespeople to attract users to the exchanges. Most of the exchange executives and sales personnel also have retail backgrounds. The exchanges rely on that retail experience to extend relationships onto the web.

While getting buyers and sellers to go online is one hurdle, getting them to use a particular exchange is the next hurdle for the online exchanges. That’s where partnerships can help, Girard says. Those partnerships involve technology as well as retail and service partners. For example, Retail Exchange is poised to capture a chunk of business in China with a partnership with Retek Inc., a company with offices in the U. S., Europe and Australia that matches excess goods suppliers with buyer demands, as well as a partnership with Mai Technologies, a Chinese vendor that provides the trading infrastructure to support a number of Chinese manufacturers and domestic retailers.

RetailExchange.com, a spin off of retail liquidator Gordon Brothers LLC, is an early top pick for AMR Research. This exchange features online negotiations—similar to the real-world experience—between buyers and sellers and draws on its former parent company’s 100 years of experience in dealing with retailers and manufacturers. The well-funded company also recently closed its third round of funding, securing an additional $5.5 million from new investor American Express Financial Corp., for a total of $30.5 million. The company has raised $50 million and says its investors, which also include 3i, Koch Ventures and Exeter Funds, trust the company’s vision because of its strong retail background.

Eden Prairie, Minn.-based Red-TagBiz.com, another AMR Research favorite, also is seeking global partnerships to gain a competitive edge. RedTagBiz has offices in Europe, with a recent opening in The Netherlands, and plans to open four to five offices in the Pacific Rim, says Mary Perdula, vice president of marketing. “We are working on a new-growth phase toward international expansion,” she says. “It means several things to have offices overseas. Anyone on the Internet can claim to be global but that doesn’t mean they have someone in those countries that has the connections, knows the culture and understands how that market works.”

RedTagBiz is making particularly strong inroads into the Japanese market through the connections of Ted Mondale, president of sister company Red Tag World (which specializes in developing supplier relationships) and son of Walter Mondale, former vice president and U.S. ambassador to Japan. “We’ve been able to connect with the Japanese market because of this partnership,” Perdula says. “The Asian market is untapped. We will have the ability to get into major manufacturers there who have not yet taken advantage of the excess consumer goods model.”

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San Francisco-based Rebound.com, which launched as a global player in 1998 and has 11 overseas offices, also has a strong Asian presence with partnerships in Hong Kong, Korea, China and the Philippines. Marybeth Dee, president, says 85% of the exchange’s transactions are cross border. The fact that Rebound is not U.S.-centric sets it apart from competitors, she says. “Buyers and sellers of excess consumer goods want to do business outside their normal distribution channels. They don’t want to remarket back into the U.S. because it cannibalizes their own market,” Dee says.

Most other types of partnerships help exchange users complete the deals. Assistance with financing, checking merchandise and other fulfillment logistics are areas in which some online exchanges will try to excel. Most exchanges do offer some level of peri-pheral services to help with buying and selling transactions. For instance, Retail Exchange recently worked out a deal with FreightQuote.com that allows Retail Exchnage users to simultaneously view multiple carrier offerings and transportation modes, consider numerous options based on price, transit time, carrier and availability, and instantly schedule shipments.

RedTagBiz.com has logistics experts to help with quality checking, shipping and financing. Washington D.C.-based Liquidation.com boasts connections with 10,000 manufacturers in 107 countries and offers high-level logistics to handle cross-border transactions. “We’ve taken our service offerings to support multi-lingual and multi-currency so overseas users can work in their own language and currency,” says Bill Angrick, CEO.

Liquidation.com, which handles industrial as well as consumer products, also provides sample merchandise to potential buyers, a perk for those who want to touch and feel a product before buying. That service could gain customers who are not sure about buying goods via the web, say industry experts.

Another example of unique value-added services is a corporate barter system offered on the iSolve.com site. The Stamford, Conn.-based company offers companies the opportunity to turn non-performing excess assets into iSolve credits which users can redeem in combination with cash for fulfillment services such as freight and cargo services, inspection and testing, media, print, travel or other services.

While many exchanges provide the same services, the web experience is not always the same for the user. “Everyone promises to provide all these services but some use third parties that require different points of contact. We bundle it all together so users have one invoice to pay,” Angrick says. “Retailers hate to have to go to more than one contact.”

Girard notes that because the user experience is what will make or break an exchange, measuring results is important. He cites RetailExchange.com’s performance review message board, where users of the site can rate their experiences, as an important differentiator from competitors.

However, most exchanges are wary of the auction model. For instance, RedTagBiz.com, which had an auction function on its site, pulled the offering within months due to lack of interest, says Perdula. Says Girard: “Exchanges really need to have a negotiation process that mimics the way the participants are used to interacting.”

But even as a perfect exchange model has yet to emerge, some players are seeking more specific market opportunities. Sensing the need to branch out of a crowded market, some are looking at offering their services in a private-label, format building private exchanges for existing groups of buyers and sellers, instead of building an open exchange hoping to attract new users.

Both Liquidation.com and Burlingame, Calif.-based Industry2Industry.com are adopting such a model. While Industry2Industry still plans to operate its exchanges, it has for the last eight months been developing private-label exchanges. “We’ve evolved from a marketplace to providers of technology to support marketplaces,” says Dan McMaster, manager of product marketing. The company, which has a background in technology systems for financial markets, found that technology is important in building the marketplaces, but once built, the buyers and sellers are best equipped to make the exchanges work.

Going to existing associations of buyers and sellers of excess consumer goods is a logical path as the online excess exchanges become a commodity. Which will stay and which will go before that time is still uncertain. Mark Larson, national partner in charge, retail industry practice at KPMG Consulting LLC, says trust in the online version of buying and selling excess goods is going to be a major factor to entice participants to use exchanges. But technology to guarantee buyers’ and sellers’ privacy and security will be critical to long-term success.