A B2B tea exchange – Using auctions

[peter]

I’m exploring the idea of building a new website/company to serve as a bridging between small farms overseas and retail buyers here in North America and in Europe. This obviously sounds big and there is a lot to think about in the process. I’m talking about an open commerce exchange where sellers/farmers can auction directly to buyers/retailers here in the states.

There are a number of benefits to this:
~ Potentially lower costs for retailers.
~ Secured and guaranteed cash flow for sellers.
~ Ability to connect two parties in commerce that might not meet.
~ Private and secure auction transactions (handled by escrow).
~ A locked exchange, behind a paywall or registration system.
~ Bypass the wholesale middleman.

Small businesses in the States are restricted in a lot of ways to buying from wholesalers and direct importers, and I’m wondering, with the ease and increase shipping capabilities around the globe, if there is a way to connect these parties and make sales transactions through auctions an economic way for them to do business. I’m seeing this as a way that small farms, brokers and sellers abroad can offer small lots at auction to buyers in the west – though, frankly, I’m unsure about what constitutes small lots anyhow when we are talking about buying and selling tea at this level.

Building the electronic exchange platform itself is rather easy (mostly just many, many hours of labor on my part). I can build it as an independent website, right here on the Tea Trade Network – at least I’ve already visualized most of the required parts.

I’m wondering what kind of additional services need to offered. Brokerage support? Logistics management? Do we just leave shipping up to the seller (isn’t that going to be almost prohibitively expensive?)

This is something I’ve been researching on the software side of things and thinking about ways to integrate it as a B2B service offering for the Tea Trade (we already have the coolest brand on the internet for it!).

Anyone who has input on this is absolutely more than welcome to chime in. This concept is quite large, but based on some conceptual foundations that have been laid by large corporations in setting up exchange platforms to connect suppliers with buyers – but while the concept is large, I’m still thinking that the target market for this is smaller buyers in the West and small farmers abroad. This is the sort of thing I’d like to get partnership and input on from the International Tea Farmers Alliance

[Xavier]

Great idea.
The main problem will be to get in touch with the small suppliers as they might not always have the time or will to get into such a new thing but if you can get contacts with the International Tea Farmers Alliance or others like that.

For logistics, think about it in terms of Incoterms (http://en.wikipedia.org/wiki/Incoterm) but we might need to have this trading platform act as a logistical intermediary too, so it might ease the process.
Also I think it would also have to act as a bank/”security” tradeplace. In other words, it would need to act as a trusted intermediary both for the money and the cargo.

This is not far from becoming a wholesaler, no? Or perhaps more like a broker.

[peter]

That’s interesting, I hadn’t learned about incoterms before. I’ll need to do more research about that. The banking aspect of this is important, to the extent that a company of this nature would absolutely need a CFO (Chief Financial Officer).

On the money handling side of things, it could be setup as a pseudo escrow type situation. Using the software package I’ve been looking at, sellers can buy credits, which become something like an escrow, and their money is transferred into our PayPal account (and beyond). We then hold the money until the buyer spends their credits and receive the goods. PayPal would handle the transaction, and the later distribution of funds (simply because of their international reach – it makes it easy to disburse funds on the back end of the transaction, when escrow for a transaction closes). In the meantime (which could be days, or several weeks) any money being held by use needs to transfer out of PayPal into an active investment account. Enter the CFO.

In the English speaking countries, we call this “sweeping”, and is a finance management strategy. We may actually end up holding onto a buyer’s money for a week or more. There is no sense in letting cash sit, since that is poor money management. While shipments are being made and transactions finalized, any money held should be the responsibility of the CFO who oversees moving the money into short-term finance investments (Eurodollars , T-bills, etc.) and then back into the PayPal account for disbursement as the transaction and escrow needs to clear to give the money to a seller (Dispute any business concerns about PayPal, it does serve as an excellent, and accessible way of transferring money overseas). If a buyer, buys a larger lot from a seller, who has to ship via slow freight (2 months?) that provides an even longer escrow period for higher investment returns.

Of course, that’s just the back end, financial side. You are right when you mention more like a brokerage, because understanding the shipping and operational logistics and supporting the seller in getting the product to the buyer is just as important in supporting the buyer and connecting them with the seller. This requires relationships with a variety of shipping firms in a variety of conditions and locations.

We’re gonna need a lot of money and connections to start something like this up….!

[peter]

There has been quite a bit of interesting discussion on this topic in the T.E.E LinkedIn group where I also posted the initial post. Unfortunately, unless you all are also members of that group, you probably can’t see it (I don’t know how sharing things from LinkedIn works though).

Anyhow, I’ve invited one of the commenters over to Tea Trade. He already operates a small business purchasing consortium and may be able to help devise a plan on how to proceed based on the kinds of needs he is already seeing.

In the meantime, I put this up on a whim, sounds like a good name for it: Namtex.co – North American Tea Exchange

[peter]

I don’t rule out Europe, but N.A. is a big enough place already – need to learn how to handle one continent at a time. 🙂

[Anonymous]

@peter: While the idea sounds good at first sight, I’m not convinced that it will work as you envision. The situation might be different in North America, but here are a few thoughts from my perspective.

Tea retailers with little experience (and little drive to travel) – those that I imagine this service is aimed at – often don’t have the expertise to judge teas properly and to purchase directly from producers. For them, the (trained and pre-selecting) middleman in the form of wholesale supplier is always a safety net and I’m not sure whether they would take the plunge to suddenly be responsible themselves for selecting the ‘right’ or ‘good’ teas. This is of course not true for all small retailers, but a fair amount of them come from various backgrounds and, if my personal impression from experiences in tea shops is right, most of them don’t know too much about tea.
On the other side, @xavier is right: the small producers often don’t have either the technology, nor the time and experience, to use such a service.
That leaves the small wholesaler/ambitious teashop owners in Asia. These are often pretty business -savvy and would definitely use a service like this. But they also do a lot of direct contact to tea retailers via email, so it’s only going to be another potential avenue for them.

As a retailer, it’s easier than ever to get in touch with suppliers at the source – even without ever having been in the country of production. Ambitious retailers know how to get their teas. And the others, I believe, value the quality ‘control’ that wholesalers offer them.

This is my own personal impression on the subject and shouldn’t deter you from any plans. I’ve misjudged the American psyche before and might be completely wrong, of course.

[peter]

Thanks @yaya this is exactly the kind of feedback and input I’ve been looking for about this. The idea came to me as I was researching software products for something and I came across a package that could support this. While I can visualize the technical underpinnings related to a project of this nature, I don’t have the hands on knowledge in the tea industry when it comes to buying and selling. I do research, but that isn’t good enough, which is why your input is so important.

I don’t think you’ve misjudged this at all and that your assessment is spot on. Those small wholesalers in Asia (and the small brokers) are a good target on the selling side of things – getting to them and getting them involved is another issue. That level of work may even require an agent or office on the ground to build trust and interest. Interesting that you bring that they do a lot of business by email – I personally believe that email is outdated and only a means to monitor other communications so that one’s email address stays protected. For example, I communicate with folks on Tea Trade through the PM system and use my email to monitor it. I do the same with dozen other platforms and websites I hang around at. Moving business communication onto the trading platform is a good way to handle it anyhow since (once filled with clients) there is a built in mailing list that buyers and sellers can access. I think platform based business communications is an improvement over direct email communications, because it allows businesses to better compartmentalize that communications.

Linking up with buyers stateside is a lot of legwork and less expensive that having to build the seller base over seas (whether those sellers are actual farmers or brokers). One of the issues with it is exactly as you describe, by buying directly, they become more responsible for quality, and if they get stuck with a bad lot – then they are gone as a customer because it will be money spent on tea they can’t sell.

There are quality control mechanism that can be built into the platform (basically seller feedback, but those can be mandatory within certain time period) – over time reputation builds and quality sellers will stay in the market and poor sellers will not. The other side of this is that it would generally be a free-reign market with little regulation except market forces.

While I can already see a way to start the platform on a shoestring (I can actually build the technological infrastructure which would include all the communications, bidding, escrow features and more for less than $1000 in only a few weeks), this is something that requires a lot of networking, marketing and building of relationships and really shouldn’t be done for less than $100,000, and that’s really on the dirty bottom end of the operational scale. In addition to marketing, a lot of expense would be spent just to finance the travel and meetings needing to cement relationships, get commitments and actually create a market of goods to be sold. I know there is interest on both the buying and selling side, but getting that interest to connect in one place takes money and work.

[Anonymous]

I’m eager to see this kind of website but not only US and Europe . 😀

[Gingko]

I think there is great potential behind the idea Peter proposed. And I think eventually, trust is a big issue. For example, alibaba.com is a wholesale/supplier website for Chinese suppliers to sell to the world. But most people I know who buy from there follow other people’s recommendations or buy from suppliers they already know something about. Otherwise, it’s like a B2B ebay and commodities could be of a broad range of quality.

If the B2B tea system could by some means examine the suppliers’ credibility (or even better, the quality of their products) before hand, people would have more confidence to buy from them.

[Author]

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