The most profitable digital business model is the online marketplace. Amazon, eBay and Alibaba have become global giants connecting buyers and sellers online. The model generates value by operating at a scale that “brick-and-mortar” traders cannot, while delivering far lower transaction costs. Furthermore, while these businesses collect commissions on a significant volume of sales, they typically don’t have to allocate capital to carrying inventory.

 

Online marketplaces have not only made transactions more efficient but have allowed smaller businesses to enter a range of previously inaccessible markets, and thus improved competition.

 

Smallholder value chains have a number of characteristics which suggest that online marketplaces could add value. Both the inputs that farmers buy, and the crops they sell typically pass through a significant number of traders, each collecting a commission. These commissions are high when compared to modern, competitive and digitized value chains. Moreover, as a result of weak logistics linkages, inventory costs are also high, with each link usually carrying significant stock.

 

Market power is significant, with both input and crops traders often able to dominate a particular region by developing deep long-term relationships. This combination of fragmentation, high market power and multiple levels of traders would appear on the surface to provide the ideal entry point for the online marketplace model.  

 

The most immediate challenge to online marketplace integration is digital literacy, which many farmers lack either the right device or skills to generate a digital listing and to correspond with buyers. However, this issue is likely to prove to be transient as access improves, and in many cases, there is already someone in a village with the skills and access to generate listings.

 

There are more fundamental issues likely to plague the online marketplace model in the ASEAN small holder marketplace. While a farmer might have a ton of potatoes, most buyers only want a few kilograms, and not just potatoes but a range of different products such as rice, spices and tomatoes. Ordering a whole basket of goods in small quantities directly from multiple different farmers is clearly implausible, even for larger customers such as hotels and caterers.

 

What is much more likely to emerge is the digitally enabled trader; traders who use digital tools to capture the benefits of online marketplaces, but still carry an inventory of goods on their balance sheet. Carrying an inventory will allow these traders to aggregate enough products from each farmer, and then divide these into a basket of goods for customers.

 

Digitally enabled traders (and cooperatives) use technology to cut out the ad-hoc phone and message-based communication that traders currently use to communicate with farmers and consumers. They could also use a digital platform to schedule logistics, offer live auction-based negotiation and digital shipment tracking.   

 

Digitizing listings also allows traders to better balance supply and demand, by providing a real time (and historical) map of supply and demand.

 

Early indications are that the model works particularly well for fresh fruit and vegetables where the time to get a product to market is short, and supply, demand and prices shift on a daily basis. Given the limited shelf life of these products, the ad-hoc process of phone and message-based communication also causes wastage.

 

The diagram below highlights the key competitive pressures on this business model. Digitally-enabled traders compete directly with more traditional traders, providing an incremental but important advantage to both farmers and consumers. It will be interesting to observe the response from the global e-commerce players. Backed by significant resources and brand power it remains to be seen if the need to carry inventory with a short shelf life will keep e-commerce companies at bay.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This model stands out from the others in the series in how incremental it is. We are likely to see traditional traders gradually being challenged by traders who introduce more and more of the tools of e-commerce marketplaces to make communication, shipping and negotiation easier and more efficient for farmers, suppliers and consumers.