Even in the best of times, big companies find it hard enough to create new businesses, so the advent of the World Wide Web and the attendant stock market hoopla put even greater pressure on top managers—this time to come up with business models incorporating e-commerce platforms, and fast. Some companies took the business-to-consumer (B2C) route, others the business-to-business (B2B) one. The results often failed to meet expectations.

Among the big businesses that felt compelled to try their hand in the dot-com world was Hutchison Whampoa, the big Asian conglomerate founded and controlled by the well-known and influential businessman Li Ka-Shing. The conglomerate, which has worldwide interests in container ports, property development, telecommunications, and retailing, chose a B2B model focusing on the office supplies market in Hong Kong. The new business is called BigboXX.com. Like many other traditional companies moving on-line, Hutchison quickly learned that survival calls for the "clicks-and-bricks" business model, which blends traditional off-line assets with digital initiatives. BigboXX has yet to show a profit—its own forecasts call for a turn to the black in 2002—but as long as it shows progress, the deep pockets of the parent company can give it the breathing space that so many independent dot-coms have lacked.

These excerpts from a recent interview with Stephen Winterhalder, the chief operating officer of BigboXX.com, offer an inside look at an e-commerce start-up in Asia and suggest the lessons to be learned from efforts to carve out new businesses in big organizations like Hutchison. The interview was conducted in Hong Kong by Wai-Chan Chan, T. C. Chu, Allan Gold, and Glenn Leibowitz.

Interviewer: What is BigboXX?

Stephen Winterhalder: BigboXX supplies paper, computer consumables, break-room¹ products, and stationery to corporate organizations. We also offer some basic furniture and computer hardware. We have about 5,000 products. About 4,500 of them should be available for next-day delivery, and about 500 of them are what we call flow-through products, like furniture or computer hardware, where it might take ten days to deliver because we don't stock those products in the warehouse. We have a 50,000-square-foot warehouse owned by Hutchison, but we pay commercial rent.

We also have our own fulfillment—our own delivery vehicles. When we were looking at this business, we realized the importance of on-time, accurate deliveries. We talked to potential third-party partners, but we couldn't find anybody in Hong Kong who would be able to meet our requirements at the price that we needed. It comes back to the traditional versus the new. We cannot run a virtual warehouse, where we have no stock. In fact, our warehouse is full of stock. We have to do that to deliver our value proposition, which is next-day delivery 99 percent of the time.

Interviewer: How big is the opportunity in Hong Kong?

Stephen Winterhalder: The office supplies market, including both off-line and on-line sales, is about HK $5 billion.² It is a fragmented market, with the top five players having only a 25 percent market share. It is still a very traditional market, with 75 percent of the business going through second- and third-tier wholesalers. We are totally differentiated from the 75 percent, though maybe not as much as we would like from the 25 percent. We have service agents who are smartly dressed and polite, UPS-style, who deliver to your office. This may seem like something you have got to do. But in Hong Kong, the competition isn't necessarily doing that. Also, we are more of a one-stop shop than anybody else. A lot of companies concentrate on supplying paper, some on computer consumables, some on stationery. We are doing the whole thing.

Interviewer: How many customers do you have?

Stephen Winterhalder: We currently have 15,000 companies as customers, about 50 percent of which are purchasing from BigboXX on a regular basis. We are signing up 600 to 1,000 new companies every week, of which about 350 are placing orders. Over 85 percent of the actual purchasers are women who come from a range of industries, including banking, legal and business services, manufacturing, trading, and government organizations.

Interviewer: How do you segment your customers?

Stephen Winterhalder: We split them by size: extralarge, which is 500-plus employees; large, which is 100 to 500; medium, which is 50 to 100; and small, which is below 50. We've actually split small into small and supersmall. Our bull's-eye customer is a large or medium-sized business because the drop size³ is large enough to pay for the fulfillment cost, and the volumes are reasonably big. The extralarge customers are actually very demanding, but we need them for the volume. Longer term, particularly when we get our customer-relationship-management system up and running properly, we will start getting into industry-specific targeting. We could have a product range for the banks or for different types of industry, but we are not doing that at the moment.

Interviewer: Please describe how your business model incorporates clicks and bricks.

'20 percent of all orders are from people going directly on-line themselves; we don’t do anything'

Stephen Winterhalder: Just over 30 percent of our sales orders are placed on-line; 20 percent of all orders are from people going directly on-line themselves. We don't do anything: they just key in www.BigboXX.com and place an order at the list price. For the other 10 percent, we've gone to see customers face-to-face and negotiated pricing with them before bringing them on-line. So 20 percent of BigboXX customers just do it themselves, while 10 percent we are converting to on-line ordering.

In fact, it's like a traditional business. If you go out there to the head office of BigboXX at five o'clock at night you wouldn't think BigboXX was an e-commerce business. We just bought a new, bigger fax machine. And while we might not like that so much, it's just the way the world is at the moment. We have now got a customer operations manager. He's got four sales administrative people and five data-entry clerks. We've got these people in place, handling orders in a traditional way. And then we've got another team of people who are talking to customers about moving them to Internet ordering.

You have to hold people's hands and help them to get into the Internet world. If you expect them just to go on-line, key in their password, and suddenly start ordering from you on the Web, it's just not going to happen. In fact, the big organizations are especially difficult—they order by fax because they don't want to encourage maverick buying.

We have this thing that we call the BigboXX lab. We bring in three or four people from organizations to which we wish to sell. We just set up the system for them—this is your password, what you want to order. And then they're off, and they love it. When they go back to their offices, they can just key in their password and press a button and order. People are prepared to do it; it's just that you've got to encourage them.

Interviewer: How does BigboXX.com actually work?

Stephen Winterhalder: We had the benefit of a blank piece of paper, and we managed to integrate the front end with the back end. If you take the front end, we've got the traditional sales force, the catalog, and the Web site. In the middle, we have the software system: mySAP.com. And then we have the warehouse at the back end. If you go into the Web site and place an order for a pen, for example, the system goes back to the warehouse and checks the stock and tells you whether you can have that pen tomorrow or not. If you can have it, fine. If you can't have it, the system will give you an alternative based on outstanding purchase orders or delivery lead times. It will give you an alternative date, so you can have the pen in two days' or three days' time. Failing that, the system will let you find a substitute for that product—to have a blue one instead of a black one.

In fact, what we've learned from actual trading is that with extralarge customers, the drop sizes are not that big, because they use us as a warehouse. Because we offer next-day delivery, they're able to reduce their stock, so actually we could do up to 60 deliveries a month to a list of our very large customers.

One of our banking customers occupies ten floors of a building; you have to deliver to every floor; and within each floor, you have to deliver to a lot of different desks—it gets very complicated. However, deliveries work two ways. Delivering to a desk on a floor is cheaper than delivering to an office here and an office somewhere else. With small customers, the fulfillment cost is also quite high as a percentage of the cost of servicing. The order sizes are small but bigger than we thought.

Interviewer: Is repeat traffic the secret to making this business work? That seems to be the lesson in the B2C world.

Stephen Winterhalder: It's about relationship building and share of wallet. Initially, we should be able to get customers relatively easily. The issue is this: are they increasing their share of wallet? For larger customers, their share of wallet is currently running at about 18 percent. We think we can move those people, based on experience so far, to increase their share of wallet by 5 percent a quarter. So if we can get that up to about 32 percent, that will add another third to our existing revenue.

Interviewer: What kind of metrics are you using to evaluate your progress?

Stephen Winterhalder: The key things we look at every week are the number of log-ins, including known log-ins and anonymous log-ins; the number of page views; and speed. We monitor the amount of time certain pages take to appear.

Our site is customized. If you are an employee of a Hong Kong bank going onto our site using your password, you are actually seeing a different page than the one seen by employees of Mr. Chan's small company, because there are algorithms that look at your purchase history and what you spend. The promotions that come up on your page are based on your purchase history.

Although that sounds very good, targeted marketing requires quite a lot of computer memory, so those pages can take longer to download. So what we monitor is how long it takes for certain key pages to come up on-screen, such as the home page, a shopping page, an information page, or a promotional page. We are trying to get them all up in a maximum of ten seconds. We also monitor the click-through rate on e-mails, which is currently about 13 percent.

Interviewer: What have you accomplished that you consider innovative in the e-world?

Stephen Winterhalder: On the Web site, we offer real-time inventory checking and order reports. You can go into our site in real time and see how many pens you ordered last week, last month, last year—and see who ordered them. In relation to the wider customer experience, we are already using some sophisticated CRM4 techniques to improve customer retention and deliver a more relevant offer.

The other thing that is exciting is something we call a supplier portal. Just through a Web browser and password, suppliers can have access to our ordering system. We can say to them, for example, "Here's all your sales of Xerox products last week by customer." That does lots of things. First, we can have vendors manage our inventory to, hopefully, reduce stock in the system and make it more demand based. Second, we get one-to-one marketing or CRM opportunities. We can look at the supplier portal and say, hey, there are 100 customers that haven't ordered paper in the last week; we'll send those customers a voucher for a certain amount of money. We can actually stimulate sales through targeted promotions based on the information from the supplier portal. The problem is that suppliers tend to be quite traditional. Our aim is to get one or two companies on the supplier portal and then promote the portal to others.

Interviewer: When did the idea for BigboXX come up?

Stephen Winterhalder: Between August and October 1999, when we were looking at B2B and B2C initiatives within A. S. Watson & Company. I was the buying director of ParknShop, a subsidiary of A. S. Watson & Company.5 A. S. Watson, the retail arm of Hutchison Whampoa, undertook a project to identify possible e-commerce opportunities it could start in Hong Kong and later roll out across Asia. After a detailed research and strategy project, the B2B space was identified—and, more specifically, the office supplies market. With respect to spending and order size, both are much higher than they are in the B2C world. Furthermore, product ranges are fairly straightforward and thus relatively easy to purchase over the Internet.

We got the green light in December 1999, and the budget was signed off on February 2, 2000. We began in April 2000 with a test group of companies as customers and then launched the business officially at the end of July 2000.

Interviewer: Where did the name BigboXX come from?

Stephen Winterhalder: Knowing the importance of branding in general and especially in this market, we set out on a fairly extensive brand development project with our advertising agency. Building upon what we saw as the core values and identity of the company, we were left with two directions. Either go for a more abstract name, as many portals do, or try to convey some of these values in a more literal way. BigboXX works for this multilingual space, and, according to the research we did, it will work well across Asia. It's simple, easy to remember, partly explains our business, and is interesting because of the two Xs.

Interviewer: What were the key steps in establishing this venture?

Stephen Winterhalder: The first thing was setting up the overall business model—what it was we were trying to achieve. Because once we'd done that, everybody we got into the organization—outside consultant or internal Hutchison resource—was aligned with what we had to achieve.

When we set up the business, we spent a considerable amount of time looking at best practices within the office supplies industry and within similar industries. We examined all of the prominent US players as well as some in Europe and Australia. Building a team was the next step. It was a combination of recruiting internal people to work for BigboXX and finding the right consultants. I have to say that this went remarkably smoothly. What's important is getting the right people.

Another big area was procurement. For procurement, it was about finding somebody who had done it before, knew the suppliers, and knew the product ranges. For the distribution side, we found an ex-FedEx guy who knew about what it took to fulfill product and run the warehouse, run the service agents, run a delivery team.

We are learning from this experience. Market research told us that the three key things are accurate delivery, on-time delivery, and good customer service. Price actually is lower down. Now that we're operational, actually keeping 5,000 products in stock available for next-day delivery is difficult. But we're achieving about 95 percent next-day delivery.

In the supermarket business, where I come from, if you haven't got a product available, somebody will pick up something else nine times out of ten. Here, if you haven't got the product available, your customers can cancel the whole order. So you are actually losing big sales. It's worth paying a 20 percent premium to suppliers for one product to ensure that the whole order is fulfilled on time and therefore not lost. We've set up some contingency suppliers to deliver this.

Interviewer: Could you have created this business without the Hutchison organization?

Stephen Winterhalder: It would have been difficult. Hutchison gives you instant credibility. You've got the cash to spend on the right infrastructure, and although they are very demanding, you have actually got a bit of time to do the job.

Interviewer: What were the pros and cons of creating a business within a big company?

Stephen Winterhalder: Once we had the budget signed off, we were really left alone to make things happen. I've got a boss here within Hutchison E-Commerce who reviews what we are doing. Every month, I have to give a quick presentation to the main board. But Hutchison will allow you the independence to go away and execute your business plan.

Where they helped first was on the management side, by providing people to help manage the project and supply internal resources. Secondly, we didn't have the scale from day one, but we did have buying power because Hutchison owns ParknShop, the biggest buyer of food and beverages in Hong Kong, and Fortress, the biggest buyer of computer hardware. For example, I can buy my break-room products, such as snacks and drinks, at ParknShop pricing levels. Based on the volume we're purchasing, I'd say the margin advantage is 5 to 15 percent.

Also, the Hutchison brand helps a lot. It helps us with suppliers in terms of getting their support. They believe that this business is going to be big, so you don't have to do that much convincing. It also helps when we go out to customers and try to sell BigboXX. When they see the Hutchison brand, they believe this is something that should be rewarding.

Where the Hutchison connection makes things a little bit tough is that expectations are very high. If we simply go around using Hutchison's name and then don't deliver on what we're promising, we'll have a big problem. This reality helps us focus on giving people what they want.

Interviewer: How difficult was it to win approval for your budget?

Stephen Winterhalder: Trying to sell the actual BigboXX business model to Hutchison was relatively straightforward. We had one presentation to the main board, which asked that we look at a couple of points, as we did. I was summoned to the finance director's office on February 2, 2000, and the thing was signed off.

We have earmarked US $60 million in the next five years to expand BigboXX, both in Hong Kong and regionally. And in Hong Kong, we will spend about HK $100 million to get the company under way. Our 2000 revenue was very encouraging, and the trends are very promising. We are aiming to achieve a 10 percent market share within one year of launch.6 We will break even in the middle of 2002, and we will pay back capital invested the first quarter of 2005.

Interviewer: Why do you think Hutchison accepted the idea so readily?

Stephen Winterhalder: Hutchison's board believes in the business model. Because Hutchison is very big in Hong Kong, we have buying power, already, that we can leverage from our other businesses and the relationships with corporate organizations. The board saw that B2B is a better route to go than B2C because dealing with corporate customers means big drop sizes. They can see the benefits of combining the traditional channel and the Internet.

'They also feel that there's a lot of learning opportunities at BigboXX for other Hutchison businesses'

They also feel that there's a lot of learning opportunities at BigboXX for other Hutchison businesses. So if this is successful, this model actually can be applied to help e-enable other, traditional Hutchison businesses. The other thing is that it's quite high profile. Hutchison is getting into another business in Hong Kong and supplying corporate businesses, so there's a feel-good factor.

Interviewer: What might you do differently today, given what you now know about the way BigboXX has evolved?

Stephen Winterhalder: When you put together a business plan, you may always be a little bit optimistic. If I had to pick one thing out, it would be phasing in the development of the business in more of a step-by-step approach. In reality, that's what has happened, but because we were expecting to do things more quickly, it has affected some of our decision making.

The main decision was going after lots of customers. And the danger of doing this is that you don't service them as well as you should. We still managed to get the growth, but we've disappointed a few customers along the way, which we could have avoided if we had moved a little bit slower and learned a little bit more before we approached them.

Interviewer: May any new businesses emerge from BigboXX?

Stephen Winterhalder: I don't want to be a jack-of-all-trades and master of none. If customers want a courier service, FedEx will do it better. If they want flower arranging, somebody else does it better.

What we found from our research was that with printing, we can actually do something that people want. For example, if we do business with a big organization, we will scan in all its preprinted stationery, envelopes, letterhead, and forms. The customer can then click on that item on the BigboXX Web site and order it like any other product. This really gets people excited because they feel that their stationery orders are sometimes out of control.

So we have teamed up with Xerox on the digital side, and we have teamed up with some partners on the traditional offset side, to give us a one-stop shop for printing. The printing service will initially target office stationery printing, a market that is worth approximately HK $3 billion—nearly as much as office supplies. So suddenly we've got two businesses. We aim to add value to fairly traditional, labor-intensive processes. We will fully launch our on-line printing solution in May 2001.

Interviewer: What kinds of geographic expansion opportunities are you considering?

Stephen Winterhalder: We have looked at the size and attractiveness of each market in the Asia-Pacific region. We have also looked at potential partners, in each market, that can bring customers, sourcing, logistics, or an IT capability. Having done that, Shanghai and Seoul are the most attractive markets at the moment. But it's very much one step at a time. The first challenge is to replicate in other countries the learning that we get from Hong Kong.