Saturday, June 9, 2007

Petal Power in The Economist

Interviewed by the Economist the merging of the two main flower auctions in the Netherlands is discussed, see Petal Power article. It is always difficult to communicate in "one liners" a complex topic that is critical for the flower industry of the Netherlands.

Here follows the questions that were asked and my answers.

Q. In particular, I am interested to know if you think the merger will indeed make the flower trading system more efficient, or if it is simply forestalling the inevitable development of a new, virtual trading system that will be inherently more efficient that any physical auction can be.

A by EvH. The proposed merger of the two largest Dutch Flower Auctions (FloraHolland and VBA) is a logical step into the direction of creating a larger electronic trading platform and lowering transaction costs in line with mergers in other industries such as the merger of NYSE and Euronext in the financial industry. Ajit Kambil and Eric van Heck, in their book Making Markets (Harvard Business School Press, 2002), have discussed that mergers allow market makers to realize economies of scale and better serve customers by giving them access to a wider range of products and trading opportunities, regardless of their location.

Indeed, the merger will give both auctions a greater scale, as well as larger operations and an extended customer base to share the fixed costs of future investments in technology, marketing and logistical operations. For buyers, the market efficiency in terms of finding the right product and the right seller via the Dutch auction system or the brokerage system will increase as well.

Q. The question is: will the effectiveness of the merged flower grower cooperative increase?

A. It is indeed critical to increase the service levels (in terms of quality and variety of flowers, delivery time, logistical costs, and the ability to react quickly to new customer demands (agility)) to their customers (wholesalers, retailers) and to the customers of their customers. Crucial are the implementation of smart logistical concepts and advanced information sharing with networked information systems among the different partners in the trading network.

Q. Do you think the latest developments in these systems will inevitably do away with physical auction clocks?

A. The transformation from marketplace to marketspace is not easy and is partly determined by the quality of the information that buyers can get out of the market. At the moment, most buyers get better information (about new products and the state of the market) when they are physically present in the auction halls. Improved digital information about the quality of flower products, the reputation of sellers, and the market state will however move buyers to the online trading platform. Physical auction clocks will stay (in the short run) but will be combined with online trading facilities. A hybrid model of offline and online combinations of different trading models (direct, broker, auction, reverse auction) will occur.

Q. And if so, is the merger a step in this direction?

A. The merger will indeed be a step into this direction. Important will be if the merged cooperative will be able to create the next level of customer service, logistical performance, and information architecture. Marketing, logistics, and information systems people have to work together to create the next generation trading platform.

The larger cooperative – every grower has one vote – might lead to better decisions (“the wisdom of the crowds”) but usually with larger groups the speed of decision making is going down.

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