has eroded in recent years, largelyas a result of focusing too muchon the superpremium end andletting the main brands drift tenward the private label. Unilever,for example, failed to capitalize onthe cachet of its superpremiumFive Brothers brand by under-investing in Ragu, which forsome time had been a premiumproduct. If you lose the focus onbuilding cachet for the entire cat-egory, you can expect your earn-ings to take a fall as weU.

Vijay Vishwanath and DavidHarding are directors ofBain & Company in Boston.

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TRACKING CACHET: How much of the overall category was sellingat a premium over the price of value brands in 1997 versus 1988?

100%

80%

60%

40%

20%

0% -

70% Soup

60% Yogurt

50% Italian Sauce

40% Coffee

25% Facial Tissues

1988 1997

best practice

The Cutting Edge in AuctionsNo, it's not eBay or FreeMarkets.It's not even on the Net.

by Eric van Heck

Until recently, auctions were a relativelyexotic way to buy and sell goods. The Webhas changed that. Electronic auctionshave popped up like crocuses in earlyspring - several hundred now operate on-line. And yet the place to see state-of-the-art auctions is not on the Web but ratherat one of a dozen or so auction halts inHolland, where nearly 60% of the world'scut flowers are sold each year.

Because flowers are highly perishable,the Dutch flower auctions are built forspeed. Every day, millions of flowersarrive at Amsterdam's Schiphol airport.They are then quickly transported tonearby auction centers, the largest ofwhich covers the equivalent of about 100soccer fields and can host up to 2,500 buy-ers. By day's end, more than 34 millionflowers (and 3 million potted plants) willhave been purchased in the course of

Sellers of time-sensitive goods on the Web should lookat the Dutch flower auctions as a model.

60,000 transactions. Most of the flowerswill then be rushed back to the airportfor immediate export. Thus, over a 24-hour period, a dozen roses can be shippedto an auction center by a grower, pur-chased by a wholesaler, delivered to a re-tailer, and end up in the hands of a NewYorker in desperate need of an anniver-sary gift.

The key to the process is a method ofselling goods, known as a "Dutch aurtion,"that dates back to the 1870s. Unlike themore common English auction, in whichbidders push the price up from below, theDutch method starts with a high price setby the auctioneer. The price then dropsuntil a buyer signals that he will take thegoods. No actual bidding is involved.

18 HARVARD BUSINESS REVIEW ?Vlarch-April 2000

FORETHOUGHT

At the Dutch flower auctions, the focalpoint in each hall is one of three clocksthat tell not the time but the price of a lotof flowers or other plants on display. Theclock hands tick downward until a buyerstops them by pushing a button in frontof his seat, indicating that he will pur-chase part or all of the lot. Each transac-tion takes only ahout four seconds, whilethe flowers go rapidly through the hall onlarge carts propelled by an undergroundchain. Once purchased, the flower lots areslapped with bar codes, identifying thehuyers and the prices, and delivered tothe various buyers' shipping areas.

Not all the action takes place in thehalls. In 1995, one of the major importersestablished an electronic auction systemthat allows wholesalers to buy flowers on-line from remote sites. Participating huy-ers connect their office PCs to the auctionclock via high-speed phone lines. To judgethe goods on offer, they rely on high-quality digital images and strict qualitycontrol by the auctioneers. As a reactionto this electronic system, the traditional

auction houses implemented their ownbuying-at-a-distance facilities in 1996.The on-line huyers, currently about 150of the largest wholesalers, enjoy the ad-vantage of being able to get a better senseof overall pricing and supply by partic-ipating in several auctionsat once. But they are limitedto huying common flowersthat can he confidently judgedfrom afar. The on-line auctionsaren't suited to the purchaseof new, expensive hybrids -orchids, for example - wheregetting precisely the right color demandsa physical inspection.

Most auctions on the Web today usethe English method. But the Dutchmethod offers advantages, as the flowerauctions reveal. For one thing, the Dutchmethod is much faster. When a largequantity of easily evaluated goods musthe sold quickly, it is ideal. Second, theDutch method tends to generate higherprices. To avoid losing a particular lot, buy-ers will often stop the clock at a higher

Dutch auctionstend to generate

higher pricesthan traditional

methods.

price than they would have offered incompetitive hidding.

Recognizing those advantages, a fewe-husinesses have adopted the Dutchmethod. At Intermodalex.com, for exam-ple, a manufacturer that needs to ship a

product from, say, Rotterdamto Chicago can use a Dutch auc-tion to lease container space onan oceangoing vessel. Like flow-ers, container space is perish-able - it disappears as soon asthe ship casts off. And becausethe space is a commodity, buy-

ers can lease it without requiring in-depthinformation. As other companies launchtime-sensitive auctions on the Web, theytoo would he well advised to look to theDutch flower auctions as a possible model.

Eric van Heck is an associate professor ofbusiness telecommunications at ErasmusUniversity's School of Management inRotterdam, the Netherlands.

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