Trailblazing the steel industry
With roots stretching back centuries, steel and metal distribution is one of the more traditional businesses in the global economy. As its products could be considered commodities, the drive for such a business to go digital may not appear urgent. When it comes to sales and customer service, many practices are deeply entrenched. It may therefore come as a surprise to learn that Klöckner & Co is considered by many to be a trailblazer when it comes to using digital platforms as a marketplace.
Klöckner saw a number of issues—both internal and common to the industry—that it felt would be best addressed with digital solutions. Communication was inefficient. A lack of transparency led to overstocked inventory. And there were other challenges, too.
This led to Klöckner’s first, proprietary platform, designed to offer Klöckner products to Klöckner customers. This has since expanded to a platform that also sells complementary products from third parties, thereby increasing the product range without a significant investment of money or effort. An independent, industry-wide platform called XOM represents the latest step in the company’s digital journey.
It started with baby steps. “It was clear to us that we had to start small. We couldn’t start with the development of a separate platform because we had to first learn how to sell steel online, and convince customers and suppliers to do business online with us,” said Gisbert Rühl, Klöckner’s Chief Executive Officer (CEO).
Management soon discovered that customer input was invaluable. At first, features were added in anticipation of customers adopting them. This proved a less effective strategy than going straight to the customers and asking for feedback and thenmaking the necessary adjustments to the platform.
Going digital required a change of mindset, especially for people involved with sales. It took a good deal of effort to convince them to use online shops, partly because the people saw the technology as a threat. To counter this perception, the company developed several initiatives, including one to help employees increase their digital IQ.
“We also started a hierarchy-free communications system, a kind of internal Facebook where I have the opportunity to chat with employees directly,” said Rühl. The communications campaign was all encompassing and remains important to Rühl, especially given how quickly the landscape can change. Convincing employees to get behind this digital transformation helped convince customers to follow suit.
The plan to eventually go to a platform that would be open to competitors was always there, but this proved a difficult idea to sell within Klöckner. “The organization understood that we had to transform our business online. They also understood that it makes sense to sell complementary products from third parties through our proprietary platform. But, even if they rationally understood all of this, emotionally, they could not support a platform where our fiercest competitors would also sell their products,” said Rühl.
Convincing the organization took time and effort. “You have to push cultural change continuously,” said Rühl. “When you only communicate here and there about how important digitization is going forward, people are less likely to respond.”
XOM: Open platform
After taking a few years to learn the best ways to sell steel products in an online environment, Klöckner launched XOM, an industry-wide platform, in February 2018. The goal of XOM is to become an independent digital marketplace for anyone who makes or markets steel, metal or industrial products.
It will seem counter-intuitive to many, but the goal for Klöckner is to have XOM eat into its own business. “It competes with our proprietary platforms and is therefore disruptive to our core business because XOM has taken over a certain percentage of our margin.”
However, a single, simple platform represents a great leap of convenience for the steel and metal products customer. Even if margins shrink, volume should increase as the platform has the potential to reach 100 percent of customers rather than the segment that is already familiar with a company’s individual proprietary platform.
Eventually, Rühl believes that the value created with XOM will be higher than the value created by Klöckner’s core business. Of course, the valuation metrics for XOM will be gross merchandise volume while the core business will be valued by a multiple of EBITA.
A test case for governance
For XOM to work the way Klöckner intends, it has to be seen as a fair marketplace for all participants. To ensure transparency, the company brought in authorities from Bundeskartellamt, the German competition authority. “They took this case very seriously because it was their first involving a B2B platform in Germany,” said Rühl. “We have close connections to them. Whenever we make additions or changes, we inform them.”
Despite still holding a majority ownership position, Klöckner maintains strict separation from XOM. Employees at XOM have nothing to do with Klöckner’s main business and vice versa. Klöckner will not have access to any other company’s customer data. Unlike Amazon, Klöckner cannot place its products first on a page when a customer searches for a particular item. Without this firewall XOM would suffer from a lack of credibility, and skeptical customers would continue to shop for steel in the old way or use other platforms.
Goals for digital
Increasing the share of sales conducted digitally was certainly one of the major goals of Klöckner’s digital transformation. To that end, the company has succeeded, with about 25 percent of 2018 sales having been conducted online.
Rühl says the company felt it was important to demonstrate the efficiency of digital platforms and to attract new customers to the online shop. Klöckner also looks closely at customer retention and customer lifetime value as performance indicators.
Steel is very much a global business. It is made in many places and used in even more. It makes sense that Klöckner would want to expand the XOM platform beyond the European Union. Rühl expects that the near future XOM will operate in North America, while Russia and Brazil are also possibilities.
In China, platforms like XOM already exist, which gives that country a large first-mover advantage. That, and significant structural differences between the Chinese and European steel markets, make expansion into China a less likely scenario.
How Klöckner will change
As Klöckner and its partners refine and grow XOM, the digital transformation will continue to have a profound impact on the next chapter of Klöckner’s 112-year history. Rühl speculates on a future that might see Klöckner end up as a fulfillment company for one or two platforms. It may mean that the digital arm (kloeckner.i) is a more independent concern, a profit center in its own right that markets its digital know-how. “And then there is XOM,” says Rühl. “It could be that, going forward, we have three different Klöckner companies.”