Retail Awakening: Influence Erosion in Ag Retail
"Death by 1000 cuts"
One of the biggest topics in ag retail over the past decade has been margins decreasing. Sales of crop input products have increased, but ag retail margins have generally declined across North America. This fact has been a key point of emphasis of retails to manage.
20 years ago there was an impenetrable moat at the retail level with their geographic location, physical assets, credit offerings, knowledge of the area and the farmer along with their relationships.
Today, this previously impenetrable moat has begun to dry up and it has been felt at the retail level not with a decrease in sales, but a decrease in margins and a loss of control.
What has driven this? What will drive it in the future? Can it be mitigated?
In this post I will highlight some of the dynamics that are driving margins to decrease, stemming most directly from the changes in information flow and influence and what else it impacts within the ag retail business.
Porter’s Five Forces
In 2020 I wrote a post about Porters Five Forces in ag retail. This is the starting framework through which we can understand what is happening in ag retail and helps to illustrate competitive and business dynamics within the space.
Click here to read the full Porter’s Five Forces in Ag Retail post.
When we apply Porter’s framework to ag retail we see the following:
1. Competitive Rivalry – The competition is relatively robust in North America. Many small towns have 3-5 retails servicing a 60km (40mile) radius. There are somewhere around 12,000 retails in North America.
The biggest thing that feeds this rivalry is that there are a finite number of acres and inputs given the geographical constraints that we see today and a one time window to sell/access that acre.
All of retail has a window (eg: summer clothing, winter clothing), but it’s different in ag. In traditional retail you can get rid of much of the inventory at blow out prices because ultimately the consumer can use the following year and there is enough margin built in. In ag inputs many farmers do not have heated sheds for storage, or would prefer not to tie up chunks of capital in something they can purchase next year, not to mention other potential quality issues like settling out of crop protection products.
This urgency to get product out the door in that small window puts significant pressures on being the first in the door with the farmer and the first to bring those products up to the farmer. This puts pressure on margins as well as the quality of information that drives recommendations – because ultimately, any product left in a retails shed costs money to ship back and/or store and can also hinder incentive targets with suppliers.
2. Supplier Power – Retails are extremely reliant on their suppliers. Generally speaking, they are the reason retails have anything to sell at all! The thing is, that’s the case with all retail businesses. However, ag is different. In the consumer space, there is constant innovation, new companies being started and unique geographical options just to name a few. These retails have significant power over their suppliers thanks to their physical locations, broad offerings and consumer habit built up… and consumer retails wield that power every chance they get.
In ag retail it is different. While the retailer has the direct relationship with the farmer, the physical assets and the credit offerings, the ag retail only has so many options of suppliers to merchandise their sheds with. Whether we are talking seed or fertilizer or crop protection, there are a limited number to buy from and they have continued to consolidate.
On top of this these manufacturers have higher gross margins that enable them to market heavily to influence customer (farmer) action and they are savvy at managing this relationship with programming. This combination of low optionality, significant marketing budgets and strategic programming has tilted the power back to suppliers across most product lines.
3.Buyer Power – Farmers are the primary buyers in an ag retail setting. While ag retails tend to dictate the price there is a shifting influence of farmers over the ag retail based on their size and position in the marketplace.
There tends to be enough competition in the market place generally speaking, few switching penalties involved (switching penalty might be inability to obtain credit elsewhere or distance to the location for example) and a comparatively similar product line offering, so farmers are able to work with the retail to obtain prices well below MSRP.
Where the retails tend to have more power over farmers is in the realm of pricing transparency. Today there isn’t a lot of postings of prices all over the place – part of this is driven by manufacturer programming and historical practices. This is changing (more later) which means there is more power shifting back to the farmer.
4. Threat of Substitution – Without a unique product line or service offering ag retails are commoditized. If you do not have something exclusive to your business as an ag retailer (eg: proprietary herbicide products), then there is not something that keeps that customer coming in the door. Now, ag retail is driven by relationships so there is something to be said about culture and employee retention to manage through this, but all things equal a unique product, service or value proposition to the customer is one of the best ways to manage a substitution of some other retail. Often this needs to be driven by looking 3-5 years out, anticipating what is necessary and understanding it as a retailer, creating a market for it and creating demand for it. This goes hand in hand with the supplier points in #2.
Ag retail has traditionally bundled services, products, credit, logistics and knowledge into their offering to customers. The other aspect is how parts of this “bundle” can get broken up. Once this bundle gets broken up, say by an independent agronomist offering, 3rd party credit or 3rd party services, the value proposition becomes less and less to the customer meaning the threat of substitution of other components of your offering (eg: crop input products) increases.
5. Threat of New Entry – While this has changed over the course of the last number of years with organizations like FBN, Meristem Ag or others, the risk is still reasonably small. One would look at the threat of a new entry as a small risk because being able to invest in assets takes significant capital, securing supply takes connections and industry knowledge and having a significant enough list of customers to target was a difficult combination to come cross generally speaking – then scaling this over a large geography is exceptionally difficult. Think about this in context of what it takes to enter the online e-commerce widget selling business – there are stories of creating a business like this in under 24 hours and having revenue within that time frame! However, the risk of new entry has increased in some regards here and varies by product line.
This sets the stage and leads us more specifically to the concept I talk a lot about: influence erosion. We will get into specifically what has occurred in the market based on actions and events within the industry.
An ag retail can make margin by buying products at a better price from manufacturers, selling products at higher prices to the farmer or selling a different mix of products (or services) to the farmer. The last two require a different level of influence.
Influence is defined as:
the power to change or affect someone or something : the power to cause changes without directly forcing them to happen
Where influence comes from can vary, but generally in an ag retail setting it stems from:
having established trust
understanding what motivates a person to take action
having information and insight that is of value for a farmer to make an informed decision
Influence is foundational to adding value to a farm operation. And adding specific value through understanding and have a relationship with a farmer is the only way to differentiate from competitors in the absence of unique products or rock bottom prices.
In ag retail, a lot of the value added by staff stems from services they can deliver (delivery, scouting, recommendations, blending, application etc) effectively to the farmer based on that farmers specific needs.
However, the farmers ability to access services elsewhere has grown over the course of the last two decades and the services and capabilities delivered by suppliers and new entrants to the market has increased, eroding retail influence.
If we go back to 2007, we can see the farmers opportunity for information about products and crop production was essentially limited to the ag retail location itself:
There were a small number of independent consultants, some opportunity to talk with government/university extension and the odd supplier sales and technical representative but there weren’t many to access nor was their contact information as readily available. If you wanted information as a farmer, you talked to your retailer - less optionality for the frmer meant more influence for the retail.
Fast forward to 2022 and the access to information and services for the farmer has exploded:
Not only has there been a proliferation in companies to get information from, there has been a movement to get closer to the customer and an ability to gain a better understanding of the farm customer than in 2007 by the likes of manufacturers.
Manufacturers in Influence Erosion
We often frame this as “manufacturers going direct”, but in my mind it’s not about selling direct to the farmer, it’s about establishing a direct relationship with the farmer in order to better influence them and their decisions.
In almost every industry we have seen this play out where product producing companies establish a strategy to create a direct relationship with their customer vs. just the traditional retailer. The target of this relationship is to increase loyalty, increase ability to sell products, increase margins and help determine future product development/services as well. Information about the customer is power, and ultimately profit.
In ag, this direct relationship leaves a lessening reliance on the traditional channel and shifts control of messaging and influence of the farmer to the manufacturer.
The tighter relationship has been enabled by various externalities and tactics.
First and foremost, the consolidation of manufacturers has been important as this allows retails less ability to go elsewhere for substitute products/negotiating tactics. It also helps the manufactures because they now can touch every segment that goes across the farm acre - from seed treatments to herbicides to fungicides and in some cases like with Corteva, to fertilizer stabilizers and biologicals. More touch points and more robust conversations with the farmer.
This consolidation has led to even more ability to tightly program in retailers as well as growers. With a portfolio that goes across every input segment there is more incentive for the manufacturer to tie in standard practice products (eg: herbicides) with more discretionary products, like fungicides. This is both for the retailer and the grower. But the outcome is that the recommendations more readily consider the programming influenced by the manufacturer, which is focused on their own generic battle strategies, market share goals and profit motives.
Next up is digital marketing. Manufacturers had to rely on in-person meetings, billboards, radio, expensive mail-outs or in retail marketing in 2007 to reach the farm customer and create brand recognition. Now, there is the ability to reach farmers directly on their phones via digital marketing on Google or Facebook and an ability to capture farmer email addresses, while bringing a higher resolution insight into who the farmer is and retargeting avenues. Plus, having a farmer email address means the ability to directly send them information about products, special product offerings or simply to continue to be top of mind. We can even consider the dynamic of creating online video’s and conferences to establish further brand recognition and relationships.
In 2007 there were generally just retail specific representatives and technical specialists with large territories. This gave them some time for grower interaction, but much less than today. Today we have seen an explosion in grower specific sales representatives with some organizations and in organizations where there isn’t grower reps, we have seen a decrease in geography size so sales representatives can spend more time at retails or with larger growers. The relationship is just a text message away now. On top, we have seen more emphasis of having a higher number of technical product people in a geography to not only train new staff or speak to customers, but execute on more trials to have better/more relevant data - something that tends to resonate well with farmers and put more control back in the manufacturers hands.
All major crop input manufacturers have their own digital agronomy system. This is another touch points for these organizations with farmers, specifically companies like Bayer who have specific Climate FieldView Representatives. On top, they bring incremental data points to understand farmers operations, understand geographies and another tool to create loyalty. Bayer for example has noted this in several of their investor presentations.
Specifically in Canada, organizations are integrating their manufacturing prowess with the distributor function (eg: BASF with Retail Connect, Bayer with InterAg). This allows manufacturers to gain more information regarding the demand, influence of product movement and augments the conversations manufacturers have with retails.
This has allowed the value chain to evolve in some instances from this:
What we have seen come to to the forefront over the last couple of years are risk management products. If a manufacturer can decrease the risk for a farmer, they are more likely to purchase their fungicide product for example like with Syngenta’s AgriClime. On top, there are parametric based insurance products and relationships that can help influence a farmers variety decision, like Corteva and parametrics.ag announcement last year. It starts with canola, but it can end up with essentially any crop input product, from fungicides to insecticides…and trickle into the fertilizer realm even. Not only this, but it delivers better farmer and geographical intelligence for the manufacturers than ever before because they can see exactly where products are being used and have another touch point for conversations and weather intelligence as just a couple examples.
For more on parametric insurance, see my write-up here.
On top, we are just getting into the carbon program side of things. Again, another area for the manufacturer to better understand and influence the farmer on their decisions and be positioned to have that conversation, support their business and integrate their digital system.
In the future we are only going to see this proliferate further, take for example insect modelling partnerships, smart spraying capabilities and other decision support tools. What’s more, we will see the start-ups and digital organizations become more prominent channel partnership mechanisms for manufacturers, further reinforcing their influence in the market place and further displacing retails influence.
None of this is intended to come across as manufacturers acting doing anything right or wrong, good or bad - it is simply the outcome of technology intersecting with competitive dynamics based on sound business principles.
Better information and insight into a customer and the market leads to a relationship which leads influence and influence leads to control, market share, and profits.
Manufacturers are incentivized to look to new technology and leverage it as best they can so that they can out compete one another. It is the competitive dynamics between manufacturers that pushes groups to look for the edge - tight retail relationships are only one piece of the puzzle.
But there is more than just manufacturer tactics eroding retail influence.
We are also seeing the following factors eroding retail influence:
Increased Presence of AgTech Companies, Independent Consultants and Equipment Companies Investing in Agronomy and Precision Services – This means there is more demand for skilled staff for one and more competition for attention at the farm gate. 15 years ago the competition to offer agronomy or precision services was little and so the offer tended to get bundled with the sale of a product. But these new companies and services have came about looking to unbundle or decouple the advice and services from the input products themselves, meaning more independent advice for a retail to compete with and therefore more voices of expertise for a retail to overcome to be the ultimate informer of the farmer.
The End of Information Asymmetry – Thanks to the internet, specifically the mobile internet, social media and Google, farmers can access sound information to make decisions much more readily. 15 years ago they had to go into/call their retail for most information. This has changed. Companies like FBN offer price transparency, connectivity platforms like *AGvisorPRO offer access to experts or finding information from experts available on YouTube or Twitter has become more common when it comes to product or practice decisions.
Consolidation of Farmers – As farmers are increasing in size, their buying power increases. Not to mention, the savvier farmers are the ones growing. This is specifically potent in ag retail because you typically have a constrained number of acres at a specific time period to sell a specific segment of products and if you miss that opportunity with a larger farmer - you sit on the inventory which is a financial hit itself from a carrying cost with capital tied up in inventory for another year and the cost to store in 3rd party warehousing or to ship it back to warehousing. This can significantly hit margins.
Demand for staff - The influx of new companies, agronomy support growth and more grower direct representatives has exploded the demand for talented individuals in ag - this limits the pool of talent to pull from that can support and influence farmers in a retail setting meaning the higher calibre and experience individuals are more sparsely dispersed in ag retail.
We can see all of these specific issues, borne out of Porter’s Five Forces, challenging the dynamics of retailer profitability.
This doesn’t mean there is nothing a retailer can do, it simply means there is a need to manage the dynamic. This can be done several ways.
Note: It’s difficult to be prescriptive here as there are options that are better for larger organizations, while some are more useful for small organization. Just some general thoughts shared here to act as a starting point.
Bifurcation of Retail Strategies and the Barbell Effect
Today, we primarily see retail strategies being driven by value added, high service offerings from small, medium and large retails. In the future there is likely to be a shift.
The barbell effect (I’ve touched on it here) is when the middle sized businesses get squeezed. The idea is that businesses on either side in a given niche will survive; it’s the group in the middle that disappears. Usually the ends are lower cost providers (large player) and the highest costs providers (smaller targeted and niche providers with extra value add).
Medium sized and smaller players will get swallowed up or merge (as we have seen) to attempt to get closer to the large end, in a never ending appetite for scale, while new players emerge on the smaller edge with a different revenue model and go-to-market, or service offering, perfectly content owning their specific niche. We have been seeing this already too and have examples such as Meristem Crop Performance.
This leads to some of the mechanisms for retailers attempt to regain more influence focusing on either niche points of emphasis or scaling out:
New service offerings and partnerships
This is one of the biggest opportunities in my mind for small and large players; create relationships with strategic companies to offer novel services to your farm customers. This might mean looking at new types of hires (eg: carbon specialists as an example), new departments and increased educational costs BUT it is necessary to manage influence and margin in the coming decade.
I talked about an insect monitoring example here, but this can be extrapolated out to insurance offerings, fungicide modelling or something entirely new. It could be focused around areas not previously focused on, like carbon or soil health as another example. What I think is important to note is that if it is monetizing a previous service offering (eg: scouting/agronomy services), there is a need to re-think the messaging, the branding, the expectations and determine exactly what this looks like. After all, there are differentiated “competitors” looking to scout fields, or offer precision services for example potentially for cheaper or as a specialized offering. This is where the bundling and unbundling comes in. I’ve been apart of an organization attempting to do this and as someone helping to develop the offering, I did a poor job thinking through the nuance of the offering, the customer expectations, the staff conversation challenges, the prioritization level needed, the branding and messaging necessary and much more which ultimately made it a challenge to implement.
Charging for a service needs to be looked at through a new product offering lens at every step of the way (even if the service itself is staying very similar), through the eyes of both the customer and the staff.
Some of these could be monetized directly as a service, others can be leveraged as an incremental source of information that differentiates you and increases influence.
I have done some consulting work with a retail organization that has created a proprietary, in depth, and layered approach to soil testing (giving them a deeper understanding of their customers fields and their geography). They are also leveraging a novel approach to plant nutrient analysis which helps them have entirely different conversations with their customers. These initiatives have began giving them new service opportunities (they make money on the soil testing method) and created an expanding portfolio of biologicals and plant nutrients to align with what they are now learning about the soil. When working towards this change in offering, it wasn’t just the service and portfolio that was changed - there were new roles entirely created, a new brand for the offering and new sets of KPI’s and chains of communication. They just completed year two of this effort but have began to see a shift in share of wallet, increase in sales and margins ahead of their forecasted rates with customers that participate in the service.
Related to new service offerings is the fact that there will need to be a focus on looking up and over the fence at what is out there to identify strategic partnerships. I’ve said it numerous times in Upstream, but as complexity increases, collaboration becomes more important.
The industry has awoken to this. Take this work done by John Gottula of the SAS Institute showing the increase in partnerships at large throughout the agrifood industry:
In a free flowing information world, having the relationships and partnerships will give increased access to information and ability to create better service offerings for their customers.
This will continue to be important even where there are challenges with being burned in the past. One point to consider too is think outside the box and look to non-traditional partnerships, thinking along the lines of data analytics companies as an example.
Next are digital focuses and I think this is one of the greatest opportunities as a whole because the ability to influence stems from having information, novelty and creating a better customer experience:
Investment in Relationship Management and Experience Tools
A big opportunity in my mind is better customer digital engagement experiences.
This doesn’t mean that physical engagement decreases in importance, but using a digital mechanism to augment and enhance the relationship is necessary. It becomes not only a place to reinforce the relationship, but better understand what is driving your customers behaviour, supports their business needs and gives you access to more information and even potentially new monetizable service offerings (eg: embedded finance or insurance products).
We have seen the evolution of relationships progress over the last several decades:
As new touch points arose, we didn’t see the previous points of emphasis decrease (outside of fax). What we have seen is each one become another tool to engage the customer based on their preferences. In my mind I see not having an online portal to service the customer akin to not giving your staff a text message function in 2012.
A portal approach can be key for customers access key business information is important for the customer and will help to be a source of information and support for their business.
This also becomes a mechanism for marketing and for new service offerings/revenue streams in the future. More digital touch points enhances the customer experience, strengthens the relationship and can lead to more insight into customers. It allows the retail to reinforce their relationship and regain influence.
The other reason this is important in my mind is that focusing on increasing prices and margin is more of a zero sum game mindset. We need to consider that as transparency and the velocity of information sharing increase in the world, it will become increasingly challenging for companies to extract higher margin sums from their customers, even in ag retail. Focusing on creating a better experience and a bigger pie for the customer through digital capabilities is likely to win out more in the coming decades. We have seen this mind set shift in the large agribusinesses like Bayer Crop Science. This will be an area I dive deeper into in the future.
The digital portal can lead to a better CRM strategy where there are specific pieces of information captured and analyzed about a customer continuously and allows for an aggregated up macro view of what is going on in a geography or within the company, helping with forecasting needs or product procurement to again reinforce a better relationship with the customer. I’ve talked about it in Upstream numerous times, there is an opportunity to leverage a sound CRM strategy to see how customer touches influence share of wallet, margin, sales growth, loyalty etc. It just needs to be measured.
The next area we can see an attempt to regain influence is through the use of generic products, proprietary products and strategic relationships with specific manufacturers. I won’t dive deep in this area because it is dependent on the size of the retail, but influence can be gained by creating demand for specific products in a specific area and being the one with the best access to these products. Like I mentioned earlier, this is more a zero sum game mind set; however, this still has merit to differentiate.
Influence erosion will continue in ag retail if there is not strategic actions taken.
Understanding where it comes from, why and what could be done to mitigate it is where a retail can differentiate itself moving forward and get plans, partnerships and efforts in place to overcome a continuous loss of influence over the farm customer.
The landscape and competitive dynamics have changed and when that happens there is a need to evolve to thrive.
As the red queen says:
“Now, here, you see, it takes all the running you can do, to keep in the same place.”
If you’re in ag retail, keep running.