The Bundling and Unbundling in Ag Retail
The cycle that never stops.
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The Bundling and Unbundling in Ag Retail
There is a famous line from Jim Barker, co-founder of Netscape, who on his way out from an investor meeting, said that there’s only two ways to make money – bundling and unbundling.
As Netscape made its way into computers around the world, the music industry went through a really tough decade. The piracy that was driven by web browsers, Napster and the ensuing MP3 revolution sent the industry into a whirlwind. For a decade the industry was going through a crisis that led to major changes in distribution and business models.
When we talk about digitalization of any industry, largely what we mean is that structures that previously enabled bundling of products, and gatekeeping of consumers, now have become disarmed. Which means that new actors founded with a digital business model effectively break up bundles and soft monopolies, cut of middlemen and blur value chains.
Essentially, the music industry went through a phase of unbundling its parts. The vinyl album and the CD was the ultimate bundle, and it was hugely successful. The content were scarce by definition and record companies were little more than a physical distribution chain.
As we all know by now this was broken into parts and unbundled by digitalization, MP3-ification, iTunes and distributed freely via iPod and later, streaming.
For ag retailers, the story is similar. The bundle is the grouping of offerings that get delivered to farmers. The bundle is unique for each retailer and is one of the sources of competitive advantage. (I recently wrote a piece called Developing Competitive Differentiation in Ag Retail that can be found here)
It is through this bundled offering that relationships are built and value is created and captured.
The Ag Retail Bundle
The differentiator between retailers tends to be their emphasis and execution of each of these major categories:
Overall portfolio offering and breadth (fertilizer, seed, biologicals, crop protection etc)
Supply Chain Management
Ease of access to credit
Program mgmt. and programs created
(*There can be other under each of these headings too)
From this comes the value creation and relationships. But if retailers have groups come ito their geography that offer some of these, you see a reduction of differentiation, influence and value created which ultimately hinders value capture and the success of a retail.
There are increasingly entrants that unbundle and re-bundle various parts of these offerings. This can be independent consultants, third party service providers, manufacturers moving downstream or farmers moving further upstream due to their newly found economies of scale.
This means that there is bundling on the other side of the retail “bundle” within the value chain:
Manufacturers on the lefthand side or “upstream” in the value chain and then to the right you have farmers, who are constantly bundling their own tools and systems to support their business, “downstream” from the retail.
Let’s start upstream with the manufacturers “bundle”:
Their bundle has increasing gone from R&D, product manufacturing and marketing to expand into digital agronomy and further decision support tools, increased technical expertise, more programs and increasingly a “whole acre” portfolio, from seed/seed treatment all the way to harvest mgmt products - meaning they can integrate and influence the entire acre on numerous crops.
This means an increasingly direct relationship with the farmer which equates to better understanding of the farmers and ultimately a more direct influence, and less value to be added by the retail.
What’s worth noting is that the services that manufacturers offer will continue to evolve as well, especially as we see some of the technological infrastructure gain relevancy for things like insurance and financial/credit offerings or carbon offerings as easy examples. This will continue to change the bundles offered at each layer of the value chain.
Couple this with some of the other dynamics that come into play slightly downstream closer to the retail: independent consultants, precision ag companies, customer sprayer companies just to name a few.
An independent consultant might bundle these service offerings:
precision service offerings
farm management software
This has now been taken out (or mostly taken out) of the retails bundle for any customer that works with that independent consultant.
If we look at where the differentiator for retails is, it’s from adding value via many of these offerings. If they get “unbundled” from their traditional product offering, the retail becomes less differentiated. They are having this occur from many angles, because they own the traditional connection with the customer. This is one reason we see margin erosion. No one inherently dislikes retail, but the retail is where there has traditionally been a large bundle and where there is margin accruing to in the value chain.
If we move further downstream we see the farmer. The farmer hasn’t always had the scale to have fertilizer spreaders, high clearance sprayers, bins for fertilizer, blending facilities or space for crop protection products for long periods of time. As farms have began to consolidate, reliance on each of these has grown (more fertilizer use, more crop protection products sprayed for example) which makes the economics of purchasing your own make more and more sense.
This is where retails have made money and locked in customers as well:
product delivery and storage
As farmers have purchased more assets to execute on these initiatives themselves, they have grown less reliant on the retail to be anything but a place to access the product and pay for it. This leaves fewer opportunities for differentiation to manage their margins and add value to the products they are selling.
Through this as well we have the continued competitive nature between retails that I talk about in Porter’s Five Forces and Ag Retail. This means even areas where they might not have independent consultants, you have a commoditization effect on some aspects of the bundle, like crop scouting for example.
If you view ag retail through this lens you begin to see many of the reasons for challenges with margins.
So how can an ag retail “re-bundle” and differentiate?
Bundling of systems and tools that continually enhance the customer experience and augment a farmers profitability eg: identify ways to participate in carbon credits, create a unique business model around crop pest alerts.
Ease of doing business - whether this is through online access, or in accessing credit and rates available. This is a lever that can be pulled on.
Unique products - proprietary products built for specific geographies and based on customer needs from your unique insight.
Unique services - this can be precision related, or this can continuously be looked at from a different perspective, like aligning yourself with a succession planners for example.
Better credit options or de risking options - Unique partnerships with organizations that enable a farmer to have less up front risk on their crop input purchases can go a long way.
Focused effort - for smaller retailers they are going to be able to zero in on things that larger retails can’t in a specific geography. This might simply be flexibility of an offering or offering products that larger organizations simply won’t initiate.
This leads to the some of the reasons we will continue to see the consolidation in ag retail; scale and scope to be able to deliver on these offerings better than competitors and in a way that allows them to be in a position of power when negotiating with suppliers and farmers.
There are alternatives, where models change entirely.
Retails have focused on being value add. I think many will continue to focus on this, but in theory, this doesn’t have to be the case.
All of these services and offerings increase complexity and costs. There is the low cost model; cut services, staff and focus etc and re-establish a core of less products, lower overhead and making money on being the lowest cost provider, strategically pairing with specific suppliers, even independent consultants and targeting the farmers looking specifically for this because they have the scale and size to invest in a lot of the infrastructure they once relied on the retailer for. This is actually what we have begun to see in the USA from groups like Meristem Crop Performance, or even Farmers Business Network in a slightly different fashion for example. These other models are often viewed negatively, but the reality is that they are just bundling their offering differently.
There are platform based models as well, that focus more on the aggregation of disparate crop input manufacturers and retailers, like CommoditAg or Agro.Club or Agrofy in Brazil. They also present a unique approach to the market that further bundles offerings in a unique way, offering value to farmers in ways that focus on convenience and ease of access to information.
Will they work? Some will and some won’t. But different doesn’t necessarily mean bad. It means a different bundle offering driven by alternative viewpoints to what it means to “service the farm customer”. This is where topics that I have talked about in the past, like segmenting through psychographics and anticipating customer needs are a core part of re-bundling and evolving any aspect of the retail business.
We will see the large players like Nutrien, Helena, Simplot etc all continue to focus on offering a scalable, best in class service and differentiated offering. But this will increasingly leave pockets of opportunities for retails to further reinforce or create niche bundles and focuses themselves.
The future of ag retail is not homogenous; it’s specialized and adaptive. Having people and initiatives in place to continuously adapt will be a differentiator for retails in the future.