The Future of Ag Retail
Updated: Dec 18, 2018
Times are changing globally in how consumers and businesses make their purchases. Buying habits are shifting and preferences for convenience, simplicity and price transparency are becoming the primary priorities. This isn’t unique to retail either – Banks and Financial Tech are changing how we bank, the taxi cab business model is being replaced with more efficient ride hailing services like Uber and Lyft and hotel chains are having to compete with AirBnB, a platform that allows individuals to rent out their empty house or spare rooms for short term tenants. These are just a few of the examples, but everywhere we look these sorts of “disruptions” are occurring.
While this started years ago in traditional consumer retail spaces, the trend has slowly been creeping its way into ag retail globally, not just in the USA and Canada. In North America at least, many would suggest this is because of Farmers Business Network (FBN), which may have some validity, but if they didn’t move first, someone else would have. They identified an opportunity and moved on it.
There is now other companies out there with “e-commerce in ag retail” as a focus, however they all have slightly different approaches to their business model. I won’t get into them all in specifics today, but I have researched and analyzed their approach to suppliers, customers and retail differentiation and all tend to have some merit. Here are some of them:
- Others include companies like ag retail giant Nutrien Ag Solutions, launching an e-commerce go-to-market offering that gives them an omni-channel approach to ag retail. The list could go on as Winfield United is developing systems and tools to support their retail partners.
Bottom line – investment is in the $100’s of millions in this space, minimum.
Will e-commerce in ag retail take off? The topic has been talked about a lot in the last couple of years and I have listened to many that say “no, it doesn’t make sense” and that “farmers want local service” and I have talked to others that suggest the bricks and mortar traditional ag retail will go extinct and the future is online, focusing solely on price. Others suggest suppliers/manufacturers (BASF, Bayer etc) will sell direct to customers. Personally, I think they are all right, and all wrong at the same time. Looking at this through black and white, right or wrong is the incorrect lens to view it.
The Tyranny of the “or”
In my eyes, there will be an omni-channel approach from the successful ag-retailers in the year 2030 focusing on an approach that has an online/app component with digital tools + a bricks and mortar (B&M) component will be necessary to being a successful retail in the coming decades. Integrating the business is going to be key to achieving any meaningful success in ag retail in the future.
Jim Collins, a world renowned author who has wrote several “must read” business books such as “Built to Last”, “Good to Great” and “Great by Choice” (among others) is famous for a lot of his work and concepts, but one has always stood out to me around strategy.
When we think of strategy we typically have the mindset that we need to pick one route; “high margin products to sell or low margin products to sell or ” “go with the value added strategy or the low service strategy”. We always have it in our minds to think in terms of “one or the other”. This is touted by Jim Collins as the “tyranny of the or”. When we do this we end up limiting the potential and suppressing our ability to build outstanding businesses. So what is the better approach?
“The genius of the and” – Instead of one or the other, what does it look like to accomplish both of the differing approaches to business? How do we have a value added business AND a transactional business and not just make them both successful, but ancillary to one another?
Once you have said “and” instead of “or”, there is still the “how” – which is exceptionally important that I will touch on later.
Non-Ag Industry Examples
In financial technology and the banking industry – I’m referring specifically to “robo advisors”, which are essentially algorithms that take into account some basic information and assess where to invest a client’s money. Companies like Wealthsimple are transparent and charge a fraction of the price the banks charge to invest money with them…and returns are comparable. Banks initially viewed them as a competitor which put their margins at risk. But, what we are seeing today is banks partnering with robo-advisor platforms or offering similar services which allows them to take some of their talented professionals who were doing investing with clients and deploy them into other areas that can support the business in other ways. This can actually increase the banks offering to clients!
Amazon built their business online, in the niche area of books, and then expanded from there to become the biggest retailer in the world, biggest online business in the world and a platform service to boot. They are now investing in traditional bricks and mortar, however they are using the new assets in ways outside how bricks and mortar retail stores had traditionally:
1. Strategically to support their distribution needs for their online business as pickup and storage points
2. Using new technology to creates a superior experience in a traditional retail setting with their cashier less technology.
There are likely other strategic components to this, but supporting their major business and enhancing customer experience are to me the biggest components.
The Middle Man
There has been much talk about the “middle man” and cutting out the retail. The middle man or retail generally serves a function that the manufacturer/supplier doesn’t want to offer; credit, distribution/logistics, physical assets etc. There is the perception (or in some cases reality) that retails do not add value to their customers, while there are many farmers who rely heavily on their local retail to make their farm successful. More than ever, the omni-channel retail organization needs to be able to add value and make their customers experience simple, and make them more profitable. This is what will bring in successful, happy, loyal customers.
Think about it, if you can buy a product from Amazon online for $99.99, or you search around and find a no-name alternative on a poorly laid out website with product and shipping for $93.99 which would you choose? Price is important, but how important is the familiarity of a well-known brand that minimizes your stress, has prescribed ways to handle complaints and issues and that remembers all your information from previous purchases? I’m opting for Amazon every time. Now obviously this is an extreme example in the sense of a complete no name and a dollar value significantly less than that of what farmers are spending, but the basic principles remain.
If talking about reduction of crop input costs I want to take a quick side tangent; the biggest impact on pricing in the industry, at least in Canada, hasn’t been online or FBN. It’s been generic proliferation. The expiry of patents and the influx of generics has taken the average costs of crop protection products down significantly the past decade, and with major patents coming off on active ingredients like pyroxsulam (Simplicity) and pinoxaden (Axial), this trend is bound to continue without the online pricing transparency.
While there will be many challenges to omni-channel, the opportunity for the organization(s) that can successfully implement an omni-channel strategy will have access to the greatest number of customers, the greatest number of sales and the ability to learn about their customers quicker than their competition which has significant compound effects in a data and tech driven world.
In part two I will dive further into retailers should approach an omni-channel strategy and the opportunities and challenges that forward thinking these retailers will face.
The Future of Ag Retail Part 2
In part 1 of this blog I introduced my thoughts around the importance of retailers of the future having an omni-channel approach to taking products to their farm customers. In part 2 I want to discuss how a retailer can implement this and some of the opportunities and challenges that will face the ag retailer of the future.
I don’t have the specific answer for what the future will look like, but I have a number of ideas and a framework in which to think about the next steps in approaching e-commerce and ag retail. The reality is there likely will remain a need for the localized chemical shed and fertilizer blending assets, but as farms increase in size, younger generations take over, on farm storage increases, planning becomes more consistent and many other changes come up – the buying habits and demands of farmers will change and evolve.
Maybe a purely online retail could have merit, but their growth could eventually become anemic. A traditional bricks and mortar retail could be successful, however, I would assume based on overhead costs and shrinking margins/sales (a percentage of business would go online) that it would be tough for them to survive for the long term.
If a retail has a physical offering and an online offering, what might that look like?
Using Services, Information and Tools to Support Customer Experience
Retails have traditionally supported their customers with tools, services, and information. Whether it is agronomic services, equipment to apply crop inputs, planning tools etc.
Now these services are sometimes offered in conjunction with the purchase of crop inputs, but what pricing transparency and technology historically does is unbundles products and services. Whether we are talking in the TV world of cable and Netflix or the Newspaper world and the internet. Transparency changes the product offering. What we will likely see more of is product purchased separately, but then an increase in fee for service offerings from retails, whether that be precision services, agronomy services or otherwise. This may also open doors for other service based companies to increase their reach.
Next, is around tools, service and experience. When we think of service we think in terms of physical services like spreading on fertilizer with equipment or scouting of fields. As technology evolves we need to consider what else this could entail. Tools and services can be digital as well. The tools can range from agronomic calculators in app or on website, virtual agronomy services, program calculators, technology that provides insight in real time in an app, in app “digital twin” modeling, automatically created tank mix guidelines, purchase/payment history and much, much more.
This could go in a number of different directions that make the process of purchasing from the physical store more streamlined as well – in app GPS to let the fertilizer shed know you are leaving your field/farm and your ETA there so that the blend is ready among other opportunities. Digital tools to support the entire business, not just the online portion.
Some questions to identify opportunities to enhance customer experience are:
- How do I make the process of buying less stressful?
- What are/where are customers pain points? Is there opportunity to minimize friction to the buying process?
- How do I ensure the customer has the information to know how he/she should best use the product?
- How do I ensure the customer has access to everything they need, when they need it from their phone/tablet etc?
- What are some non-traditional services I can offer?
o What other tools will help customers?
o How do these tools all work together holistically?
- What are other industries doing?
With machine learning and other artificial intelligence there is going to be many unique technologies that come out that can enhance the customers insight. Let’s use an example of Xarvio from BASF as the framework. This tool can identify weeds, insects, disease and beyond…and it gets better with every use thanks to artificial intelligence. If I am a retailer, can I have an offer of this type of technology to not only support the customer, but also enhance my understanding of what’s happening in the area? Then on top of that be better informed about products to bring in/not bring in to manage inventory levels? There is going to be weather modeling, disease modeling and other technology that will be supportive of this as well – but it’s how the technology gets deployed and leveraged that will determine how successful it will be in making the farmer more money and supporting the retail business as a whole.
The Online and Physical Store Experience
Another opportunity is in the online purchasing portal – all websites have unbelievable access to analytics to gain a better understanding of their customer through their use of their website. How retails optimize this and leverage this is a key differentiator in the online experience. If they are looking to optimize for simplicity and ease of use, customers will value that. Amazon was the first to catch onto this. Physical retail stores are infamously set up to engulf you in the store, to the point of you getting lost and spending more time in the store so that in the end you buy more. Traditional retails thought this would work in online as well, so that’s how they set up their website in the early 2000’s. What happened online with this approach? People got confused and hated it. So they didn’t return. Amazon had a keen insight on this and augmented their website to be simple and easy to use so the experience was smooth. This will be a key in ag retail e-commerce as well. It’s not just about putting up products on a site with a price it’s about the experience!
The way customers shop online gives a lot of insight about their preferences. In building an online presence the successful retailer will learn about their customers and their purchasing behaviour which will allow them to understand more about the needs and happenings of that customer and the area. This can also be supportive of the physical store. Data, I never mentioned it until now, but it will be utilized strategically by the leading retails at length.
Aggregation Theory is a concept I have been fascinated by for about a year now. While it may not have a direct relationship with these types of concepts above, I do believe there is some validity understanding it and where it may have possibilities when it comes to ag and ag retail. I think there will be many the more I reflect on it (that will be a blog at some point!). I highly recommend reading about it here: Aggregation Theory | Stratechery
Physical store retail experiences will need to evolve as well. The possibilities are endless, but it should be set out based on the type of customer you are looking to attract! Does your core customer value seeing crop input products in action? You could set up specific showcases beside the retail location. Do they value digital tools? Make an office at the retail a “Tech Oasis” full of different technology and have an expert there to showcase it, almost show room like. The possibilities are endless, but there is something to be said about having tangible benefits to coming into the office setting even with online presence. Not everything will be able to be purchased online as initially agronomic issues will arise and there will be benefits to having a brand built up as an area “go to retail”.
It’s easy to highlight different opportunities that may be out there, but there are numerous challenges to successful omni-channel implementation – all of which I will not go through.
Here are some of them:
Integration with existing business – When approaching customers from numerous channels, every channel can’t be approached in a silo. There needs to be integration across the entire business, from the executive chairs down through every department; complete alignment. Every staff member working face to face or digital screen to digital screen needs to understand the vision from the customer experience to operational processes to ensure efficient and effective execution of the vision. This isn’t going to be easy. Specifically when one approach (online) can hinder the traditional approach of maximizing services, margins and focusing on controlling that customer relationship. Distribution constraints and needs, customer priorities (online purchases vs. physical purchases), staffing considerations all need to be addressed. This to me is the biggest challenge and one I think will require some thinking and an elegant solution. Again, this all needs to tie in simply for the retail itself and the farm customers.
Inventory Management – Ag Retail doesn’t always have inventory levels at 100% accurate, nor do products get tied to specific customer orders consistently which could end up causing confusion in the early stages of any omni-channel approach. This will need to be in line to avoid concerns. Assessing and implementing processes to manage this will insure it is effectively deployed.
Delivery – Logistical constraints are rampant in the ag input industry and lining up wheels can be difficult. How will delivery to the farm be done? Is there a fee? What does the sale confirmation process look like? Is there minimums to delivery?
Adding value – What does adding value look like in an omni-channel approach? How do you target essentially two different types of customer segments? This is a challenge, however, I do think it’s possible upon laying out a specific company strategy/approach.
Margin Erosion - Disruption in any industry is fickle because the leaders in any business make business decisions based on maximizing profits. If you look at how disruption occurs in the true definition of “disruption” from a Clay Christensen train of thought, the competitors come in at the lower end of the industry taking customers that are traditionally less profitable or targeting product segments that are less lucrative, so businesses ignore them initially or write them off. This is a part of what started with FBN, but slightly different. In order for retails to compete in the online space they are going to be laying their cards out on the table on pricing and they may have to accept tighter margins, at least initially and then look at what the “blended margin” would be between B&M and online. The key to consider is how does this impact the business overall? If you don’t compete online, the pie with which you are competing for shrinks, but your piece of the smaller pie may be larger. Or, can you have a thinner slice of a much bigger pie? This needs to be analyzed in the short and medium term to see what the opportunity will be. Looking at the number of analysis tools out there I think there is a good opportunity to know the market place and understand shifting demands of customers. Companies like Proagrica have done online surveys already, and while their online survey approach has some flaws to it, it is a step in the right direction. Combine that with a more traditional survey like CropLife’s and there is going to be better ideas of where customer preferences are at and how to drive the customer desires of the future.
Technology – Tech is changing, every day! The ability to identify the right technology and effectively combine technology to offer it in a cohesive package will be constantly evolving and present new challenges. This is going to take having the right staff that think integratively and ferociously stay up on what is happening to customer demands, industry shifts and what new technology is out there.
Opportunities within this – In season demand and floor space in distribution warehouses are always going to be a challenge. Suppliers have their plants running and need to move product out into the channel, and the retail needs product to manage in season logistical constraints and there needs to be space for the products constantly. This has costs associated with it. If you look at the number of products a retail handles vs. what stock keeping units (SKU’s) take up the most amount of space you can actually nail it down in western Canada to 3 main culprits taking up the most amount of space, for many retails it could be ~50% of total SKU’s fall under these 3 categories – glyphosate, glufosinate ammonium (Liberty) and canola seed. These products are bulky!
For example, a conventional tote of Liberty, rounding to 450L does approx. 400ac. A pallet of 72 jugs of an average fungicide in the market today will do 3,000ac and upwards of almost 6,000ac! Liberty is used on somewhere between 12,000,000 and 13,000,000ac the last couple years. Does this present an opportunity to focus on getting these products online first and then move towards others later to ensure farmers get them in a timely fashion and present opportunities to manage shed space if the right price is laid out for them? Glyphosate also tends to be commoditized, so margins from a retail perspective aren’t high and farmers use A LOT of it. This may offer a window to ease into the e-commerce space and offer significant learning opportunities.
There are numerous other opportunities and if you want to discuss more please reach out as I love discussing this space.
Suppliers and Other Considerations
I have heard often that suppliers or manufacturers will start going direct to the farmer. Now I can’t comment specifically on whether the strategy will come out of any major supplier or not in North America, but it does occur in other parts of the globe such as Brazil for example. If you look at it in North America though, there are a number of things that retailers do and are well equipped to do that major suppliers may not have expertise in, or are willing to live with giving up small margins dollars to outsource; credit, distribution, relationships with thousands of individuals, capital expenditure on assets such as fertilizer blenders or chemical sheds, a full service portfolio, significant investment into staffing (and other overhead) and other essentials that help support farmers. Manufacturers focus on R&D, demand creation/marketing, and government (registration of products through government bodies, environmental regulations etc) instead of those things listed above, and they do it well. Trends like increasing farm size and mergers that mean well rounded portfolios’s could lead down a road that one day makes a direct to farm approach more viable as well.
With technology and platforms could I see a day where it may make sense for manufacturers to go direct to the farmer? Definitely. But in the short/medium term, 5-10 years, I would assume the chances are slim in Canada. If you have other opinion or thoughts please let me know!
I have been asked if I think an outsourcing approach to e-commerce is viable by two ag retail individuals specifically. I find the question an interesting one. There is an organization out there that will fully support ag retails in developing their e-commerce offering, AgVend, so it is an option.
One story in e-commerce outsourcing that has been in the news lately is around Toys R Us. Toys R Us actually partnered with Amazon in 2000, paying Amazon to run their e-commerce website with very little effort to learn or understand the business of online from within their own organization. After some bumps in their relationship, the deal with terminated around 2006. However, at this point Toys R Us was already behind. They had no understanding, let alone expertise, in the e-commerce space to use for going at the space on their on. This set Toys R us back significantly, having to learn the basics as e-commerce was really starting to take off. Now we know where Toys R Us is…along side Blockbuster and Kodak in the Bankrupt, Disrupted Company Hall of Fame. Was this the only component of Toys R Us’s unraveling? Not a chance, there are always numerous business decisions that move a company closer to the nail in the coffin, but that Amazon agreement played a significant role in getting Toys R Us to where they are today.
The point of this story is to say that if a company does opt in for an outsourcing approach or even a partnership approach, it must ensure it still has individuals heavily involved in the process that get an understanding of what it takes to run a successful e-commerce business – lastly, remember it isn’t just about a site with product to purchase, it needs to be supportive of the business as a whole and integrate more than just a buying experience; it’s about offering an entire business solution experience to customers.
There is going to be challenges in this space, but I know of at least 3 retailers looking to have online options out to farm customers by the 2020 season in conjunction with their B&M offering. Each retail organizations’ approach will be unique and need to consider the constraints that are specific to them and their areas and what their customers are looking for. Sitting on the sidelines in this space presents a risk of being left behind, unable to catch up. Whether you’re a farmer, supplier rep, retailer or other ag industry professional, think about what you would value in an omni-channel retail strategy.
I am always interested in discussing this topic further, please reach out by sending me an email or message me on social media (Twitter & Instagram): @ShaneAgronomy