The Re-Engineering of Ag Retail
Updated: Aug 22, 2019
A passion of mine for anyone that knows me is exploring agriculture. Another passion of mine is the business of retail. Combine these interests together and you get a keen interest in the business of crop input retail in North America. This is a topic I follow closely, and one that I am generally pretty opinionated on (although not always right!). About 8 months ago I wrote an article called “The Future of Ag Retail” which has been one of my more controversial, and most read posts. I think there were some general things that are correct, but much that I missed; not in terms of what has come to fruition today, but what is possible tomorrow. And while I have written on ag retail and it has been very heavily covered over the last year or so, one thing I have noticed in many articles is that some are missing what is going on in these retail trends.
What is Disruption?
“Disruption” might be the most over used word in any industry today. Every industry has disruption occurring. But what is disruption?
Disruption is defined as “disturbance or problems that interrupt an event, activity or process”, but lets dig deeper than that as that’s the historical definition, different from how it is used today in business. When used in business it stems from Clayton Christensen’s 90’s book, The Innovators Dilemma , where he defined it as a way to think about successful companies not just meeting customers’ current needs, but anticipating their unstated or future needs. His theory worked to explain how new organizations with minimal resources were able to enter a market and displace the established system. In Christensen’s writing companies started at the ‘good enough’, low value end of the market to customers that were over served vs. entering at the high value end, such as Tesla or Uber. Today, “disruption” is used more commonly to talk about technology that changes the processes, products, services or business models that allow companies to more cost effectively reach/satisfy a customer need. There are many examples, but Amazon in retail is a typical example that everyone is familiar with.
Disruption is when technology enables businesses to satiate unmet or growing customer demands and expectations that previously weren’t possible to meet, typically at a different price point vs. incumbent organizations.
Ag Retail Will Be Disrupted!
I don’t mean to say the ag retails of today won’t be there tomorrow, but what we will see is new ways that they engage with farmers, sell to farmers, possibly some new players or groups that you wouldn’t have historically considered “retailers” may sell directly to farmers. This isn’t a bad thing. This is the evolution of a business model, creative destruction in action, the bedrock of capitalism. I won’t specifically get into all of that today, but I’d like to discuss this topic more regularly in the future.
Ag Retail Strategy Re-Defined
The first two articles drew a lot of attention in The Western Producer, from the June 13th Western Producer titled “Nutrien targets independents, co-operatives” and from June 27th “FCL refutes Nutrien CEO’s co-op comments” both of which stemmed from comments Nutrien Ag Retail CEO Mike Frank said on an investor call that weren’t positively received:
"Today, our retail competitors are operating in the 1980s model of ag retail, in fact, most co-ops and independents don't have the resources or scale to make the investments needed to serve the growers of today or the future."
Understandably, this didn’t go over so well with Winfield United, Federated Co-op (FCL) and likely any other retail in western Canada (or the USA). But was Mike Frank off? What was he really getting at?
Nutrien envisions a future where there are less retails, servicing more acres per retail, with a backwards integration with their own proprietary manufacturing of products as a starting point. For example, Nutrien has started creating more super sites in western Canada and closing down their smaller locations managing their overhead. If we start looking bigger picture they have also strategically acquired companies/assets to be able to defend against longer term margin erosion and to enable themselves the ability to differentiate and learn along the way, this goes beyond just incremental retail facilities. A prime example is their proprietary product business in Loveland Products Inc. that according to their 2018 Annual Report “provides meaningfully higher margins than vendor brand offerings as we procure and blend the products at seven formulation facilities across the globe.” This is across their generic line of herbicides, fungicides, and insecticides, but also their Proven Seed line in western Canada and their Dyna-Gro seed line in the USA. To top it off, they have also acquired Actagro, a specialty soil and plant health company to amplify the plant nutrition component of their Loveland Product offering. This type of moat can be significant for a business in a sector that is hampered by low margins and high operating costs.
This alone isn’t what Mike Frank was getting at. There is more. Technology. Another area Nutrien has beefed up their stables significantly. For one, the Nutrien CEO Chuck Magro has publicly said that they will be investing $100 million/ yr in their digital initiatives such as their digital platform that includes e-commerce. This is a significant investment that has global reach, which can be tougher for retails to match that aren’t capable of spreading that investment across ~1500+ retail locations globally. Nutrien has also acquired in a few key areas; variable rate technology and digital capabilities in Echelon Ag, Agrible, a strong platform in and of itself that also has roots to traceability and sustainability monitoring tools (something with potential implications for retails down the line) plus the purchase of Waypoint analytical, a soil lab. Roll these three purchases up and you have numerous mechanisms to manage costs at retail locations, collect data, improve forecasting and inventory management and drive farmers to an all-encompassing digital portal that would allow a farmer to buy product, see purchases, streamline communication, check crop health and imagery just as a starting point! Impressive to say the least.
This isn’t meant to say Nutrien has it all figured out, but if we look back at some of the comments from FCL defending their business for example, they centre around capital expenditure in physical assets and acquiring retail locations. This is what Mike Frank was getting at, this is the “old” ag retail game. Still necessary, but only part of what will make a retailer successful looking a decade out. Full credit to FCL, in my opinion, their investments in the western Canadian ag input businesses over the last decade have been excellent in all aspects of the input business. But what Mike Frank is saying is that it’s not purely about assets anymore, or buy whole sale, sell retail, it’s not about services in the traditional sense when we think ag retail; it’s about setting yourself up for the future and digital tools enabling farmer success are a large part of the future of crop inputs in western Canada and beyond. This is why Mike Frank thinks Co-op’s and independents aren’t able to keep up with Nutrien.
E-Commerce in Ag Retail
Zeroing in on e-commerce and taking a look at traditional retail now for a second to put things in perspective. Today about 12% of commerce is done online , peanuts right? Think about the carnage this small percentage has had on traditional bricks and mortar retails; Sears, Toys R Us, Radioshack bankrupt just to name a few, plus many others struggling. When you are dealing with significant overhead costs, a fine line on inventory and tight margins, losing access to a small percentage of customers to online store can hurt.
(Note: I reference traditional consumer retail a few times in this article. I am fully aware they are not one and the same, but I try to draw comparisons where I think there are some similarities)
Lets go back to ag retail now – If 13% of farmers (or 13% of acres better put) begin purchasing online, like what a survey out of the USA from Farm Journal found could happen in 2019, that cuts off access to 13% of the market if you don’t have an online purchasing option which means a retail is attempting to grow while their access to the market is actually shrinking. That’s difficult and hurts profitability in other ways too including synergistic segments of a companies business. Combine this with other technology like “See and Spray” technology, variable rate fungicide (xarvio) and more, and it becomes apparent quickly that in order to be successful as an ag retail in the future, attempting to sell more jugs of chemical becomes a harder ball game to play in and investments in technology are a required starting point.
What "Services" Will Farmers Value and What Services Will Ag Retail Offer?
Looking at this from yet another way, even the “services” a farmer will demand in the future will shift and look slightly different than services of today, leaning more towards digital tools. I recently read a good article on services in ag retail and how that is part of what will limit disruption, and while we differ slightly in our conclusions of whether ag retail will be “disrupted”, I think it is because we have different views on what disruption is because beyond that we agree on many things. The author argues that sound services are required by ag retailers of the future, and I couldn’t agree more. If we look at the grocery retail for second and go back 10-15 years, “services” were essentially how many people were working to direct customers or get customers through the check out, did they offer a fresh deli, did they bag your groceries and offer help out to where we are today; stores offer self check out (or in the case of Amazon Go, no check out) online shopping, delivery and in store pickup as well as entire dining areas for a “fast casual” dining experience. The same grocery stores are still behemoths, or bigger, generally speaking, but they have evolved their online and in store services to match the new demands of their customers and leveraged technology to deliver on this.
Shifting back to ag retail, today if we look at services such as evening fertilizer blending, just in time chemical delivery and crop scouting, they are pivotal to the success of ag retails, but the demands will evolve. These demands may include access to tools like an AGvisorPRO platform, online/in app purchasing/business tools or something more complex like direct to phone messages from sensors alerting of the specific fields of a farmers that are currently experiencing an insect outbreak with the exact fields/areas, insect and recommended chemical needs to the litre with the option to select “buy” or “learn more”, just as one example.
Technology Enabling New Pricing Mechanisms
It is technology that enables these types of services. What all of these capabilities facilitate, data capture, online platforms and more, is where things really change the game. Outcome based pricing of crop inputs. Which can go several ways, but here are a couple basic examples:
1. Farmer has a field where they are considering using a fungicide. Based on the year, conditions etc the retailer, manufacturer or otherwise would say “We guarantee a 4bu/ac increase if you use product xyz”. You would pay a small fee to do so, and if the yield bump didn’t come to fruition you would get your money back. If you achieved the 4bu bump, then you would have mitigated risk and achieved a superior outcome.
2. Farmer “locks” in a specific yield that they would like at the beginning of the year, and the company with their digital tools, technology and platform will recommend give specific products at specific rates and specific times in conjunction with different practices, all taking into account different weather, biotic and abiotic stresses etc. This will help enable the farmer to achieve that specific yield. Much like an agronomist would do today, except using specific data driven decisions based on real time information (Note: an agronomist still necessary to deploy this type of offering).
This has come to the forefront of late because of media coverage of Bayer and Climate Corp talking about their digitally enabled capabilities and what the future of pricing their products could look like. The future of Bayer doing this could really change the landscape of ag retail as this gives them an avenue to go direct to the customer. I won’t dive into it in this article, but this type of capability shifts many things in the crop input world; from grower/retail programming, to emphasis on digital platforms to product strategy, insurance, R&D and more IF it were to be a route taken by Bayer or any other manufacturer. (Note: Outcome based pricing has been talked about in Healthcare for a number of years too)
Bayer/Climate Corp aren’t the only ones looking at outcome based pricing, others are equipped to do so, such as Farmers Business Network, but Nutrien is equipped and looking to offer. Chuck Magro has been quoted as saying “what we’re preparing to do is underwrite the risk for our farm customers, which is something that has never been done in our company or in the agricultural industry today.” This type of offering is extremely complex and requires vast amounts of data to be able to underwrite and be confident that the recommendation achieves the outcome that was suggested. When you look at the types of organizations that will be capable of this, you will continually come back to the ones with size and scale.
Does This Mean Small Retailers Will Be No More?
I would argue no, it just makes things more difficult. It means they need a different and focused strategy looking out longer term. When it comes to having the type of technology required to offer something like outcome based pricing, or having the type of capabilities that enable e-commerce you can go about it 3 different ways:
1. Build in house: an expensive proposition for smaller retailers that requires very specific expertise within the organization.
2. Acquire: another expensive route, but one that also gains you access to outside expertise and gives you a proprietary or unique asset.
3. Partnership: a strategic approach where an organization will look across the landscape and identify companies that have the specific tools and products they need and obtain an agreement to work together.
Nutrien has opted to do all 3 of these, spending dollars in house, acquiring many organizations, and partnering with such organizations as Agrian. For many retailers, especially independents the most viable option is partnering, which brings me back to the first article I linked to which had commentary from Winfield United Canada GM Greg McDonald, and while Greg didn’t allude to this directly in the article, I assume it is part of what he was getting at with his comments. If you look beyond Nutrien into who is investing heavily into the future of farmers and ag retailing in North America, it’s Winfield United (Land' O Lakes). There are numerous retails in western Canada linked up with Winfield United plus a huge number in the USA. Winfield has committed to developing digital platforms in their R7 and Data Silo tools that have numerous connections to other platforms, sensors and the capabilities similar to other industry heavy hitters like Climate Field View or Farmers Edge. Next, they have in house developed an “e-business” platform that gives their partner retailers the ability to offer e-commerce, but also offer an entire online business experience. Lastly, they also have proprietary product lines, again similar to the strategy of Nutrien and their own tools to be involved in sustainability. So when Greg says that independents will be able to compete in the longer term, I’d say he’s accurate that they will have access to tools that are going to be similar to that of large organizations like Nutrien.
What about small or medium sized organization that do not have access to those types of tools?
Find the right partners. When I look across the landscape there are numerous specialty organizations that have the capabilities to help deliver the necessary tools so a retailer can offer their farm customer of the future the same high end, tech and digitally enabled experience as everyone else. Organizations like AgVend, who have the e-commerce infrastructure and offer their services to ag retails, or data driven organizations like Farmers Edge who are accruing mass amounts of data and can help offer a similar outcome based offering and more to ag retails. When it comes to having access to specific products there are lots of smaller organizations out there today to partner with that can offer differentiation and potential exclusivity of unique, value added products, like microbials. This isn’t as simple as just partnering either; there is a lot of complexity to ingraining these types of offerings into the entire business strategy and culture of the organization. It changes everything a retail is historically optimized for and that needs to be taken into consideration when partnering and deploying any sort of digital or differentiated product strategy. Identifying ways to offer the services and technology to farm customers in a way that is unique and synergistic to the business is a core target. A more broad approach to better equip your organization with vast connections would be to partner with an ag accelerator or incubator creating a win-win scenario between the accelerator (insight and access to farm customers) and the retailer (expertise from the accelerator or company leaders within). Lastly, the need for good people can’t be ignored. There will still be a people component, and strong individuals will be that much more important in the future; talent will be a significant differentiator because of how these tools will enable the best people to be that much more efficient with their time.
Conclusion: Evolution + Investment is Necessary
Today across the North American landscape there isn’t a lot of variance in the ag retail business models; similar assets, similar product offerings and similar go-to-market strategies, but with subtle differences. If we look to the future, I think the ag retail landscape will look much different in what retails offer and how they go about offering it. Much like grocery where you have minimalist discount retailers like Aldi and Lidl that offer little to no services with limited SKU options to higher end offerings like Whole Foods that have online shopping, delivery, in-store pick up and otherwise. I think this is how the ag retail landscape will look too, offering choice for the farmer of the future. In order to get there, retails need to be focused on what their customers will want, identify the tools required to give them that and invest in the technology and their people to get there. It won’t be easy, but it’s necessary.