The Shopify of Ag Retail
There is continual reference towards “The Amazon of Ag” or “Amazon of Crop Inputs” in the ag marketplace. But as my friend Matt Coutts pointed out in his well written post “The Amazon of Agriculture”, the reality of becoming a true “Amazon” is exceptionally complex – it’s not just a website with products, it’s a living business organism, constantly evolving it’s infrastructure and funding it’s growth in ways that challenge the status quo plus a voracious focus on the customer that is hard to match. There are companies out there that Matt hints at that are executing on portions of what makes Amazon great, but the reality is that there are challenges to delivering on it on a macro level.
Matt also touches on Amazon’s 3rd Party business driving large portions of their revenue and profitability:
“It is easy to argue that one would not want to replicate Amazon, as their value creation is arguably lead by their North American 3P business and Amazon Web Services.”
Greater than 50% of their revenue comes from being a platform, aggregating demand and facilitating commerce between sellers and consumers.
While Amazon has became the “go-to” spot for consumers, agriculture brings different challenges. Given the nature of the ag retail space: business and relationship driven, need for large physical product distribution and time challenges in season, we likely will continue to see various input retails remain successful in their given geographies. With that said we will see the demand for online touch points and purchases continue to grow amongst farmers moving forward, which means there is an opening for a business that enables that for retails.
What is Shopify?
There is a successful business in the consumer market place who’s business model has a fit within the ag input space to really drive and engage farmer experience and value derived from their ag retails.
Instead of operating its own centralized marketplace where it sells products to customers itself, Shopify provides a platform for small merchants to build virtual storefronts and sell items on their own personally built websites, with all the features and functions necessary to transact online. At the core of its business, Shopify provides an easy way for a company to manage a retail business from one central location online, tracking sales and inventory, helping fulfill orders, and helping customers create their own websites. Shopify charges a subscription fee to use its service, offering several different tiers suitable for businesses of all sizes. Its 1 million+ merchants range from one-person entrepreneurs with a single product all the way up to multibillion-dollar brands with hundreds of products. They earn revenue through a recurring revenue model that every business pays to continually host their store on the platform. They earn additional revenue through high value upsells or features, like payment processing or shipping services.
Shopify is a platform. They do not own inventory or own physical store. They provide the digital infrastructure to enable physical stores to create an online footprint, with all the tools necessary to do so. Or allow an idea to turn into a store, without a physical footprint. They act as a conduit between small businesses and online app service providers and customers in order to facilitate shopping and ultimately transactions.
Sounds relevant to agriculture, doesn’t it?
Ag Market Place Dynamics
In ag retail there is currently somewhere around 10,000 bricks and mortar retail locations within North America. This serves over 2,000,000 farmers in North America. Many of these retails do not have online capabilities to transact or inform a customer in a meaningful way outside of a basic website.
If we look at the data today, the majority of transactions in ag retail occur through a physical store or offline interaction. However, this is changing. Farm Journal did an online survey in 2019 that stated about 12% of customers were interested in purchasing crop inputs online. Nutrien Ag Solutions, the largest ag retailer globally, reinforced this number with their 2019 annual report stating that 11.5% of purchases occurred through their own online digital portal with the aspirations of >50% occurring there by 2023.
Attempting to look at things through a consumer lens (which always has inherent short comings when used as a metaphor for ag, but provides context) using Home Depot as an example, they have grown significantly online the last number of years with about 8% of their transactions occurring online and 50% of those transactions being picked up in store. The kicker is over 60% of their sales in total start online! Imagine if they didn’t have a digital store front to engage and inform the customer? Of course agriculture is not B2C (business to consumer), it’s closer to B2B (business to business), but I think we will see trends in the consumer space closely resemble that of ag retail over time. There will continue to be the desire for farmers to have close personal relationships with their retailer, however, the trend is towards having an avenue that augments the personal and physical relationship.
With all of this said – building digital store fronts is not a core competency of any ag retailer. Their focus and strength is on strategic asset and efficient logistics, customer service and marketplace/geographic and technical knowledge. These value propositions will continue to be delivered through ag retailers in the future too. But, they will be able to enhance all aspects of the above through a digital footprint.
Who’s core competency is it then?
This is where the “Shopify” of agriculture comes in. A specialist in ag retail and digital store front know-how that can deliver a “software as a service” to the thousands of agricultural retails in North America like Shopify delivers to millions of small businesses.
Building out the infrastructure that supports ag retails has the potential to be a powerful business proposition.
The dynamics that change with an ag specific model would be that they do not necessarily need to outsource all app development like Shopify does. Shopify has so many types of businesses on it, they need industry specific tools in many cases, and in house development just isn’t realistic. In ag, bringing the industry expertise enables the ability to build out all of the tools necessary for ag retailers and for farmers.
This brings us to the question of, who can be the “Shopify of Ag”?
Some of the players today in the ag retail space include organizations like AgVend, CommoditAg, Agroy, Agrellus and more. They have subtle differences between them, but ultimately they can build out custom web services like Shopify. These are all relatively new players with the majority being founded in the last 3-4 years. AgVend is one that has an emphasis towards a Shopify like business model with their portal product offerings.
Even in the grain space you have organizations like Bushel and FarmBucks, enabling similar value proposition to incumbent companies.
That brings us to the business model that a Shopify of Ag can run. I want to focus on the one aspect of a company I am familiar with in the space and that’s AgVend. They have different levels and layers of service to be able to support retails with digital infrastructure to support the retails overall go-to-market strategy:
Each of these offerings operates as “software as a service” or annual recurring revenue to support continued progress of the product and support for the retailer. This will support the back end integration, online merchandise, credit integrations, customer communications and more. The opportunities within this for retails excite me.
The beauty of this business model is that it is relatively capital light. AgVend doesn’t need to take a position on the product, they are simply supporting the facilitation of a sale through an online channel and building out the tools to further enhance this experience for the customer and the retailer – saving the retailer from having to go outside their comfort zone.
Growth Areas in Future
We have seen during the COVID-19 pandemic that demand for these types of services in North America has sky rocketed from retailers. The farmer was already moving towards a desire for more online business interaction, but COVID has significantly sped up the desire.
For AgVend and others that are similar, the business won’t stop at facilitation and mild iterations. Building out within their platform and tools to further drive inventory management systems, logistics apps or integration with farm management systems and digital ag companies, digital grain companies and more will come from this. For a deeper dive on other ways they can grow, check out my Bonus Edition of Upstream Ag Insights that overviews marketplace business models in farming.
This was an introduction post on this topic. The progress of this model (or more aptly stated, alternate route) is something I’ll follow up with in another post: the aggregation of demand in ag and how an organization like AgVend could grow in the future and what organizations are set up today, aggregating demand, and have the opportunity to build a marketplace like platform. The best part is that there are other technologies that could be layered on within this business, like blockchain, that enables some unique product build outs providing value to other industry verticals and ultimately farmers.
When people invest in Shopify, they are investing in the future of small businesses and an online foot print. When you look at companies like AgVend or CommoditAg building out their footprint and service offering, it shows they are investing in the future of ag retail and the vision that the future of ag retail means engaging farm customers from not just a physical perspective, but an online perspective too. These types of organizations have a significant chance at success by instilling themselves as digital infrastructure that enables farmers and retailers to all become more successful.