A Fuel And His Money
September 12, 2008
Are almost one-in-three ag retailers afraid to make money? Based upon the data in the latest CropLife® 100 survey, it seems like this is the case — particularly when it comes to addressing higher fuel prices.
As everyone associated with the ag retail business is aware, two of the biggest challenges facing the industry today are tighter margins on crop protection products and higher fuel costs. Both issues ranked in the top concerns for retailers polled in our annual CropLife 100 survey
And while market dynamics may prevent retailers from recouping crop protection sales, fuel prices should be another matter.
Or so you would think. In the 2005 CropLife 100 survey, I was somewhat surprised to find that although many retailers were charging grower-customers more to recover their fuel costs, 24% were not. Of course, given that higher fuel prices were then a relatively recent event, I thought some of these reluctant retailers were simply adjusting more slowly to the market and that the 2006 percentages would reflect this.
I was wrong. In the 2006 survey, while 99% of retailers said higher fuel prices were having a negative affect on their bottom lines, the percentage not charging more to recoup these losses increased to 31%. Even worse, approximately half of this “no recovery” group said they weren’t exploring alternative energy sources such as the use of biofuels either. For these retailers, the fear of losing grower-customers/market share is apparently greater than the reality of losing money. Take it from me, this is a bad path to be on and can’t be sustained. I’ve seen it before.
As I’ve pointed out in prior columns, I used to cover the soft drink trade 20 years ago. Back then, there were roughly 1,200 small soft drink bottlers scattered across the country, all fighting for sales and market share. In this climate, margins were tight as raw material costs steadily rose, but most bottlers were unwilling to raise their prices because they were afraid to lose any bit of precious market share to competitors that wouldn’t follow suit.
Year after year, I watched as these bottlers had good market share numbers, but kept losing money. The running joke in the industry became that if bottlers ran the post office, there would still be nickel stamps. Last time I checked, there were fewer than 500 bottlers left, with virtually all of the “good market share/losing money” ones forced to sell out to other companies.
While I’m confident that ag retailers can avoid following a similar path, I am still concerned. After two years of relative quiet, consolidation returned in 2006, with seven companies exiting the CropLife 100. Although I’m certain there were many factors that led these retailers to sell their businesses, losing money for a couple of years in a row was probably involved. Looking back to see how many of these retailers were recovering fuel costs in 2005, more than half (57%) weren’t. Now they’re gone. Is this just a coincidence?
Everyone is aware that fuel prices are high, and likely to stay that way. Given this, I’m sure most grower-customers would understand a slight increase in their custom application bills without bolting to the nearest competitor. For long-term survival, retailers charging more for this important cost of doing business only makes cents.