Distribution: The Next Ag Battleground?
As 2018 gets into full swing for the ag market, the dust is finally settling on consolidation. Kicking off the new year, the industry said good-bye to such long-time names as Agrium, DuPont Crop Protection, and PotashCorp and hello to Nutrien, Syngenta/ChemChina, and DowDuPont. Still to be completed is the Bayer and Monsanto merger, but for the most part, 2018 marks the end for this cycle of large supplier get-togethers.
So what comes next? Very possibly, these now super-sized corporations could begin looking at the distribution game.
Although this might seem a bit far-fetched at the moment, I’ve seen this kind of pattern play out in another industry I used to cover: Soft drinks. Here’s some background for context.
Back in the mid-1980s, Coca-Cola and Pepsi were locked in a vicious battle for market share. At the time, Dr Pepper and 7UP were the No. 3 and 4 companies in the industry. Pepsi tried to buy 7UP. Coke countered by trying to purchase Dr Pepper. Neither went through because the Federal Trade Commission (FTC) stepped in and said these deals would concentrate too much of the market into too few corporate hands.
Effectively blocked from making further “big” acquisitions to build market share, Coke and Pepsi decided to opt for a new way to grow their businesses/market share and keep shareholders happy: Distribution.
Since their inception, soft drink bottlers (which formulated and distributed products) had been independent dealers, primarily owned by a groups of families. However, throughout the 1980s, Coke quickly purchased several large bottling operations, forming Coca-Cola Enterprises. Pepsi followed, forming the Pepsi-Cola Bottling Group for the same purpose. By the start of the 2000s, both companies directly owned approximately 90% of their respective distribution networks. And ultimately, controlling distribution meant Coke and Pepsi now had a “captive outlet” for their base products, concentrates, and increased their overall marketplace presence without having to “buy up” competitors.
Can you see some parallels here to what’s going on in agriculture today? At this point, it seems as if the large suppliers are as big as they are likely to be allowed to get without some regulatory body such as the FTC or European Commission stepping in and saying “no.” How can these companies then increase their market shares (and shareholder values) without growing their businesses in large consolidation chunks? Branching out into the ag retail channel would seem to be the next logical step.
If I had to guess, I would think we are probably three years away from this trend possibly starting (primarily because these newly-combined companies will spend the next few years fine-tuning their merger dynamics). But after that, things could get very interesting indeed …