As many of you know, I have spent a fair amount of time over the past year learning about and discussing e-commerce with a number of industry audiences and journalists. Initially, the speaking requests were prompted by some of my published comments relating to the expansion and marketing efforts of Farmers Business Network (FBN). More recently the requests have been prompted by the ongoing proliferation of e-commerce platforms being rolled out including several that have been initiated from within the traditional distribution channel. E-commerce, whether originating from within or outside traditional boundaries, is on the minds of many folks these days.
So does all of this interest in e-commerce signal a big new trend, or, will e-commerce become yet another ‘flash in the pan’ poised to do little more than temporarily distract us from more important matters? While pondering this question I recently came across a provocative little blurb on LinkedIn stating, “Incumbents often find themselves on the wrong side of big trends. Established organizations often struggle to mount a timely response to them. Getting ahead of trends is the single most important strategic choice you can make.” Those three sentences struck a chord with me, but I quickly reminded myself that it is not all that easy to spot big new trends early on or most of us would have invested in Microsoft or Amazon back in their early days! Instead, our past experiences have taught us that there are far more overly-hyped flashes in the pan than big new trends in agriculture. It is this ever-growing list of supposed big new trends that never fully panned out coupled with our perfectly normal desire to preserve long-standing business models that makes us skeptical, defensive, and yes…even vulnerable.
While I do not think e-commerce is going to single-handedly transform the crop input distribution channel, my instincts tell me our future views on e-commerce will evolve rapidly. I suspect the majority of retailers who find themselves resisting e-commerce at this juncture will soon find themselves embracing it…and most likely out of necessity. As a wise (beyond his years) retailer told me after proof-reading this note, “There is no need to get angry or emotional about this. There is no one to blame and there is no bad guy here. This is just business evolution. We need to look at the world from our customer’s eyes and we will realize this trend is not going away and we can never go back to how we were.” I agree!
I believe e-commerce will carve out a loyal following of farm customer participants and probably sooner than later. I expect that loyal following will be primarily made up of larger, more sophisticated and more self-sufficient farming operations. These more “transactional” farming operations will be less concerned about breaking ties with traditional retailers who currently provide application services and/or crop management expertise as the centerpiece(s) of their product/service bundle. While the great majority of these farming operations will likely never fully abandon their traditional retail suppliers, I suspect they will become increasingly more proficient at “cutting the heart out of the melon” and leaving the scraps to those who cannot figure out new and important ways to add (or defend existing) value, improve their customer’s shopping convenience and buying experiences, or properly segment and price their product and service offerings to fit the needs of different customers. For these more “transactional” farming operations, e-commerce is not merely a tool that offers greater price transparency and shopping convenience, it is a tool that greatly expands their list of potential suppliers.
Meanwhile the more “traditional” farming operations will continue to require the traditional services which typically support the gross margins necessary to cover the costs that such services generate. If this was a growing part of the market traditional retailers could easily ignore the more transactional types. However it is an indisputable fact that traditional farming operations are shrinking in number as the years roll by. Worse yet, as some of these traditional farming operations gain the necessary scale to compete with others for land the vast majority gradually start migrating in the direction of becoming more “transactional” themselves.
It will come as no surprise to any of you that “transactional” farming operations have fewer (or at least significantly altered) service requirements which tend to generate insufficient gross margins to fund traditional operating costs. It should also come as no surprise that these transactional customers are growing in number and in acres farmed. Ignoring this steadily growing group of farm customers may appear to have little impact day-to-day or even year-to-year, but doing so is ignoring a steadily growing portion of the overall market. Eventually a tipping point will be reached.
The majority of traditional retailers have either avoided or struggled mightily to serve transactional customers. The most frequent reasons given are the need to maintain pricing consistency with existing customers and to maintain peace and harmony with key employees, particularly crop advisers. Only a small handful of ag retailers have successfully segmented their pricing along unambiguous service lines, making it possible to better span the range of “traditional” and “transactional” customers while rightsizing their offerings and operating costs to fit these varying customer’s needs. While this is not easy to do it has been done. E-commerce might well make getting it done now, unavoidable.
Whether or not e-commerce will become a big new trend is really not what matters. What does matter is that a combination of economic pressures, demographic changes, access to technology, and the need for cost containment down on the farm is driving change and will further concentrate the land in the hands of fewer farmers. This combined with the looming possibility that traditional manufacturer rebate programs could be scaled back or significantly altered as a result of the mega-mergers that have recently taken place may force significant realignment across the crop input distribution channel. While we have no way of knowing exactly how manufacturer rebate programs will evolve it is probably safe to assume that equal to greater rebates will not likely be generated on current sales volumes. A no growth strategy is as it has always been, a slow death strategy.
Today most of us are focused on the price transparency impacts of e-commerce and find ourselves responding defensively. Over time it is likely the most successful retailers will come to embrace e-commerce as a means to access a larger portion of the overall market while simultaneously reducing their operating costs as a percentage of their overall sales revenues. They’ll be mindful that those who earlier tip-toed into the “cash and carry” world found it exceedingly difficult to produce an operating margin when few, if any, operating costs were removed. It will be no easier using e-commerce as a transaction platform if operating costs are not simultaneously reduced to compensate. Will e-commerce, by itself, be responsible for all of this? Certainly not, but e-commerce may well become the catalyst that forces us to adopt a more streamlined way of doing business while simultaneously forcing us to identify and remove unsustainable operating costs. How do we know? Because that is exactly what e-commerce is doing in nearly every other sector of the economy.
Farmer purchasing habits and preferences (note I intentionally did not say “loyalties“) are evolving…and will continue to do so. Retailers who cling to serving a gradually diminishing segment of the overall market will find it increasingly difficult to spread their operating costs over a dwindling number of customers and acres. Meanwhile, those who attempt a higher-tech form of “cash and carry” without making necessary operational adjustments will be migrating from a slow growth strategy to a sudden death strategy. While it may sound like we are “damned if we do” or “damned if we don’t,” that’s really not the case. All of this simply means ag retailers are going to be forced to figure out how to serve a larger portion of the overall market, to provide something of value to every customer, and to remain viable while doing so. Having e-commerce capability and serving more of the overall market is a piece, but only a piece, of the answer. The remaining (and equally important) parts are creating “new value” while steadily improving operating and capital efficiency by removing unsustainable operating costs from retail operations. As another of my good friends recently opined, “All of this to me comes down to a huge opportunity to execute.”
We should all remember that e-commerce did not invent market disruption nor will it be the final word on the subject. Most successful retailers became successful while being disruptors themselves, altering the former status quo. We simply need to return to the days when we were hungry and operated like our survival was at stake…because it always is. While many will initially view e-commerce as a flash in the pan, those with brightest futures will view it as a sheep dressed in wolves clothing waiting to be shorn by those who recognize it for what it is. I am optimistic that the “best of the best” will embrace e-commerce and by doing so will continue to be successful by serving more customers, more efficiently.