Reinventing the rules of ag retail Part I For those who thrive on change, agribusiness is clearly the place to be. Consolidation is accelerating, profit margins are evaporating, pricing structures are crumbling and competition is escalating.

There is no safe haven. Every sector of the industry is being redefined at revolutionary - rather than evolutionary - speed.

Last year, BASF acquired American Cyanamid from American Home Products. In earlier consolidations, Stauffer and ICI formed Zeneca Agrochemicals, while Sandoz and Ciba-Geigy merged into Novartis. In November, Zeneca and Novartis became Syngenta. Rhone-Poulenc Agro and AgrEvo formed Aventis Crop Science in early 2000, but Aventis has announced it may divest its ag chem business sometime this year.

In the seed sector, Pioneer went to DuPont, DeKalb folded into Monsanto and Mycogen was swallowed by DowAgroSciences. More recently, Dow absorbed Cargill Hybrid Seeds into the Mycogen line.

Still with us? Cooperatives also joined the fray. The latest move was the formation of Agriliance, an agronomy marketing joint venture representing former names Wilfarm, Cenex Land O'Lakes Agronomy Company, Terra, Countrymark and Farmland Crop Protection.

"What we are doing is seeking critical mass on a world level to generate savings for our customers," says Bob Broich, vice president of Agriliance. "It's all about maintaining a least-cost, customer-focused distribution network."

Survival tactics. For chemical companies, however, consolidation is all about immediate survival. "In the past, manufacturers could extract about $25 per acre from the marketplace," says Rick Patton, marketing manager for customer strategy at BASF. "But when Roundup Ready technology hit, it reduced that price point to about $12 per acre. That was a shock - half the value just got sucked out. So you have to restructure the organization."

According to Paul Kindinger, president and CEO of the Agricultural Retailers Association, restructuring also is occurring at the retail level.

"Just a few years ago," Kindinger says, "a retailer that grossed $1 million to $2 million was a viable unit. Now it takes two or three times that much. So we are seeing dramatic change in ownership patterns. There may be the same number of outlets in a given region, but there are fewer owners. Sheer size and volume dictates the ability to compete."

Joint efforts. To be sure, industry consolidation is changing the way farm products are distributed. And Gary Aagesen, director of northern region sales for Bayer Corporation, believes the changes can be positive. On the top end, he says, mergers and buyouts reduce the number of product contacts for distributors. At the same time, regional conglomerates like United Agriproducts and Agriliance further streamline the process. And new business models also contribute to base efficiency.

"Efficiency is not always a function of mergers and buyouts," Aagesen explains. "Joint ventures and working agreements also have an effect. For example, Epic is a Bayer product, but we share the marketing with Aventis. The combination increases the sales force in pure numbers, helps assure market share and spreads the risk. And if you work jointly, you remove a stock-keeping unit from the distributor's inventory."

For retailers, Paul Kindinger also sees a positive side of consolidation.

"Seed companies are being bought by chemical companies," he says. "As a result, the distribution of seed is shifting - it's becoming integrated at the dealer level. Last fall I toured extensively, and every retailer I visited was either in the seed distribution business or considering a proposal to get into it. Five years ago hardly anyone was doing that."

Internet influence. Despite those pluses, a single technological innovation is responsible for much of the pressure on profit margins, and that is the Internet. Product pricing is now transparent, and that has transformed farmers into better buyers than ever before.

"The Internet is not going to allow the retailer to bundle goods and services and mask the price and/or cost of each component," Aagesen says. "For example, we surveyed retailers and learned that most charge $4.50 to $5.00 per acre for product application. But the actual cost is more like $7.00 per acre. Product price used to subsidize that, but no longer. Retailers will have to separate product price from service and place a margin on those services that is realistic to cost."

By "unbundling" products and services, says Steve Barwick, vice president of corporate marketing and operations at Growmark Inc., retailers can better serve their clients. Farmers' expectations are changing, he says. Some shop only for product price without service, some want full service and others want a combination.

"We can no longer include all services in a single product package," Barwick says. "Farmers' expectations have been influenced by the Internet, and that will not change. To be successful, retailers must be able to tell their value story. Determine exactly how much it costs for application, scouting and soil sampling, and charge for that. There also is real value in return privileges and complaint handling. Those are all things the Internet can't do. And never forget the value of personal contact and trust."

Retailer support. Be assured, too, that product manufacturers are ready to support the retailer-farmer relationship. Patton's company, for example, has developed a clear product performance policy. If the farmer purchased the product on the Internet, and the seller does not accompany the grower on the service call, BASF will not service that particular performance issue.

"Another thing we've done is focus more closely on risk management," Patton says. "With our Performance Guard program, we offer a risk management tool just like crop insurance or production contracts - if a farmer uses a prescribed list of products at labeled rates, we warrant performance.

"This accomplishes two things. If there is a problem, it reduces tension between the grower and the dealer. At the same time, it's a cash flow tool for the farmer. He can take that agreement to his banker and show that there is a ceiling on his costs. It's a form of risk management, and farmers are really focused on that."

Work the Web. While in some ways the Internet is like an evil twin, it also is a retailer's best friend. The Internet can boost efficiency and help provide a higher level of service.

To increase efficiency, Paul Kindinger says the first step is to integrate accounting, ordering and inventory systems to avoid duplication. Then maintain constant communication with manufacturers and distributors.

The service issue is even more critical. "Let's face it," Kindinger says. "We are operating in a mature market, and that means competition will be fierce, and in all likelihood margins will not increase.

"So retailers need to embrace technology and immediately form an e-commerce strategy. Get a Web page and set it up so that your customers can place orders whenever it's convenient for them. Then, get creative and use the Internet to get even closer to your customers. Help them gain knowledge. Offer information that will help them with management and marketing decisions. Get a digital camera so your field scouts can photograph a pest outbreak, post it on the Net and start offering advice. Use the Internet for education and training. Save your customers time, save them money and make it convenient.

"The industry is changing - so change with it. Use technology to implement a business strategy that shows your customers that you offer more value than anyone else."

How to prepare for tomorrow's competition Be aware of trends that may offer new opportunities. For example, if farmers in your area are ever required to produce nutrient management plans, be ready to provide consulting and recordkeeping services. Also, as farm size increases, so do labor requirements. Position custom work as a viable and efficient alternative to hiring more labor.

Take industry consolidation personally. Efficiency is the driver, so jump on board and streamline purchasing channels, inventory management, accounting procedures and labor requirements. Automate everything that can be automated. Also investigate possibilities for joint ventures, strategic alliances and acquisitions - just like the big companies are doing.

Recognize that your customers are changing. Some will require fewer services; others will want traditional services. So "unbundle" pricing strategies and determine exactly how much it costs to provide services like product application, field scouting, soil sampling - even complaint handling. Then tailor the product-service combination for each situation.

Growth involves much more than covering additional acres or selling more products. Investigate new growth areas like financing, agronomic consulting or crop marketing services. And don't forget data-intensive technologies. Particularly with precision farming practices, data management and interpretation are areas that many farmers need help with.

Approach the Internet as your friend. Get a site up and running and go beyond providing basic information. Make the site an active business where customers can place orders whenever it is convenient for them to do so.

Never underestimate the value of personal contact and trust. It is the only aspect of business that will remain unchanged.

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© 2007 Penton Media, Inc.