Who you rely on for products and services may never be the same again.
This is the first story in a series about how distribution channels in agriculture are changing and what those changes will mean for you as a buyer.
For years farmers across the Midwest have purchased farm inputs such as seed, chemicals, fertilizer and machinery from their local dealers. And what was delivered to one farm looked much the same as what was delivered to the next. Same price tag. Same service. Same delivery truck. Same turnaround time.
In the past two years, agribusiness has begun to realize that so much sameness doesn't work anymore. It is rethinking the old product distribution channel used to bring products and services to market. Whereas in the past, product moved from manufacturer to distributor to dealer to customer, in the future it may go directly from the manufacturer to the customer or take a variety of other paths to reach the buyer's door.
Experts say the change in distribution channels should mean good things for buyers. In fact, they refer to this time as the "golden age of the buyer," in which customers decide what products and services they want, when they want them and at what cost.
"Those who are buying today will find that more and more sellers will be increasingly courting their business," says Dr. Mike Boehlje, Purdue agricultural economist who spoke on the topic of changing distribution channels at the annual agribusiness conference at Purdue University. "So it is going to be a real plus for those on the purchasing side."
Forces of change.
Four factors are driving the change in product distribution channels. The first is a fragmenting customer base. Farmers cannot be lumped into one market category anymore. Differences exist in their size of operation, type of enterprise, buying behavior and income.
For instance, since 1982, the number of farms with greater than $500,000 in gross sales has increased dramatically, according to a recent Purdue survey of 1,700 producers from across the U.S. "We are quickly moving to 90/10 agriculture, where 10% of the farmers account for 90% of the gross sales and therefore 90% of the input purchases in this industry," Boehlje says. That 10% probably will have product and services needs that are much different than those of farmers with a smaller number of acres.
A second factor driving new distribution channels is higher customer expectations. Farmers today have higher standards of performance as a result of the increasing scale of operations, market pressures and competitive product offerings, according to Dr. Jay Akridge, professor and associate director of Purdue's Center for Agricultural Business. For example, the same survey found that 20% of farmers shop for price, 18% shop for convenience, 15% buy based on product performance, and the balance want all those things.
"They want price, service, information and products that perform," Akridge says. "And they are willing to make trade-offs and pay for extra value if it delivers on their farm business. This group also will be quick to change suppliers if they are not getting the value they want."
A third factor is technology. One area is logistics technology to improve the transport of goods from one place to another. "Ten years ago, you would hear people talk about just-in-time inventory," says Dr. Frank Dooley, associate professor at Purdue's Center for Agricultural Business. "Today we hear about Global Positioning Systems, bar coding, which is almost standard practice everywhere, and supply chain management."
These systems will allow input supply firms to do a better job of managing inventories to ensure that product is delivered on time. For example, if a company transports seed from another sales region, the sales rep can use GPS to track when the truck will arrive and even give coordinates to thefarmer's field.Some chemical companies already are using a system of electroni c sensors and satellites to track product levels in bulk tanks. The sensors take a daily reading of the inventory and send the information to the supplier by way of satellite signals.
Technology also has improved communications. The development of the Internet, Intranet (Web pages for company use) and expanding bandwidths have improved the speed at which information can be communicated among customers, manufacturers and suppliers. "Just think. Four years ago, virtually no firms had a Web page. Now, 79% have them," says Dooley, referring to another recent Purdue survey of agribusiness professionals. Among farmers, Internet access has doubled in the last two years - from 13 to 29% - and the growth is expected to continue.
The fourth factor driving new distribution channels is increased competition among suppliers. The product performance gap is narrowing, meaning the product sold by one company is likely to perform about the same as that of another. At the same time, new players, like telemarketers and Internet companies, are entering the market offering you the opportunity to buy products directly from the manufacturer at a lower cost than what your retailer may be able to quote you.
All these forces are putting pressure on manufacturers and resellers to come up with new ways to get products and services to you better, faster and cheaper or else lose you to someone else.
So what might the new product distribution channels look like? One channel, and perhaps the most visible one, is the Internet. With the advent of company Web sites, farmers can log on and order products direct from the manufacturer day or night with a click of a mouse and the touch of a few keystrokes without ever having to talk to the middleman.
Ag finance is becoming a common example of that, Boehlje says. "I can get housing loans now on e-commerce, I can communicate with my ag lender through the Internet, and increasingly I can obtain a loan with some lenders and have funds transferred to my account electronically," he says.
Other products are expected to follow if they haven't already. Of the agribusiness companies surveyed by Purdue, 5% are selling over the Internet today. Sixty-five percent say they will be selling over the Internet in three years, and 12% of the companies' dollar sales are expected to be Internet-generated three years from now.
Other emerging channels will be shaped according to whether you are buying products, services or information. In other words, the product might be delivered direct, the information might be delivered over the Internet, and the after-sales service might still be handled by the local retailer, according to Boehlje. "As an example of that, I might buy my automobile over the Internet, or a tractor from a dealer that is not in my locale," he says. "But when it comes to getting the repairs done, I typically and frequently will take it to my local dealer."
Boehlje is quick to point out that these emerging distribution channels will not necessarily replace the local dealer, but their role may change. "The retailer, in some cases, may be playing a critical role in product delivery and application of, for example, fertilizer. But in other cases, the dealer may simply be involved in doing the accounting and billing and the product moves directly to the consumer."
And although the Internet may be the biggest threat to dealers' traditional existence, it may also be their best tool to enhance their role. "We may actually find e-commerce being the mechanisms by which the local retailer does a better job of providing information to his customer base," Boehlje states.
Where do you fit?
Boehlje says these new channels will operate simultaneously alongside each other. And each channel will be used to serve different customers in a way that best meets their needs.
So how do you know which channel you will fit into? Ultimately, that decision will be up to the marketer and it will be based on a variety of factors such your farm size, type of enterprise, buying behavior and level of service required.
However, you can influence channel selection by continually informing your input suppliers of your wants and needs in terms of products, services and information, according to Boehlje. "Here are the kinds of things I would like from you as my fertilizer, seed, chemical or other supplier," Boehlje says. "Here's what I think would be useful or valuable to me."
Communicating those needs is not to imply that you will always get what you want, Boehlje adds.
But it will at least improve your chances.
At the same time, producers must be realistic in their expectations, especially when it comes to services. "What I'm suggesting is that producers are going to have to increasingly acknowledge that they may not get exactly what their neighbor gets," Boehlje says. "And because they are not getting exactly what their neighbor gets, it shouldn't surprise them that they are paying a different price than what their neighbor pays."
In the next issues of Farm Industry News, we will give you a more detailed look at the distribution channels that are taking shape in specific industry segments and their implications for you as a buyer.