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Buying guide: Is the internet killing ag retail?

Illustration by Kotryna Zukauskaite Illustration of shopping cart on green background. Digital look
Local service, brand loyalty, lower prices -- finding balance in the age of unprecedented choice

It wasn’t that long ago when e-commerce behemoth Amazon was only selling books. But two decades later, it has morphed into an “everything store” where you can buy, well – pretty much everything. Consumers responded, opening their wallets to the tune of $141.37 billion in North America alone last year.

The agriculture industry has taken notice. In the past several years, a new wave of agtech startups such as Farmers Business Network, AgVend and many others have entered the fray, promising to disrupt or enhance the ag retail space and offer farmers competitive pricing on crop-protection chemicals, fertilizer and even seed.

In fact, a study from McKinsey & Company conducted earlier this year found the number of agriculture suppliers who sell products online more than doubled between 2016 and 2018.

“Both digital start-ups and tech giants see the agriculture sector as underserved,” the study asserted. “With purchasing power shifting to younger digital natives as older farmers age out, these newer entrants are banking on a large potential customer base.”

That begs the question: Do brick-and-mortar ag retailers still have a role in the age of e-commerce?

AMAZON VS. TARGET

One underlying trend fueling the e-commerce movement is multiple years of low commodity prices.

“When farmers are financially stressed, they become more highly sensitive to price,” says Tanner Ehmke, manager of CoBank’s Knowledge Exchange Division.

But another underlying farming trend is often at odds with this situation. Farms are slowly but surely getting bigger on average. Because of that, they need to build more reliable partnerships – both on and off the farm. As Ehmke points out, they often need agtech, fertility, seed and chemical and long-term planning advisers, just to name a few.

“Retailers remain in a strong position here,” he says.

Consumer trends may foretell agriculture’s future. For example, as Amazon’s online sales picked up momentum, some experts began to worry whether it would end up steamrolling more traditional retails spaces, such as Target. For its part, Target continues to develop an online presence, growing digital sales by 36% last year, but the company’s true focus has been doubling down on the physical side of its business.

“They pushed investment in being the best retailer possible, and it’s worked out very well for them,” Ehmke notes.

Target’s own 2018 annual report confirms this. The company barely mentions its digital successes, with an agenda of reimagining its stores and strengthening its overall branding taking the front burner instead. Total sales topped $75 billion last year and the company is the ninth-largest employer in the U.S. (Amazon is No. 2), making it hard to argue that Target will be going away anytime soon.

The same challenge is present in the ag retail space. E-commerce and brick-and-mortar businesses each have their own strengths and weaknesses. The former tends to win out on price, while the latter tends to win out on service.

What does that mean for the farmer? It all depends on your priorities, Ehmke says.

“If price is the only thing you’re looking at, you might not need the service relationship,” he says. “But if your longer-term goal is to build a team of advisers, retailers tend to have the expertise.”

The McKinsey survey found that farmers tend to use three distinct channels throughout the input buying process: the retail store, in-person representatives, and online channels. Farmer preferences are highly dependent on the task at hand.

For example, when farmers are looking for a more simple product comparison or purchase decision, 45% say they prefer a pure digital interaction versus making a phone call or in-person visit. But as soon as a farmer has a question about a product’s use or services, 78% prefer human interactions over browsing a website or mobile app.

THE LAST MILE

E-commerce enterprises understand the price-versus-service challenge and have steadily been making inroads on that front. An agtech idea can be born and raised in Silicon Valley, but brainpower without muscle is of little use. A solid distribution plan across the central U.S. is needed to facilitate actual sales.

FBN, for example, is headquartered in San Carlos, Calif., but has also built a 100,000 square-foot distribution center near Des Moines, Iowa, and has nine other warehouses scattered across the country – seven of which are in the Midwest and Plains.

And then there is CommoditAg, a digital platform comprised of eight existing retail owners, each of which deploys a designated warehouse for e-commerce sales.

Access to the so-called “last mile” is a critical part to this infrastructure, according to CommoditAg CEO John Demerly. The company’s footprint currently reaches 46% of the U.S. crop protection market but hopes to expand in the near future.

“We own the inventory, so our model makes it easy for farmers,” he says. “Warehouse capabilities also provides us the opportunity to have additional customer conversations on-site.”

And while competitive pricing cannot be ignored, Demerly says farmers actually make online purchases for many other reasons.

“There’s convenience, availability,” he says. “E-commerce needs to be easy to use both online and on a smartphone. And time is money, too”

More mobile apps will likely pepper the market as it continues to evolve, Demerly says – including one that CommoditAg is developing.

NOT JUST PRICE

Pat Sullivan, who leads the partnership management team at AgVend, an online platform that partners with local retailers, agrees that e-commerce opportunities don’t begin and end with cheaper prices – although some retailers have long feared it would kickstart a race to the bottom, eroding margins. But Sullivan contends it’s more about value for their dollars.

“Farmers want to understand if that product is priced with a manufacturer warranty, financing or rebate program– which hasn’t existed online until AgVend – and if the price includes the ability to return the product,” he says. “They want to know when it will be delivered, and if there is agronomic advice or services available. There’s a lot more to this than just price.

Like CommoditAg, AgVend has partnered with existing retailers. Sullivan says this allows a blend of retail and e-commerce expertise.

Sullivan says AgVend hides retail identities until a farmer completes a purchase, which allows those retailers to compete without revealing their entire price book to competitors. Suppliers pay to list products, making the service free to farmers. AgVend also allows retailers to create their own digital storefront to interact directly with customers.

“It’s not just about online or offline – it’s about grower flexibility to choose when and where they do business with their suppliers,” Sullivan adds.

HarvestPort is another recent entry into the retail e-commerce space – although in a much more advisory role. The group helps farmers with purchase timing, finding lower-priced inputs, getting information on new products and giving exclusive access to input pricing for members.

“We will work with crop retailers and manufacturers with existing boots on the ground; we will not take principal risk on product,” according to CEO Brian Dawson, adding that the company’s Inputs Program is designed to leverage the strength of farmers’ collective buying power to generate the best prices on crop inputs and other supplies.

Dawson admits the company’s strength is not in agronomy – nor does it pretend to be. Farmers want someone who can take a holistic view of the operation and can understand emerging technologies, he says. HarvestPort promises to bring in experts without sidestepping existing retail relationships.

“We are more high-touch to begin with for a tech platform, but once in our system, growers in our platform can see a full annual forecast of what they need, which is updated all the time,” Dawson says.

In the Midwest, where buying is highly seasonal, there’s a per-purchase charge for the service.

MOVING FORWARD

The list goes on. All of these services may make the abundance of choices about purchasing inputs feel overwhelming, but market share is nonetheless on the rise, which was just 8% a year ago but could reach 25% by 2022.

Still, plenty of farmers are only in the exploratory stage of the game, including Minnesota row crop farmer Justin Stock.

“We’re using e-commerce as a gauge of where we think pricing should be,” he says. “For now, our local retailers are staying even or a little less expensive on prices. It doesn’t feel like all of the stars have aligned just yet for us.”

Stock says to justify the payoff for less service, prices would have to trend 10% to 15% lower than what his local retailers currently provide.

“Finding an attractive financing packing is also important to me,” he adds. “Most major brands are currently offering 0% for some time now.”

Stock also wonders about the long-term strategy of startups that appear to be running on venture capital – will they be able to remain viable business partners once that money runs out, or once they are bought out or go public?

“I don’t have a problem with their business model, but I do wonder if some of them will remain profitable long-term,” he says. “Bottom line, we have to be cautious when we make input buying changes.”

In the meantime, Ehmke says farmers should prepare for additional penetration of e-commerce into the ag retail market.

“There will always be room for growth, but it will be interesting to see how everyone jockeys for position, especially in a margin-stressed environment when farmers are pinching pennies,” he says. “No one will be able to do everything really well, so farmers will have to prioritize what they need.”

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