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Is Walmartization ahead?

In the past decade, the number of ag chemical dealerships has fallen across the Midwest. But at the same time, a new player has come to a dozen towns in eastern South Dakota, southwestern Minnesota and northwestern Iowa promising Wal-Mart-like everyday low prices, top-notch service and new tools to improve farm profitability.

Like Wal-Mart, the new player, Hefty Seed Company, based in Baltic, SD, is dramatically reshaping the local and regional marketplace. Each of its stores casts a wide shadow, drawing business from at least a 50-mile radius and oftentimes much farther.

General manager Brian Hefty is unapologetic: “Other dealers aren't happy with us.” But the company plays fair, he says. It buys its products through normal channels, not from brokers.

In fact, he says, some farmers' stories about Hefty Seed's low prices are fiction: “A lot of farmers, even if they don't want to buy from us, they know that other dealers hate us. So they use our name,” he says.

Sign of the times

From many perspectives, Hefty Seed has entered the marketplace at just the wrong time. The agricultural retail industry is in the throes of a shakeout as retailers cope with the rapid adoption of genetically engineered seeds — and resulting lower ag chem sales — as well as farm consolidation and other factors.

“We're looking at a very significant structural realignment over the next four to five years,” says Mike Jackson, president of AgriBusiness Group, Indianapolis, IN, which consults with ag businesses and other groups to identify successful business strategies. “What this means is that there will be substantial additional concentration on the retail level.”

Translation? Fewer retailers. Some estimate that at least a third of ag chemical retailers will have merged or gone out of business in the next five years.

“Farmers in general really don't understand the substantially weakened condition of many agricultural retailers,” Jackson says. “The last five years have created some very tenuous financial times for many retailers. We estimate that well over half of retail businesses have below-cost-of-capital return on investment.”

So why has Hefty Seed been expanding at the very time the industry is under economic pressure?

Brian Hefty says that the company's business model helps it operate more efficiently than many retailers. Low administrative overheads, an efficient workforce, high per-store sales volumes and cutting-edge business practices contribute to a solid bottom line, he says.

But perhaps the most critical factor in the company's success, according to Hefty, is its focus on the do-it-yourself market.

Do-it-yourself strategy

When Brian Hefty was growing up on the family's farm, which today stands at 2,500 acres, he recalls this advice from his dad, Ron, who started Hefty Seed with a store on the home farm near Baltic in 1969: “'You want to try to do the $100 per hour jobs, not the $5 per hour jobs.'”

That's the mantra at each of Hefty Seed's 13 outlets: There is substantial money to be made from spraying and fertilizing your own crops. In fact, you can't book custom application services of any kind from Hefty Seed.

Eliminating custom application helps keep Hefty Seed's ag chemical and fertilizer prices 5 to 25% below competitors' prices, Hefty says, because dealers offering custom application services typically subsidize these services with higher chemical and fertilizer prices.

“Depending on the area, custom herbicide application may be charged at $3 per acre,” he says. “If a dealer was really going to make money at that, he would have to charge $8 per acre. Usually that [deficit] is made up in higher prices for whatever products the farmer is buying from the dealer. Custom application is the loss leader.

“Our core philosophy is to help farmers do things themselves,” he continues. “We give them the tools to raise great crops. We are not going to spray the field or spread the fertilizer. We see a tremendous opportunity because a lot of farmers are asking how they can make more money without picking up more land. [Applying their own herbicide and fertilizer] is one way they can do it.”

Hefty says the company doesn't play favorites as it seeks new customers. “We aren't after the big farmer,” he says. “We have a set price for everybody. Our prices are way better for the small and medium-sized farmer. The larger farmer may be able to get similar prices from other dealers.”

The company stresses customer and workforce education to “empower the farmer” to handle scouting and application chores himself. More than 10% of each staff agronomist's time each year is spent in training. “When a farmer gets a recommendation from our people, he can have a great deal of confidence,” Hefty says.

In the off-season, the company sponsors day-long customer education sessions. Throughout the year, it communicates technical information to farmers through regular AgPhD radio and TV programs. The 90-second to five-minute radio spots run on stations throughout its service area five to six days a week, depending on the season. Brian and his brother Darren, company sales manager, also are the stars of a weekly AgPhD television program, which also runs on area stations and is available nationwide on satellite via the Dish Network (Channel 9409) and DirecTV (Channel 379). The radio and TV shows are produced by their sister Jannel at a studio at the Baltic facility. (For the record, none of the Heftys possesses a PhD.) The company also has a regular newsletter and a Web site,

No-credit policy

Several other factors contribute to Hefty Seed's ability to price crop chemicals and fertilizers aggressively, Hefty says. The company doesn't offer financing, so it doesn't have any bad debt. Customers either have to pick up their products or have them delivered via common carrier. The company has a small administrative staff of five managers and bookkeepers out of a total full-time staff of 60 for the 13 locations. That compares to an administrative body count of more than two dozen in many ag retail operations of similar scope, Hefty says. And its stores and warehouses are relatively new, making them efficient to operate.

A drive by the Hefty Seed store just west of Winthrop, MN, during a mid-summer sales doldrum underlines the company's emphasis on efficiency. The gate guarding the entry of the store may be closed and the parking lot empty.

“If we don't have business going on that time of year, our people will be on the road trying to drum up more business or educating our customers,” Hefty says. If a farmer telephones for advice that day, calls will roll over to the Baltic headquarters.

Many avenues to success

Jackson, of AgriBusiness Group, says that the Hefty Seed business model, while apparently successful, isn't going to dominate the ag retailing industry. Traditional retailers offering a broad range of products and services are likely to continue to succeed. But they will have to learn how to profitably work with customers who want services, such as crop scouting and custom application, and those who don't.

“Not all retailers, by any stretch of the imagination, are in a financial bind,” Jackson says. “The trend among successful dealers is to work toward profitability based on an accurate understanding of the cost of services. They will continue to sell products, but also sell physical and intellectual services separately.”

This is Jackson's advice to farmers as the ag retail shakeout continues: “Farmers aren't responsible for the retailer's profitability. But you are responsible for helping retailers understand and create value that is appropriate for you, because most farmers would not be better off if the retail support network were to go away.”

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