Ag Retailers Look to Retool Strategy for Success in the Era of E-Commerce
DENVER, Feb. 20, 2019 (GLOBE NEWSWIRE) -- Online agricultural retail startups are compressing margins for traditional ag retailers through increased competition and price transparency. While e-commerce platforms remain a relatively small portion of the overall ag retail marketplace, growth in the segment has been significant in recent years and will continue to increase. According to a new report from CoBank’s Knowledge Exchange Division, traditional ag retailers will need to transition to an omni-channel strategy in order to grow in the digital age.
“Online competition will continue to intensify and pressure margins for traditional ag retailers in the years ahead,” said Will Secor, grain and farm supply economist with CoBank. “Traditional ag retailers that successfully embrace the challenges introduced by e-commerce will succeed as tomorrow’s cutting-edge ag retailers.”
E-commerce platforms that lack a physical footprint will struggle to fully serve farmers, especially in the tight and uncertain time windows that typify production agriculture. Some traditional ag retailers have already begun responding to the challenge by doubling down on their service and distribution capabilities while building their own online presence.
Adapting to Survive
Traditional ag retailers are already undergoing transformational change from manufacturer mergers, farmer consolidation and technological advancements along the agricultural supply chain. These changes are forcing traditional ag retailers to alter their practices and strategies to better compete and meet their farmer-customers’ needs.
The growth of online ag retail will accelerate this change. However, it will not change the basic business model of ag retailers, which is grounded in product distribution and service provision. Instead, e-commerce will pressure traditional ag retailers to add online options for their customers while better differentiating themselves from online-only retail outlets.
Farmers Moving Online
Only a small percentage of crop farmers are purchasing inputs online today, but that is beginning to change. In 2017, USDA figures show that only 25 percent of crop farmers purchased inputs online, up from just 16 percent in 2013. The total number of farmers purchasing inputs online increased by 40 percent over these four years.
This trend is likely to continue. For one reason, larger farms are more likely to purchase inputs online. Thirty-nine percent of farms with $250,000 or more in sales purchased inputs online compared to 24 percent of farms with sales of $10,000 to $99,999.
Research by Purdue University indicates that on average, a new generation of farmers will be taking over decision control of the farm in the next eight years. These younger farmers will likely be more comfortable with technology and may prefer e-commerce options.
Minding the Margins
Despite relatively low sales, e-commerce companies pose a threat to brick-and-mortar ag retailers in two ways. First, any new competitor will erode sales and margins to some degree and second, e-commerce sites increase transparency for product prices.
These e-commerce sites provide farmers with several sources of product price information that are just clicks away. Farmers can then leverage that information in negotiations with local brick-and-mortar retailers. Traditional ag retailers that bundle products and services together under the product price are losing some customers to e-commerce sites that provide only the product. The e-commerce channel allows cost-sensitive farmers to eliminate service costs like custom application and product warranties.
“In order to remain profitable and respond to this price pressure, traditional ag retailers will need to better communicate the value of services they provide with the product, or separate the service offerings from the product and lower the product price,” said Secor.
Seizing the Competitive Advantage
The physical footprint of traditional ag retailers is one of their competitive advantages. E-commerce platforms without a physical presence are less equipped to provide farmers with immediate support during uncertain time windows caused by variable factors, such as pest pressure and weather.
However, an omni-channel strategy will likely be necessary for traditional ag retailers to succeed and grow in the digital age. This strategy provides farmers multiple avenues to interact with an ag retailer. A full online interface may be standard in the coming years with chat, video calls, e-commerce, service scheduling and other capabilities embedded in the online platform.
“Focusing on the competitive advantage traditional ag retailers have in distribution and service, as well as investing in their own online services, will allow them to succeed in the changing environment,” said Secor.
A video synopsis, and the full report, “E-Commerce Disruption Pushes Ag Retailers to Focus on Distribution and Service,” are available at cobank.com.
CoBank is a $128 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 70,000 farmers, ranchers and other rural borrowers in 23 states around the country.
CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.
For more information about CoBank, visit the bank’s website at cobank.com.
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