Online agricultural retail start-ups are compressing margins for traditional agricultural 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 agricultural 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.”
The report suggests that 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, CoBank noted.
Adapting to survive
Traditional ag retailers are already undergoing transformational change from manufacturer mergers, farmer consolidation and technological advancements along the agricultural supply chain, the report noted. These changes are forcing traditional ag retailers to alter their practices and strategies to better compete and meet their farmer-customer needs, according to Cobank.
“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," Cobank said. "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
According to CoBank, only a small percentage of crop farmers are purchasing inputs online today, but that is beginning to change. In 2017, U.S. Department of Agriculture figures showed that only 25% of crop farmers purchased inputs online, but that was still up from just 16% in 2013. The total number of farmers purchasing inputs online increased by 40% over these four years.
This trend is likely to continue, CoBank said. For one reason, the report said larger farms are more likely to purchase inputs online. Of farms with sales of $250,000 or more, 39% purchased inputs online, compared to 24% of farms with sales of $10,000-99,999.
Research by Purdue University has indicated 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, CoBank said.
Minding the margins
Despite relatively low sales, the CoBank report suggested that e-commerce companies still 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.
CoBank said these e-commerce sites provide farmers with several sources of product price information that are just a few 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, the reported noted.
“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,” Secor said.
Seizing the competitive advantage
According to the report, the physical footprint of traditional ag retailers is one of their competitive advantages over e-commerce, because 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, the report said, adding that this strategy will provide farmers with 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, the bank noted.
“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,” Secor said.