January 8, 2018

Retail today is different from retail five years ago—how should you be responding to changes in the market structure?

By Barney Bernstein, Senior Associate

There’s a perfect storm of opportunity brewing in the ag retail environment. 

An uptick in consolidations at the retail and cooperative level is a sign of the changing times, with many businesses closing shop and exiting the market, and many others merging and acquiring new facilities—all to expand reach, save costs and/or make business more efficient. 

Following on the heels of M&A activity at the manufacturing level, today we’ve got a market where fewer suppliers are serving fewer retailers. And all of these dynamics, combined with low commodity prices and increased production costs, are taking a toll on margins.

The proliferation of generics is another factor in the equation as ingredients go off patent with no blockbuster products on the near horizon to replace them. Retailers and growers under price pressure believe generics could be the ticket to squeezing more value from the supply chain. While basic manufacturers fight to maintain their volume of proprietary chemistry, they must rethink their approach to retail partnerships—because retailers, of course, have the most influence on growers when it comes to choosing branded vs. generic. 

And then there’s the addition of purchasing groups such as FBN. While buying groups are not having a significant impact on where farmers buy product, they are providing price transparency that can influence retail profitability.

When you consider all the links along the ag value chain, there are none stronger than the connection between growers and their local retailers. Growers turn to retailers as a trusted advisor for navigating the vast and complex choices available to them, seeking guidance on everything from crop protection to seed treatments to aerial data capture. Retailers must leverage their resources to strengthen grower relationships.

Retailers hold the key to the farmgate—they control who and what goes through that farmgate, and they’ll recommend products based on what’s going to make growers most successful.

Finding Synergies

While it may seem all signs point to this being “the era of the ag retailer,” you cannot achieve peak potential if you’re carrying the same costs from the days of $8 corn.

Commodity prices remain in a slump and input costs are going up, as are retailers’ own rising costs of doing business. And as the market contracts under the influence of generics, some segments may lose value—and that could come back with negative consequences for retail profit margins as well.

The best way for retailers to combat these market challenges is to run as tight a ship as possible.

Pac-Man may rack up the points with every dot he gobbles up, but it rarely works that way in business. Far too often we see mergers take place without synergies—a bigger organization is created and the new entity, on paper at least, has the ability to cover more geography. However, bigger does not mean better, especially if the consolidation causes you to lose efficiencies or become less agile in responding to changing customer and market needs.

When businesses merge the goals are to improve sales, profit margins and the market position of the new entity. That sounds great in theory, but these goals are not automatically achieved as soon as you sign the deal. First you have to achieve synergies, which usually means tough decision making in the form of expense reduction and process improvements that eliminate unnecessary overhead costs.

If the organization was not running optimally to begin with, then you’re just adding another layer of inefficiency to an already inefficient operation. For organizations that were under financial pressure prior to the merger, failure to strategically plan for a more efficient post-merger organization only creates a larger financial burden. And that’s a dire place to be when pressure is building within a changing market.

Retail organizations growing by merger or acquisition need to critically evaluate their cost structures—especially where there are overlapping locations. Are the right people in the right locations supporting the right products to the right customers? To know if you’re set up for success internally, you must understand what’s going on externally.

Knowing how and where to begin going after synergies requires scrutiny of your market realities and dynamics. The first step is learning everything you can about your markets—the ones you’re currently in, the ones that are new, and the ones you might be considering in the future.

Know your markets inside and out.

So much of the market intelligence in agriculture is based on general market data or intuition. This is great for giving you a general sense of market conditions and relative performance, but companies need a way to put that general data and intuition through a rigorous evaluation.

To really know what you’re up against in every market requires a more granular level of detail. We’ve helped numerous clients see their markets in an entirely new way with our Enspire™ analytics platform, which shows how much value, by crop, is available for each location in a market, and how much value has been captured by that location.
Enspire and the Competitive Index—the new layer of analysis we’ve recently added—work together like a precision mapping tool for your markets, allowing you to plot out the unique set of circumstances that affect performance for each and every location, including where competition overlaps. Enspire reveals the value of the opportunity within a specific market, and the Competitive Index shows how hard you’re fighting for that opportunity. Armed with this insight, you can more effectively identify where tweaks can be made to achieve synergies and plan your strategy for success.

Concentrate resources where there is greater market potential.

Dispersing resources uniformly across an entire market is not precise enough to ensure maximum efficiency—as you move geographically across a market, the individual locations are not facing exactly the same pressures, so their support needs would be different.

Enspire and the Competitive Index help point companies to where they can make efficiency improvements. This deep dive into individual markets and locations is helping clients identify the root cause of variances from location to location so they can allocate resources in the most efficient and beneficial way possible. There’s energy getting wasted somewhere, no doubt, and you might be surprised to find out where.

For retailers or cooperatives looking to expand through acquisition or just grow into new markets, this is an exceptional tool for giving you insight into the value of potential acquisition targets. It’s a better way to segment your markets and more effectively plan for success. This level of granularity allows you to break issues down into smaller, more manageable parts so you can tackle the unique issues of each segment and give them what they need to thrive.

It can also drive changes to reduce wasted time and energy. This insight can help direct how you align personnel and physical assets around areas with high value potential and adjust resources in areas with low potential so you’re using resources more efficiently.

Retailers and other entities affected by these market changes have a choice—ride it out and see where the chips fall, or take action on the front end to proactively set your business up for success.

With any merger or acquisition, the completion of the deal is just the first step of a long process of analysis and strategy to ensure you’re gaining full benefits from what the collaboration has to offer. Widening your footprint is only a winning strategy if you’ve taken measures to achieve all the synergies available in the transaction. Those who are willing to make changes to be more efficient are the ones in it for the long haul.

If you’re interested in learning more, contact Barney Bernstein at bberstein@entira.net or 919.830.6527.