June 26, 2018

When the stakes are high, how do you go from “I think” to “I know”?

By Mike Karst, Senior Partner

Planting trees is risky business. We want them in our yard for shade and aesthetics, but choosing the right spot is not as easy as digging a hole and planting it where we want it.

You can do all the pre-work for planting a tree—shopping multiple vendors for price and selection, applying the right fertilizer, marking the underground lines—but you can destroy the tree’s chances for survival if you plant it in the wrong location. You may prefer it in the corner of the yard because you think it looks the best and ignore the fact that it gets too much sun, not enough water, or will become too crowded with other landscaping as it grows. You’re letting the emotion of planting the tree in the spot you like best to take priority over all other factors. 

A poorly planted tree may set you back a few hundred dollars, but the stakes are higher in business. Capital investments in particular require due diligence to remove the emotion of “I think” and get to the ideal state of “I know.” Whether you’re identifying a site for a brand-new, multimillion-dollar location or assessing what to do with assets in a post-merger environment, making an investment of this magnitude is an endeavor that requires thorough market analysis.

Location Matters

The hub and spoke model made popular by the shipping industry has become a growing trend among ag retailers looking to streamline product logistics from central to outlying locations. Many of our clients are evaluating options for high capacity storage locations by expanding an existing location, building a new facility, or acquiring a business that already has an established hub. 

There’s no question centralization works for many businesses needing to move product from point A to B as directly as possible, which theoretically speeds delivery and reduces costs. However, centralization only saves you money if the site is strategically positioned. And finding the right spot requires more than looking at a map and dropping a pin off a main road in a rural area.

There is an adage that every time fertilizer is dropped on the ground or transferred into another container, it adds $10 per ton to invoice price. That makes a substantial difference on a highly commoditized product like fertilizer. However, simply adding a fertilizer hub to your asset list does not solve the problem. An asset without the acres to support it is just an expensive building, not a competitive advantage.

The moral of that story—don’t jump in with both feet just because you think it’s the right thing to do. You must know it’s the right decision, because you absolutely will destroy its chances for success by putting it in the wrong spot. FedEx doesn’t just build a new sorting facility wherever it feels right, and neither should you.

But, access to acres is just one part of the story. Another major consideration is competition. You can read our previous article on “Quantifying the Competition” to see how we utilize our proprietary Competitive Index metric to see competition in a new way.

Inspect What You Expect

We’re all entrusted with resources to achieve the goals of our respective organizations. Whether it’s time, money, or assets, there’s an inherent fiduciary responsibility. This responsibility magnifies when making large capital investments. These decisions impact your employees, cooperative members, shareholders, and leadership. Making decisions on gut feel is a failure to meet those responsibilities.

Tangible answers founded in data are required for big capital investments. With so much at stake, I wouldn’t want to base the decision on a back-of-the-envelope calculation. You owe that to the people counting on you.

So how do you know? Two of the most critical considerations in site selection logic are the available acres and the competitive presence in the market. An area with a couple million acres of opportunity may look like a good place to build a new location. But when you spread those million acres across several companies, and then you factor in throughput costs and fertilizer consumption rates, etc., the market value potential may become too diluted to make financial sense.

In some of our past projects we’ve helped clients uncover this insight and show the real market value potential of a single geographic location, so they would have a more informed, data-driven discussion about whether it’s a prudent investment. Our Enspire™ platform reveals the value of the opportunity within a specific market based on acres available and corresponding farmgate spend for your respective products. Coupling that with our Competitive Index shows how hard you’re fighting for that opportunity against other contenders.

Combining the Enspire and Competitive Index frameworks brings logic and data into decision-making when the stakes are highest. Knowing the market opportunity and competitive pressure are complementary data inputs—it’s when you look at the two together that you really see the complete picture. Are there enough acres, or need for tons, to validate a hub? AND is the competitive landscape undersaturated? If the answer to either of these questions is no, then your logic trail has reached a dead end.

Oversaturated in Northeast Indiana

Let’s move from theoretical to tangible. Northeast Indiana is an interesting fertilizer hub case study. There are currently five major fertilizer hubs owned by five different entities. The intent for each hub was to decrease costs and maximize efficiency. But what happened instead was the market quickly became oversaturated and consequently negated any potential they had to decrease costs.

To give a visual perspective, pictured below are two maps showing corn (yellow) and soybean (green) acres—one is Northeast Indiana and the other is a similarly sized geography in Northwest Iowa. Corn and soybean acres are much denser in Iowa because the market in Indiana is broken up by cities, rivers and other impediments not found in Northwest Iowa.

 

 

NE IN (top) vs. NW IA (bottom) – (corn is gold and soybeans are dark green)
Northeast Indiana has a comparatively sparse concentration of corn/soybean
acres because cities, woods, rivers, and a large Amish community (tan area
near IN/MI border) detract from opportunity value. Those impediments
are notably smaller in Northwest Iowa.

The conclusion: Northeast Indiana is a less attractive market for a hub purely based on acres. I agree, that is underwhelming. Iowa is a prime agricultural market. It will beat most other markets consistently. But we do not have the luxury of picking up our business and putting it in the heart of Iowa. Let’s play the hands we are dealt in this case study and move on with a look at competition. 

The two maps below are a cursory view of the competitive market in Northeast Indiana. The first picture shows selected retail locations and major hubs in Northeast Indiana (noted by the four stars), and the second picture shows the potential territory coverage for each hub.

Above: Identification of competitive fertilizer hubs servicing NE Indiana

Above: Here is the same image with the respective 50-mile drive zones for the fertilizer hubs.

Now we are getting somewhere. The 50-mile drive zone for the fertilizer hubs got very messy, very quickly. When you pair that crowded market view with the acreage densities, it makes you wonder—does putting a hub here make sense? If you’re one of the first to build, sure. However, this is not a party where it pays to be fashionably late because your investment is likely to be more cannibalizing than profitable.

In most every scenario using this process with a client, we have helped them use data to overcome opinion. Our intent is to provide a fresh perspective supported by data to help clients focus their efforts toward the most profitable outcome.

Going down the path of building, buying or expanding a location is a high-stakes investment, and you need to get it right the first time. Being armed with this granular-level data shifts the dialogue from a go/no-go decision to a more in-depth discussion about the best way to structure assets given specific conditions of the market. Even if you validate that a new facility can be supported in a market, if you don’t put it in the right spot, you are not maximizing the intended benefit. Maybe you’ll find it’s better to invest in multiple smaller locations—expand the locations you have rather than building a brand new mega hub. Even if you’re not first in the market, you can still win by putting yourself in the best spot.

This research could be the difference between moving forward…and moving forward into a ravine.

If you want to talk about applying logic and due diligence to your site selection process, contact Mike Karst at mkarst@entira.net or 901.753.0470.