June 29, 2016

Testing the resilience of crop protection product brand loyalty

By Barney Bernstein, Senior Associate

During the recession, many American households turned to buying generic or store-brand consumer goods as a budget management strategy. Shoppers looking to save a few bucks on life’s necessities gave up their favorite brands and opted for less expensive alternatives for everything from Cheerios to Band-Aids.

Farmers face the same conundrum when purchasing their crop protection chemical products, especially when faced with less-than-stellar market conditions in agriculture. Experts project 2016 will see the lowest net farm income since 2002 because of continued price drops for most commodities.

Given this steady decline in profitability, in addition to many key crop protection products coming off-patent, it’s no surprise that the industry is seeing a significant uptick in the volume of private label and generic crop protection chemicals being purchased by growers wanting to be conservative with their operating costs. A recent study of 160 growers in the Midwest revealed that 74% are replacing their current crop protection branded products with generics or a brand offering a better price. Additionally, 28 kinds of pesticide active ingredients will come off patent in the next five years including 10 herbicides, 12 fungicides, five insecticides and one safener, which represented over $4.28 billion in 2013, accounting for around 7% of the world total agrochemical market value.

The latest round of high commodity prices has come and gone, and as input costs adjust to the new reality, there’s no doubt growers will have to make strategic adjustments.

We can find parallels by looking at the consumer products industry. In the midst of the recession, consumers made the switch to private label products in great numbers to save money, and market share went up for private label consumer packaged goods (CPGs). As the economy stabilized, the momentum of this shift slowed, but the CPG industry entered a new normal in which private label is part of shoppers’ consideration set. A study by The Integer Group and M/A/R/C Research in February 2015 reported that 32.2% of respondents indicated they are currently buying more private-label brands (vs. February 2014), with only a small subset (6.6%) indicating they intend to return to name brands.

And looking at the pharmaceutical industry, the hefty price tag of over-the-counter and prescription drugs makes generic and store brand versions far more attractive. If the store-brand ibuprofen works just as well for aches and pains, why pay $3 more for a bottle of Advil? And the cost difference on prescription drugs often makes the decision a no-brainer, when going with a generic version can save hundreds of dollars. Of course, in pharmaceuticals most of this shift toward generics is driven by insurance companies; and while we don’t have a comparable body in agriculture, we do have agronomists and crop consultants who often advise growers on where they can save money and still maintain their yields.

Grower Choice

Just like in pharmaceuticals, when a proven ingredient goes off patent in the crop protection chemical industry, suppliers jump at the opportunity to bring their own version to market. In many cases they can offer growers a much less expensive alternative with virtually equivalent chemistry.

As the price gap widens between branded and generic products, and the gap in quality gets smaller, what will compel growers to keep paying a higher price? True, generics thrive in poorer market conditions, but growers still have a choice—and they have high expectations.

Growers are very knowledgeable about the chemicals they use. Many have been using the same chemistry for decades. They know how their chemicals are supposed to work and how to use them effectively. So, they’re not necessarily apprehensive about the quality of the active ingredients in the generic versions, but they certainly have expectations for their performance.

If spending less on generic or private labels produces the same yields, why would a grower spend more on the name brand to get the same result?

It could come down to value. Aside from the desired yields, what else do you get with the purchase of your crop protection chemicals if you go branded vs. generic or private label? Here are some of the factors growers may be weighing in their minds as they select inputs for their operation:

  • Quality. Will the generic products perform as well as the branded products? The active ingredients are the same, but inert ingredients and different formulations can affect results in the field.
  • Programs. Manufacturers offer incentives that you won’t get from a generic product.
  • Risk. Does the generics manufacturer back their product the same way the brand does? Probably not. Products purchased through a broker especially may not have return policies and warranties on par with what they’re purchasing through a retailer or direct from the manufacturer.
  • Relationships and service. Customer relationships are huge in agriculture. Growers rely on their trusted advisors to support their products and troubleshoot issues.

As with consumer goods, downturns give farmers a taste of more cost-effective alternatives, and time will tell if this is a permanent switch, or just temporary until things turn around. Will the transition to private label and generic crop protection products be a method that growers continue to consider in order to reduce input costs and manage profitability? And if growers see positive results from less expensive alternatives, will they migrate back to brands as commodity prices rebound?

There are definitely tradeoffs in using private label or generic products over branded versions. Entira believes it’s timely and critical to explore all the factors driving this change in our industry and how they will affect manufacturers and distributors moving forward.

Later this summer, we will launch our latest multi-client study, “The Impact of Private Label and Generic Crop Protection Products,” which will focus on understanding the key drivers influencing growers to transition from branded crop protection products to private labels and generics. We will answer all of the questions above and more, including trends in product adoption, decision factors influencing product sales, grower loyalty, and how they perceive value when it comes to crop protection products. The study will focus on a combination of active ingredients, and subscribers will determine the ingredients to include in the study, selecting from recently off-patent and soon-to-be off-patent ingredients.

We are enrolling subscribers now for this timely research study. If you would like a copy of the prospectus to learn more about the study and how to participate, please contact me before July 15, 2016, at bbernstein@entira.net.