Agriculture, Strategy

Rural Retail. Time to cut out the Middle Man?

In a period of rural retail brand power consolidation, why don't more suppliers go direct to market?

Rural Retail. Time to cut out the Middle Man?

As the regional and rural retail landscape changes, it's perhaps time to reassess the model. What challenges do suppliers and retailers face, and what's to come in the next few years?

The rural retail market in Australia is consolidating. Canadian firm Nutrien will soon increase its share of the rural merchandise market to around 25% of stores with the acquisition of Ruralco (having Landmark already in its stable). Elders, meanwhile, has bought Australian Independent Rural Retailers (AIRR). Whilst there has been much analysis about what it means for regional and rural consumers, it is worth exploring the implications for suppliers and the future of rural merchandise stores from that perspective.

For decades, rural retail has been the key channel-to-market for ag supplier brands, providing necessary exposure and sales that product brands could not achieve any other way. But there are some obvious and growing concerns for ag wholesale brands with the retail channel.

Firstly, recent retail consolidation increases the power held by a smaller number of rural retailers. This has the potential to decrease the bargaining power of suppliers and their ability to influence how their products are stocked and sold. Drawing a comparison with Coles-Woolworths grocery duopoly is not unreasonable.

A second issue for suppliers with the retail model, is that they give up (knowingly) some of the control of the marketing of their brands to the retailer. In short, the retailer becomes the face of the brand and can position supplier brands to suit their needs. The way in which retailers sell a supplier’s product could be a long way from the way in which the supplier intended the brand to be represented. Worse, retailers often stock their own house brands and actively switch-sell.

In handing responsibility for sales to the retailer, suppliers have begun to realise they have lost touch with the end-user of their products. There are many major ag brands who have little direct contact with the users of their product. Recognising this gap, ag brands are now introducing CRM strategies in order to build a database of, and relationships with, users to drive a stronger ‘pull’ strategy, not just a retail-driven ‘push’ strategy.

A further issue with the retail model is the obvious need to margin products to cover the costs of staff and infrastructure. This adds cost to the end user, historically for the benefits of expertise and convenience. But in an internet age, where farmers have expert advice on their screens, and where product is often delivered direct to the farm gate from the wholesaler, do retailers provide the same value, or are they just taking a ‘clip of the ticket’?

As retail power consolidates and ag brands have less control over how their products are represented, it is perhaps understandable that some wholesale suppliers would look at direct-to-market alternatives.

Farm fencing manufacturer, Clipex, provides an interesting case of a successful business that has taken a different path-to-market from the traditional retail model. Clipex has built a strong and growing, vertically integrated, direct-to-farm business. Except for a handful of independent retailers, the vast majority of its sales are direct or through its own stores.

Louise Olsson, Marketing Manager at Clipex, had this to say about their approach, “We choose to deal direct with farmers. We don’t bag rural stores. We just want to make the farmer experience the best possible. This means we can sell a solution rather than a product, we can tell our own story and it gives us the ability to make our products more affordable. We cut out the middle-man.”

Back in 2016 a start-up called AgQuote attempted to take on rural retailers with an online platform where consumers could seek competitive quotes from rural retailers for farm supplies. The business did not succeed and accused rural retailers of pressuring ag suppliers not to use the platform. AgQuote may have been one of the first to attempt disrupt the rural retail model, but is unlikely to be the last.

What is perhaps surprising, in an age of digital disruption, where ‘retail is dead’, is how few ag brands have elected to market direct to farm and how resilient the old school rural retail model has been. You might expect that the direct-to-consumer model would have high appeal in regional areas where the cost and effort required to physically get to a retailer is significant for many farmers.

Rural retail continues to occupy an important place in farming communities, built on long-standing relationships and advice. However, in speaking to a senior ag chem supplier recently, they made it clear the dilemma that they face:

“If we go direct, we could give farmers a better price, increase margins and grow market share. But the risk of alienating the retail channel is real and not one we want to take just yet.”

Rural retail plays an important role for farmers, communities and suppliers—but the future of that model will depend upon continued delivery of value to suppliers. Where consolidation appears to threaten the supplier value and where attractive alternative routes to market exist, suppliers could be expected to look closely at direct-to-market alternatives.

It will be interesting to see how the current period of consolidation impacts the supplier-retailer relationships over the coming months and years.

First Published in The Weekly Times under the heading: Retail Domination May Force Wholesalers’ Hand

Authored by Lachlan Drummond, managing director at Redhanded. You can find more of his thoughts in bite size pieces on Twitter @lachdrummond.

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