Is the agricultural inputs channel barely surviving or undergoing a rebirth through transformation?
Preface
Profits keep declining, channels are increasingly difficult to manage, new product R&D cycles are long, and slow new product promotion has become a chronic headache for many manufacturers. For agricultural inputs manufacturers, maintaining existing channels is beyond reproach. However, in the internet era, agricultural inputs e-commerce, information transparency, and large-scale growers have become mainstream. Industry changes often happen overnight rather than being counted in years as before. Crises and opportunities that can arise at any time make all parties in the agricultural inputs industry feel the pressure.
"Indescribably miserable" and "unprecedented pressure" are the most fitting words to describe the vast majority of agricultural inputs manufacturers today. Declining profits, chaotic channels, disordered pricing, and weak new product pipelines are all challenges. The same is true for distributors: retailers refusing to be managed and manufacturers' flattening policies putting pressure on them leave many distributors facing the pressure of transformation. The release of the zero-growth policy for agricultural inputs in 2015 placed a time bomb in the agricultural inputs market, leaving every link in the agricultural inputs chain on edge. While they were congratulating themselves that agrochemical companies collectively issued a "prohibition order" on going online, e-commerce platforms represented by JD.com, Rural Taobao, and Dashengshou Agricultural Inputs Mall were still accelerating their entry. There are also manufacturer transformation representatives such as Tiantianquan, Nongyi.com, and Nongshang No.1, backed by Noposion, Huifeng, and Kingenta. Although traditional distributors and manufacturers choose to talk down the e-commerce model, and some manufacturers' e-commerce efforts have already caused people to lose confidence, the industry still judges that in the next five years, the agricultural inputs market will completely overturn today's business forms. Traditional agricultural inputs manufacturers have only two paths ahead: barely surviving or achieving a rebirth through transformation.
Current situation one: Large-scale growers are gradually growing stronger, and the distribution model lacks sufficient service support
The pace of land transfer continues to accelerate and concentrate, and new types of farm owners will also form at an accelerated rate. This kind of large-scale grower also represents a new type of consumption concept and consumption behavior. Smallholder farmers do not know how to mix and use products, because they have always relied on one group: the recommendations and guidance of agricultural inputs store owners. But for large-scale growers, as the land they cultivate becomes larger and larger and their agricultural inputs procurement amounts become higher and higher, they bear greater risks than smallholders. They are more cautious and rational in choosing agricultural inputs, they increasingly trust themselves rather than others, and they increasingly tend to buy cheaper agricultural inputs directly from higher-level distributors or manufacturers. These driving forces compel them to accumulate knowledge of agronomic techniques and agricultural input products on their own, to make choices independently, and to search independently through the internet. Their purchasing habits fit better with the sales methods of agricultural inputs e-commerce.
Therefore, as the professional requirements for agronomic knowledge continue to rise, distributors are no longer able to serve large-scale growers well based on their own knowledge and experience reserves. For large-scale growers, a platform that provides quality services is the best choice.
Current situation two: Traditional agricultural inputs profit margins continue to shrink, and small and medium-sized enterprises hang by a thread
According to China Agricultural Inputs Network's report on the cost and profit of compound fertilizer in China in September, enterprise costs increased slightly in September while profits declined. Taking urea-based 45%cl3*15 as an example, its raw material cost is currently around 1309 yuan/tonne, plus 300 yuan/tonne in production costs, for a total cost of 1609 yuan/tonne, an increase of 0.56% over the same period in August. However, as autumn fertilizer stocking drew to a close, major compound fertilizer enterprises focused on clearing inventory, and the center of actual transaction prices fluctuated downward. Calculating based on some enterprises' ex-factory price of 1700 yuan/tonne for 45%cl3*15, the enterprises' gross profit margin is 5.53%, down 1.6% from the same period last month.
It can thus be seen that the average gross profit of compound fertilizer among fertilizer enterprises has already reached a relatively low level. According to relevant principles of economies of scale, only when output reaches a critical point can low gross margins generate considerable profit amounts and sustain the continuous development of an enterprise. For small and medium-sized enterprises with long channels, high costs, and relatively low sales, they can only hover on the edge of survival.
Current situation three: Farmers' purchasing power has declined noticeably, and promotional methods are weak
For the chemical fertilizer market, winter storage not only has a decisive impact on chemical fertilizer sales that winter, but also plays a bridging role for production, processing, and sales in the following spring. However, in 2015, the chemical fertilizer winter storage that should have started in mid-to-late October showed no signs of activity even as late November approached.
In addition, in 2015 new urea production capacity reached as high as 9 million tonnes, which dealt a huge shock not only to the urea market but to the entire chemical fertilizer market. Urea prices in mainstream regions hit new lows in mid-November. Because downstream demand was relatively low, distributors mostly purchased in small quantities and multiple batches, so manufacturers were passively exposed. Due to factors such as grain price fluctuations and weak farmer enthusiasm, any promotional activity by manufacturers appeared extremely pale, and all of these became important factors in the delayed start of winter storage in 2015.
It can thus be seen that excessively high supply, long-solidified promotional activities, and a sluggish agricultural product market triggered a chain of reactions, but ultimately it was the decline in farmers' purchasing power and purchasing enthusiasm, and manufacturers' promotional methods struggled to stir farmers' nerves.
Current situation four: The internet has become a basic tool, and diverse choices have intensified competition
The spread of the internet goes far beyond what ordinary people see, such as online payments and online shopping. It is also subtly changing a series of behaviors such as purchasing habits, forms of learning, and occasions for interaction. For farmers, the internet has enriched the agricultural inputs they can choose and brought them closer to upstream players, so price and brand competition will continue to escalate. The offline advertising bombardment of utility pole stickers, posters, and wall advertisements can no longer reach them accurately, while the phenomena of the same brand at different prices and different brands at different prices will push manufacturers to standardize their own pricing and intensify market competition among brands. In conventional playbooks, price cuts and buy-one-get-one offers will only keep pushing the industry into a vicious cycle. When new products have not yet been fully accepted by the market, the advantage of traditional agricultural inputs as a profit point will continue to weaken.
Whether it is profits, channels, or users, all are constantly developing and changing due to market forces. The distribution system is in fact a relatively primitive sales form, and when dealing with a complex and diverse market environment it often finds its strength insufficient for its wishes. In the future agricultural inputs market, business methods and commercial forms will undergo the following changes.
Trend one: Agricultural inputs e-commerce will become the faucet that gathers sales, and manufacturers' integration with the internet will become the norm
Innovation in any commercial form follows basic rules. Whether it is the distribution system or the e-commerce model, both emphasize customer traffic (traffic). Traditional distributors oversee dozens or hundreds of retailers, and retailers become the faucet that generates sales. But limited by the physical and service characteristics of stores, a single store must both transact and provide service, and also needs logistics functions. E-commerce, through the internet, can achieve "one-to-N" transactions, so in terms of transactions one platform can complete the transaction volume that tens of thousands of retail stores can provide, while the richness of products also leaves retailers far behind. As platforms such as Alibaba, Tiantianquan, Dashengshou, and Yunnongchang expand their reach on a large scale, a large number of traditional agricultural inputs stores have become their offline service centers. Compared with scattered and unorganized traditional retail outlets, such service centers have relatively strong support in products and marketing strategies, and are bound to reshuffle traditional retailers. This is tantamount to monopolizing the vast majority of sales outlets in the agricultural inputs market. The best ways out for agricultural inputs manufacturers are, first, to make products extreme; second, to go online and integrate with e-commerce.
Trend two: Large-scale growers will become the mainstream planting group, and agronomic techniques will become a necessary service
From only 400,000 large-scale grower households in 2012 to more than 3 million households in 2015, it can be seen that land transfer is rapidly consolidating into the hands of large-scale growers. Because agricultural production is affected by the market prices of related agricultural products, but from 2013 to 2014 it maintained a growth rate of 18.3%, and from 2014 to 2015, based on the transfer area in each province, it could still maintain a growth rate of more than 9%. The era of large-scale growers is not far away.
In addition, in China, even across a mountain ridge, farmers' pesticide use habits may differ. Their disease symptoms may be the same, and perhaps using one type would be enough? But even if the disease is the same, because their soil texture and crop resistance differ, the pesticides used are also different. Facing large-scale land with extremely high planting costs, large-scale growers' demand for professional agronomic techniques is becoming stronger and stronger. The model of agronomic techniques driving sales is becoming as routine as going to a doctor for medical treatment.
Trend three: The trend toward specialized agricultural inputs is becoming clearer, and products are becoming more diversified
The purpose of market segmentation by enterprises is to obtain greater economic benefits by positioning according to differences in customer needs. As is well known, product differentiation inevitably leads to corresponding increases in production costs and promotion expenses, so enterprises must weigh the benefits obtained from market segmentation against the costs added by market segmentation. Against the background of continuously declining profits in the compound fertilizer field with nitrogen, phosphorus, and potassium as the main contents, entering segmented markets has become a possibility. Agricultural inputs suitable for staple grains nationwide have already gained partial recognition in the market, but there are still many specialized agricultural inputs for cash crops that have not been developed, ranging from scallions, ginger, and garlic to crops such as citrus and sugarcane. It can be seen that there is still great opportunity space for these crops. In order to obtain high profits and avoid the red ocean, choosing segmented markets has become a relatively better choice for agrochemical enterprises, and can also greatly enrich the product structure on the market.
Trend four: Pioneering manufacturers will complete transformation goals, and the golden-period dividend will disappear
In today's increasingly complex policy and market environment, transformation has become the word most often on the lips of agrochemical enterprises. How to transform? In what direction? These are unresolved questions. Today's main directions for agrochemical enterprise transformation are service-oriented enterprises, e-commerce (self-built platforms), integration through borrowing online networks, and diversification. A more obvious service-oriented example is Shikefeng; for e-commerce, one must mention Noposion; for integration through borrowing online networks, one must mention the cooperation between Australia's Elfert and Dashengshou Agricultural Inputs Mall; for diversified business, one must mention Xindu Chemical's Haha Farm. Whether the transformation is appropriate is another matter. During a period of industry confusion, anything can be magnified by sensitive industry nerves. Tiantianquan's chain format can trigger intense industry discussion. Setting aside publicity, it is more its bold self-severed-arm e-commerce transformation that attracted great attention from capital, the industry, and farmers. When this kind of transformation becomes normalized, the public's attention will not be as focused as it is now, and the image power of its transformation will be diluted. By 2020 the industry's transformation window may close, and there will hardly be players like Tiantianquan and Nongyi.com. It can be said to be a grand spectacle when all the carp cross the river, yet it is difficult to forge glory.
Agricultural inputs are the last stronghold of the traditional commercial form. Change is an irreversible general trend. Whether it is manufacturers' self-revolution or the impact of outsiders, for the old business model it is a redemption and a rebirth. 2020 is also the final deadline for the zero-growth policy for agricultural inputs. Being able to complete transformation and meet industry changes concerns the interests of all parties in the agricultural inputs industry.