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 Aug. 25, 2022 by Shane Thomas, an agronomist and author of the Upstream Ag Insights weekly newsletter. You can read his full weekly newsletter here. It is commonly quoted that Jeff Bezos said "Your margin is my opportunity" in seeing the "large" margins of competitive retailers or the margins in other industries that Amazon had not expanded to, inferring Amazon could one day absorb that margin in their business. There are questions as to whether Bezos said the quote or not, but regardless if we look at the Amazon way, we know Bezos sees a competitor's focus on margins and other financial 'ratios' as an opportunity for Amazon since the competitor will cling to them and their way of doing things while Amazon focuses on doing what's in the best interest of the customer and accruing the highest absolute free cash flow on a long time horizon filtering through the Amazon business vs. short term margin KPI's. This same quote could come from John Deere, specifically singling out crop input manufacturers margins. (Note: For clarity, John Deere has NOT stated this publicly nor have I heard anyone from Deere say it ever...I simply am using it as an interesting point of reference to illustrate a potential point of weakness in crop input manufacturers current revenue model as new technology comes to the market place) At John Deere's Leaps Analyst event there was an emphasis that their new technologies are going to "unlock" $150 billion in total market benefit to farmers. Some of this might be in new value creation by enabling precision harvest management (eg: less harvest losses) on their combines for example, but some of it will come from cutting out certain expenses of farmers, like crop protection product waste, directly hindering crop input manufacturers sales and margins. Deere has been building out tools that are centered around the future of farming, not what it has historically been. When it comes to smart spraying technology, specifically green on green, coming to the market there has been an emphasis on the reduction in herbicide usage. This may occur in instances, but there is actually a double whammy that I have neglected to talk about until now: the commoditization of active ingredient IP, trait IP and customer relationships. In order to illustrate this I will walk through the concept of "commoditizing your complement" and how the ramifications could impact crop input manufacturers and retailers, reinforcing a necessity to rethink business models, bundles and go-to-market strategies. Substitutes vs. Complements From economics class we will all remember that every product in the marketplace has substitutes and complements. A substitute is a different product you might buy if the first product is too expensive. Chicken can be a substitute for pork. If you're a chicken farmer and the price of pork goes up, the people will want more chicken. Basic supply and demand. A complement is a product that you usually buy together with another product. Gas and cars are complements. Coffee and cream are complements. Computer hardware is a classic complement of computer operating systems. The key insight regarding complements is that demand for a product increases when the prices of its complements decrease. To read the entire article click here. Tweet |
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