Agricultural input market - Mega consolidation 2.0, Business not as usual

The agricultural input market is currently witnessing its second major consolidation wave in two decades. These massive tsunami waves affect not only the size of the leading players but also the way they do business. The previous wave created three clear giants: 2 in crop protection (Syngenta and Bayer) and one in seeds (Monsanto). The current wave is changing things again by creating new giants (DuPont+Dow, Chem-China) and new modes of operation.

Lessons from the first wave

The first wave, early in the 2000’s, created for the first time a “crop centric - unified platform” approach, combining inputs from three previously separate markets: (i) Crop protection, (ii) Seeds and (iii) Biotechnology Traits. This approach was rolled out in major arable crops (like corn and soybean) with a particular focus on crops dominated by annual purchases of certified seeds. The success of this approach led to the accelerated growth of companies like Syngenta (+7% p.a. compared to 5.8% industry average during the last 10 years) in crop protection, and Monsanto in seeds and traits. Other innovative leaders like Bayer, BASF, Dow and DuPont, adopted more conservative approaches, and ended up delivering lower growth rates.

A second clear group of winners were cash rich second tier players, able to buy up cheap assets disposed of by the newly created giants, in order to satisfy anti-trust demands. UPL with 20.8% p.a. and Adama with 12.1% average, took the best advantage of the situation over the last decade. These purchases along with major investments in independent distribution channels created a select group of major generic players which were able to increase their market share at the expense of others.

Characteristics of the current wave

The current wave is intensifying the mega giant trend, and creating an even more concentrated market. In effect, we are witnessing the creation of an even more exclusive “champion’s league” which will become home to only 3-5 mega “clubs”. These players will controls more than 70% of trade but more importantly almost all the basic innovation in a 95B USD market.

In addition, on the off patent front, we are witnessing two key developments:

A slight enlargement in size of leading off patent players through a parallel mini consolidation wave. Recent examples include: (1)FMC+Cheminova ; (2)Arysta+Chemtura+Agriphar.

More and more Chinese manufacturers attempting to increase their direct participation in global markets at the expense of small and medium crop protection traders.

These two phenomenon are increasing the already large pressure on many small and medium players.

Time to Focus your strategy

These developments should cause many to at least reflect on their strategy and commercial go- to-market approaches. Now is a time where strategic thinking and strong balance sheets will play an important role.

Players lacking the ability to significantly grow their market access through large-scale acquisitions will need to engage fresh thinking and focus their growth strategies. Options could include concentrating commercial efforts on specific niches where competition is less intensive, alignment of certain assets with the portfolios of the mega giants, cost leadership in specific technologies etc.

Below is a short list of key issues to reflect on:

1. Channel access:
• How much effort should we invest in building channel access in the large markets?
• Should we now concentrate our efforts on smaller markets?
• Is it worth buying distribution in key markets and what will it cost?

2. Innovation level:
• Should we now avoid innovation altogether?
• Should we increase innovation in specific portfolio gaps of the mega giants? Should we invest in specific technologies?
• Should we focus on “simple” innovation which could also be introduced to the market through second tier players?

3. Consolidation efforts:
• Should we engage in our own consolidation initiatives?

4. Asset purchase:
• Do we have the financial basis to participate in the expected asset disposals which are expected to be imposed by the anti-trust approval process?
• How can we maximize our cash position?

One thing is clear – companies which continue to deploy simplistic strategies, are putting themselves at risk. Such companies may face corporate resource dilution due to loss of market share and profit to competitors that adopt more sophisticated approaches.

Summary

Following the developments outlined above, small and medium players will be well advised to critically examine their strategic trajectory and redefine their own unique path forward. Doing so is not an indulgence reserved for big players alone. Quite the contrary is true – the smaller your resources the more important it is that you develop a unique strategy. Developing a winning strategy is a pre-requisite for success but is not enough. Building a successful strategy requires careful attention to detail and matching core competencies with unmet market needs. A well crafted strategy has the potential to deliver exceptional value over time and will therefore attract investors in case this is needed. These investors will also be looking at other critical elements such as corporate congruence, adequate funding, and management execution capabilities. This exciting challenge is awaiting courageous players seeking to address the risk of limiting innovation at a time where agriculture needs it most.

This is an opportunity to GROW by REDIFINING your strategic path. Don’t miss out!