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Selling complementary products together is an age-old, effective supply chain management approach called bundling. It's aimed to add benefit both for the seller (company) and the buyer.
The big question is, Do you as a consumer really benefit? And what if you could bundle the products you produce for added value for your buyer?
Ask farmers about bundling and they're quick to reel off such words as “marketing gimmick” and “inflexible.” “I don't like product bundling, primarily because it reduces my flexibility to obtain the products that might work best for me, regardless of the manufacturer,” says Chuck Myers, Team FIN farmer from Lyons, NE. “However, I recognize the reality that bundled products are here and that, in some cases, I might be able to benefit from them.”
Ask companies to discuss this topic and many quickly change the “b-word” to “product incentives” to overcome a negative connotation. They also decline to divulge tactics, except perhaps to pass the buck down the chain to the local ag retailer who, they claim, is driving this bundling bus. “We realize that bundling will only be effective if it's tailored at the local level, otherwise it ends up being restrictive because growers have different needs,” says Tony Minnichsoffer, communications manager for Syngenta Seeds.
Ask local ag retailers, the so-called gatekeepers of bundling, and they'll both criticize and praise this practice. But with razor-thin margins cutting deep into their business, they've learned to find more sustainable margins by bundling a product with other products, or a product with services. As more biotech traits continue to link seed and crop protection products, retailers can market a combo platter of all components of a crop production system. And many are getting help from these suppliers to do just that.
Bundles can work
Despite the rhetoric among various chain participants, bundling can succeed at both ends, especially if it includes an innovation like Roundup Ready soybeans or it combines a popular product and service, providing a win-win deal for buyer and seller. Most recent bundling success stories use a low-interest financing plan designed to attract greater customer loyalty.
For example, two seed and crop protection bundling programs that tie in financing are TruChoice Opportunity Program from Pioneer/DuPont and the AgriFit Plan from Syngenta. Both companies allow customers to finance both seed and crop protection products on the same favorable extended terms, up to 2½% below prime, if specific products are used in specific quantities.
Pioneer/DuPont improved the TruChoice program by adding crop protection products from more companies for 2002 (Syngenta, FMC, Dow AgroSciences, Bayer, Aventis and DuPont). “If farmers purchase 10% more Pioneer seed than last year or plant 90% of corn acres and 50% of soybean acres to Pioneer seed — plus buy approved crop protection products to treat 75% of total corn acres — they receive 2½% below prime deferred financing,” explains Jerry Harrington, public relations manager for Pioneer. “Farmers receive 1% below prime if they meet one of the seed or corn herbicide use requirements. And a farmer who buys any amount of seed or crop protection products at less than these levels receives a rate of 1% over prime,” he adds.
Not surprisingly, a large percentage of Pioneer seed is financed today, which started over a decade ago when the company implemented a deferred payment program. “The popularity of financing has increased since the fall of 1998 when we began offering below prime interest rates to help farmers deal with low commodity prices,” Harrington says. “After DuPont purchased Pioneer, TruChoice was born, and now we can offer good financing on both seed and herbicides/insecticides. Farmers are saving a lot of money this year thanks to this program and Greenspan's lowering of interest rates.”
Low financing is key
Team FIN farmer Dale Koester from Wadesville, IN, says this is the third year he is using TruChoice because the bundle fits his needs. “I like the low-interest financing and the fact that it doesn't change the herbicides that I use. To qualify for this program, you do have to plant a large percentage of Pioneer corn and maybe that does influence my seed purchases and I don't realize it,” he says. “But I look at it as a way of telling many of the other seed companies no.”
Although Pioneer would not release any statistics indicating program success, Harrington did state it is growing quite well. For more information, contact your local Pioneer dealer or your ag chem retailer, or visit www.pioneer.com/truchoice.
Syngenta's AgriFit Plan, one of the company's most popular financing options, allows farmers to finance both their NK seed and crop protection product purchase on the same favorable terms. “We understand the continuing challenges our customers face in the present farm economy,” Syngenta's Minnichsoffer says. “The key is to provide purchase programs that deliver value. That's why we developed a program to provide our customers an opportunity to finance both seed and selected herbicides and insecticides at up to 2½% below the prime interest rate.”
To receive the 2½% below prime deal, farmers must buy $15,000 worth of seed bundled with $10,000 of qualifying crop protection products. “We are not particularly interested in bundling only as a mechanism to entice customers to use more of our products,” Minnichsoffer says. “Growers need freedom to choose, and we want to provide a wide array of options. If it is in the best interests of the grower to include both our seed and crop protection products, then the seed advisor [dealer] or retailer is in the best position to package a crop solutions offer that provides greatest benefits.”
And new seed-only financing from Syngenta this year is its NK Community Choice Option, available in certain states. This industry-first option gives customers access to the same competitive loan rates through an interest “buy-down” program available at participating hometown banks. For more information, contact your local NK seed dealer, call the Syngenta Seeds Credit Department at 800/445-0956, or visit www.nk.com.
In another example of the many ways companies bundle products for farmers, BASF bundles products and rewards customers using its Harvest Partners points-based incentive program, in which Aventis (now owned by Bayer) and Syngenta also participate.
“Our business model focuses on the distribution chain by providing dealers with programs and products, allowing them to match the best bundled agronomic, economic and service package for each individual grower,” says Dale Locken, U.S. sales director for BASF. “Then retailers reward good customers with points earned in our Harvest Partners Preferred Customer Program.”
Bundling and monopoly?
Monsanto applied a bundling strategy years ago in research and development when it created the most successful product bundle ever: Roundup Ready seed with Roundup herbicide. It is so successful, say some economists, that it has been monitored for antitrust issues.
But before jumping to negative conclusions, understand the new market behaviors and strategies undertaken by today's chemical and seed (biotech) industry players. According to Peter Goldsmith, ag economist, University of Illinois, farmers seem to have two major concerns about biotechnology supply firms. One, innovations such as genetically modified seeds command a price premium in the marketplace. Two, biotech firms try to mitigate their large investment and greater risk through more extensive supply chain controls such as vertical integration and licensing.
“Considering these new types of controls, one can see why Roundup has become the poster child for bundling with the potential for antitrust in agriculture,” Goldsmith says. “Monsanto, through its use of licensing, restrictive contracts, technology fees and bundling, has made farmers uneasy. This rapidly adopted bundle says that Monsanto did a great service to growers by figuring out the technology relationship between the herbicide and the seed, because many farmers love the features, benefits and convenience they get with this bundle. But at the same time they're leery of one company trying to control too much,” he says.
“However, despite Monsanto's efforts and increased industry concentration, marketing power [by one firm] appears to be muted. Farmers not only have alternatives among genetically modified products, but there are unmodified substitutes available,” Goldsmith says. “And there is little evidence of excessively high prices combined with limited access, which would be a sign of significant market power.”
Although Goldsmith sees no firm evidence of predatory monopolies at this time, he says farmers will likely have to learn how to deal with constricted markets in the future. “In a global economy, technology is going to be the critical component of U.S. agricultural competitive advantage. Other countries have advantages in labor costs or government support, while the U.S. has the edge in technology,” he says.
Farmers who bundle to win
Goldsmith says one way farmers can try to survive the current commodity-based ag economy is to band together to exercise market power and mitigate some of the price discrimination they are facing.
“Or farmers can turn the tables, using similar bundling strategies to differentiate their own unique products and services to end users, allowing farmers to price discriminate,” he says. “But for farmers to capture more value, they've got to make the client — that is, food processor, food manufacturer, retailer or whomever — value what they do, as opposed to what someone else does.”
Goldsmith can easily cite numerous examples of farmers who are leading this transition from commodity-based business model to a knowledge-based business model. “One particular group of farmers, known as Ag Guild of Illinois [www.agguild.com], is as far along as any group of producers I know in understanding value creation and delivering a unique and consistent quality product to an end user,” he says.
The group is currently marketing a high-isoflavin soybean to a company called Protein Technologies International (a DuPont company) in St. Louis (www.protein.com). PTI is marketing soy-based products that help lower cholesterol and reduce risk of heart disease. “This group of farmers has figured out the mapping between the soybean varieties and the isoflavin levels — given the soil type and other variables — which is yielding a homogenous product that the buyer wants,” Goldsmith says. “Their knowledge has added value here, and they are bundling that with the bean.
“What we're really talking about is U.S. agriculture departing from a commodity-based model to be integrated more closely with the greater economy of differentiated products and services,” he explains. Most farmers would prefer to continue to produce as in the past. But global agriculture makes it difficult, especially when many countries are now producing commodities.
“I encourage farmers not to sit by and wait for the next ‘soybean’ [big product] to come along. Even if it does happen, excess profits will be quickly driven out as the technology moves offshore — aided by the global economy and facilitated by multinational firms,” Goldsmith adds.
“For U.S. producers, the challenge is to create value beyond the product itself — something unique that is not easily replicated or imitated by other producers throughout the world. And these sources of value are such things as service, knowledge and relationships.”