Agribusiness has faced tough times, but the outlook is positive. Satish Shankar, a partner with Bain’s Industrial Goods & Services practice, offers some rules that winning agribusiness companies follow, including building on proprietary assets and embracing digital.
Read the Bain Brief: Can Agribusiness Reinvent Itself to Capture the Future?
Read the transcript below.
SATISH SHANKAR: These are tough times for agribusiness. The S&P 500 has generated a return of 7% per annum over the last three years. In the same time, the S&P Agribusiness Index has been flat. Despite the challenging times, what we're finding is that the best agribusiness companies are generating very good returns. We looked at 200 listed agribusiness companies across the world, and we found that the top 15% generated a return in excess of 20% over a 10-year period.
Looking forward, we believe the outlook for the agribusiness sector is positive. We're expecting a 60% increase in global demand for the top agri-commodities over the next 40 years. There are eight rules to winning in agribusiness. Let me touch upon a few of them.
The first rule in agribusiness is to create and capitalize on proprietary assets. These proprietary assets could be physical assets like a tight distribution network or a tight sourcing network, or they could be intangibles, like intellectual property.
Take, for example, CP Group. CP Group started off in Thailand as a poultry feed supplier to farmers. They also started to supply day-old chicks to these same farmers. They started to buy the grown-up chicken from the farmers and created an integrated poultry business, which has served them very well, not only in Thailand, but in other markets like Indonesia.
The second rule is to strive for differentiation. This is an oxymoron in the context of a commodities business, but we find that the most valuable agribusinesses are able to create differentiation either through sourcing or through genuine product differentiation. For example, many of these companies are able to offer organic product, fat-rate certified product, or sustainable product to their customers and extract a premium from that. There are also opportunities to create product differentiation—for example, supply of artisanal coffee, or cholesterol-free cocoa.
The third rule is to embrace the digital age. Typically, we associate digital with consumer platforms like Uber, Airbnb and so on. We, however, believe that the agribusiness is ripe for digitalization. The reason for this is it has a very fragmented upstream network in the form of millions of farmers. There are a significant number of intermediaries who play a role between the farmer and the customer, and there's significant wastage across the entire value chain.
We're already seeing companies like Climate Corp., which is owned by Monsanto, and John Deere leveraging digital technologies such as block chain, the Internet of Things, and Big Data to reduce inefficiencies across this value chain and create significant value in agribusiness.