Keywords Business & Finance;
This is the draft of an article on the Stock and Agent Industry. My interest in the industry arose from a minor involvement as an expert witness in the recent commercial litigation on the Wrightson/Dalgety merger. But that is not the focus of the study. Rather it is to examine the contemporary industry using some recently developed economic analyses, and look at its past and future.
This is being circulated comment; all of which would be welcome. The bibliography is not yet attached – omissions would be of interest.
The paper was originally drafted to go in a book on the distribution sector which did not proceed. This is a resetting of the paper written in 1986 or 1987.
Stock and station agents are not part of the distribution sector, although one of their activities is merchandising. However, the industry illustrates many of the features observed in the earlier part of this monograph. It is this application of the principles to a specific case which justifies the inclusion of this chapter in the study.
Stock and station agents are an example of what might be called “the department shop problem”. It is not at all obvious why such stores should sell as diverse a range of items as foodstuffs, baby wear, and furniture; nor why the significance of department stores is diminishing. Stock and station agents provide an even more diverse range. The Examiner of Commercial Practices identified their main activities in 1986 as
(a) seasonal finance to farmers
(b) agricultural merchandising
(c) real estate services
(d) insurance services
(e) grain and seed merchandise
(g) stock drafting
(h) livestock trading
(i) deer and goats
The range of activities has changed over time. The Examiner noted “historically, [they] were involved in retailing the whole range of products which the farmer might need, including groceries, electrical appliances, whiteware, and pots and pans. In recent times the range of goods sold been reduced substantially as stock firms have concentrated more on direct farm inputs such as animal health products, agricultural chemicals, fertilizers, and fencing material.” Other activities in the past included ship garages, liquor’ outlets and motor vehicle dealerships. New activities being added. Deer and goats are recent,.and the provision of computer based farm information services is likely in the near future.
At this stage it is useful to introduce some of the concepts and terms around which the chapter is written. First we observe that stock and station agents offer a “bundle” of products; that is typically the farmer purchases a collection of goods and services from the agent at a lower price than if they were purchased separately. The reason for this is often “economies of scope”, that is – it is cheaper for the agent to provide the bundle than to provide the services separately. Economics of scope are often more important than “economies of scale”, that is – the average cost of production falls with increased output.
Sometimes the bundling will occur because of “tieing”. That is, the firm requires that once a purchase of one good or service is made, other purchases are made. One source of tieing is some sort of monopoly provision of the initial purchase. We also use the term’ “gluing”, where the provision of one commodity or service reduces the cost of provision of the entire bundle. Gluing is not in the normal jargon of the economics profession, but has been used to explain stock and station industry phenomena. It differs from tieing, because the former is a production phenomenon, the latter a selling phenomenon.
Finally we note that customers generate “search costs” when they are purchasing. There are economies of scope in search costs. It may be less costly (measured, say, in time) for the farmer to take a bundle from one stock firm, than to search around for the best/cheapest combination from a number of traders.
The relevance of these concepts to the distribution sector should be evident.
The Origins of the Stock and Station Industry
Stock and station agencies are not unique to New Zealand, but they are not world wide either. They exist in Australasia and to a lesser extent Latin America and parts of the mid-west of the USA, that is – where extensive pastoral farming is predominant.
Mr G.R. Macdonald describes their origins as follows:
“The stock agent started either as. a merchant and shipping agent or as an auctioneer. When the merchant landed, say, a shipload of sugar, he employed an auctioneer to sell it for him. Then these two separate functions started to coalesce into one firm. The man who was able to finance the farmer got the selling of his produce. The ability to finance became the key to success. The stock and station firm as it has developed, is the farmer’s banker; it sells his stock and his wool, buys his grain and his seed, which it dresses and sells, finds a buyer for his farm and finances him into a new one, keeps his accounts, makes out his tax returns, and even helps him to make his will. Firms have agents all over the country, experts who will execute buying orders for stocks of all sorts and who will see that the farmer is supplied with all the stores he wants.” (1969, p 138)
This is an insider view (and one which is a little outdated given the changes we shall discuss below). An economist would identify two factors. The first is economies of scope, that is – the production technologies of, say, selling produce and merchandising are such that it was cheaper to do both than each separately. We have not the evidence to probe the technologies in detail, but some of the cost savings are evident enough.
The second factor is the role of seasonal finance, reported by the Commerce Commission as “the glue that holds the `bundle’ [of services] together” (1986, p.24). While, as we shall see, the role of seasonal finance is not as important today we might speculate that it was crucial in the past. The livestock farmer requires seasonal finance to match the on-farm growth of his development. Monitoring the security of advances on livestock requires greater involvement than for a mortgage on land, or even on crops. Thus the stock and station agent came into being because it involved much lower monitoring costs than, say, a trading bank. Not only would the agent be knowledgeable about the production side of the farm but could, where necessary, monitor the sales of merchandise which were provided on credit. For instance Anderson reports that during the slump of the 1930s, Williams and Kettle salesmen carefully scrutinised farmers’ orders for groceries. Items considered a luxury were marked off and not delivered. One farmer recalled “getting a letter telling us not to drink so much tea” (1974, p.138)
Of course, the technological and social arrangements which created the stock and station industry are not set in perpetuity, and one of the fascinations of the industry to the general economist is the disintegration of the past arrangements and the industry response. We have already noted that since the mid 1960s the general retail sales activities of their merchandising have virtually disappeared, according to the Examiner because “stock firms were no longer competitive in non-farm related product trading, owing to increased competition from diverse sources” (1986, p.16). The Pappas, Carter, Evans, Koop report indicates that the agricultural merchandising function is also under threat. They report that co-operatives and trading societies have been extremely successful relative to stock firms, and mention that “Wrightson NMA was earning only 1.4% profit on the sale of merchandise” (p.6). Moreover a comparison of 24 products sold in the Hamilton branches of Wrightson NMA and the Auckland Farmer Unions, shows the latter was able to offer prices which averaged 9 per cent lower than the stock firm.
As we shall see, the Examiner also reports that the stock and station industry no longer dominates many of the other activities listed above. Most dramatic has been the change in the provision of seasonal finance, the glue which holds the industry together.
As recently as 1972, Standbridge was able to state “[s]tock firms are the predominant short term financiers of New Zealand agriculture, by dollar volume” (p.318). He reports stock firm advances at June 30, 1971, being $140m compared to trading bank advances to farmers of $99m. However trading bank advances were growing more quickly and in 1979 they overtook the stock firm advances. The Examiner reports that by March 31 1984, the agents advanced $400m and the Trading Banks $806m (1986 p.9).
Standbridge’s account provides some insight to the mechanisms by which seasonal finance provided the glue. He observes that:
“the average interest rate charged on loans was in most cases less than the average cost of capital. There is also little interest rate variation … the reasons for this state are that:
“(i) commission and merchandising business generation is considered by stock firms to have far more impact on profitability of an account than interest rate variation;
“(ii) the influence of the small effectively permitted range of rates is considered to have an insignificant effect on the behaviour of farm borrowers;
“(iii) stock firms have not traditionally used interest rate adjust as a manipulative tool to equate variation in economic cost.” (p.353-4)
Thus interest rates were the “loss leader” for the industry. Below cost advances were used to tie the farmer into purchase of the rest of the industry services. This cannot work by itself. Farmers in receipt of the advances were required to purchase the rest of the services.
When asked by the AERU to what extent they felt tied by their source of finance, 8 per cent of all farmers felt obligated to buy goods from the same source, and 13 per cent felt obligated to sell produce through the same source (Shepard, McCartin, and Pryde, 1986). This figure may appear low until the 69 per cent of farmers receiving seasonal finance from banks are discounted. It would appear that about a third of those whose seasonal finance comes from stock firms feel tieing exists.
Collective Pricing Agreements
Another mechanism which blunted the selling of cheaper alternatives was collective pricing agreements. Three Collective Pricing Agreements covering livestock and woolbroker services were registered under the Commerce Act 1975, in 1977. The arrangements were, of course, much older. The Examiner remarked that “the practice of determining woolbrokers’ charges on a collective basis has been in operation since the turn of the century or thereabouts.” (October 1977) The other arrangements appear to have developed in the 1950s.
The case put forward by the stock and station agents for the Collective Pricing Agreement has a quaint ring a decade later. Their association argued that it was in the public interest on the grounds of protection “a form of insurance against cut-throat competition which it [is] claimed could lead to the elimination of the small operators”, profitability (which it was claimed without evidence has declined), and responsibility (as demonstrated by the Association’s attitudes). The Examiner supported the agreement, with a number of conditions. In essence the set rates would be maxima because the Association practice “unreasonably limits pricing competition” while his proposal “would have the benefit (to the farmer client) reference to a guide setting out the recommended charge for the service”. Moreover the maximum rates would be set after a approval by the Department of Trade and Industry (Office of the Examiner, July 1977). In passing it may be mentioned that while the Commerce Commission endorsed the notion of the rates being a maximum, farmer mythology is that no one got a discount.
The Reducing Importance of Seasonal Finance
The Collective Pricing Agreements were deleted in November 1984. In that time the industry had gone through a change. Details of why the traditional bundle had become untied are not clear, but the broad directions can be assessed. First, from the mid 1970s the financial system began to undergo great strains, partly as a result of the high rate of inflation but compounded by government measures to control interest rates and the direction of lending. It might seem that this would be of advantage to a subsidized lender, but the industry was facing competition for raising funds.
So agents found that the interest rate controls restricted their ability to raise funds. Note that about half the industry advances are matched by farmers’ deposits, many of whom would have turned to other financial institutions seeking better returns. Moreover, given the deterioration in the financial situation of the farm sector over this period, farmers probably had less to deposit anyway.
A second factor was that it became easier to monitor a farmer’s performance. One of the features in the histories (or should we say hagiographies) of the various stock and station agents which struck this outsider was the rudimentary farm accounting and budget that keeps getting alluded to. This was also true for the agents themselves. Professor Bryan Philpott started work in a stock and station agency in 1936, and recalls being told that it was unnecessary to study for an ACA, since the firm’s accounting procedures were “special” to it. By 1972 Standbridge could still write “[s]tock firms are increasingly insisting on a personal budget to accompany loan application” (p.341). He also remarks that there was a “lack of care and experience at branch level in the use of budgeting techniques” (p.326). The development of methodical farm financial systems by the stock firms opened the opportunity for trading banks to use them as the role of the “shrewd … judge of land and stock” (e.g Anderson, p.12) was demoted. Moreover as stock firms tightened up their financial management, the attraction of their casual approach relative to the banks was lost.
Third was the demise of the stock firm as a retail store, as the comparative advantage they had begun with was eroded by modern retailing techniques. Initially the farmer would have found the merchandise over-priced, partly from the relative inefficiency of the agents but also because there was a margin to cover the subsidy on interest. Thus it could be in the farmers’ interest to use untied credit from a trading bank, even though the interest rate was higher. As the stock firms withdrew from retailing, it became harder to tie the credit since some of it-would have to be spent outside the firm.
As the seasonal finance lost its tieing power, the stock and station industry lost its dominance in the provision of many products and services When preparing a report for the proposed merger between Wrightson NMA Ltd and Dalgety Crown Ltd in 1986, the Examiner for Commercial Practices identified the market shares for much of the industry. They are shown in Table I. The general picture is that except for store and auction sheep and cattle and some grain and seed merchandising, stock and station agents have significant competitors. Even for wool broking, the share is only about 75 percent and decreasing. It is noticeable that in the new growth areas such a deer and goats and kiwifruit, the stock and station companies have only half of the national market.
The Structure in the Industry
Before considering this continuing dominance in livestock drafting, and the lessons to be learned from recent changes in wool broking, it is necessary to say something about the structure of the industry. At the turn of the century there were about 80 stock and station agents. In 1960 the were 20 odd. Following the merger between Wrightson and Dalgetys there will be seven companies, as follows:
Wrightson Dalgety: nationwide coverage
Elders Pastoral: seeking nation wide coverage
Williams and Kettle Ltd: Hawkes Bay, East Cape
Farmers Co-operative Organization Society of NZ: Taranaki
Pyne Gould Guiness Ltd: Canterbury, Marlborough
Reid Farmers Ltd: Otago
Southland Farmers: Southland
Of these only Wrightson Dalgety is a national company, with around 70 cent of the activity of the seven firms. It has grown up by a process of amalgamation of smaller (and often regional) companies, and is a part of the Fletcher Challenge Group. Elders Pastoral is strong in Auckland, Southland, and the lower North Island. It is a part of Elders IXL Ltd, which includes Elders Pastoral Ltd – which it describes as “Australia’s leading Pastoral House operating a nation-wide network of 400 branches and stores”. It entered the New Zealand market in 1984 by purchase of the Yates Corporation’s interests in the pastoral industry, and has grown by acquisition. The other five firms are each regional.
In my view the (common) description of the industry reducing from, say 80 firms to 7 firms is misleading, since part of this is the process of amalgamation of regional firms. What matters to the farmer client is that whereas once he or she had five or six firms in his region to choose between, today as one or two (plus specialist services).
The existence of national and regional competitors raises two interesting issues. One, the process of growth through acquisition, is dealt with below. Here we consider the advantages of a national stock and station firm.
Mr Sholto Mathews, General Manager of Elders Pastoral and previous deputy managing director Dalgety Crown, submitted reasons for and benefit of national coverage in his evidence to the Commerce Commission’s merger enquiry (1986). In summary, the benefits arose from four sources. First there are stock movements between regions. Second a national competitor is able to reduce exposure to regional risks (such as a natural calamity). Third, there are economies of scale from volume of sales, and services more easily reaped from a national agent. Fourth, a national firm has a wider range of career opportunities.
Note however that a strong regional firm would also attain some of benefits of the latter two sources, relative to a thinly spread national firm. One also wonders if some co-operation between regional firms might give some of the benefits of a national coverage. If Mr Mathews is right then either this co-operation will have to work, or the regional firms will go to the wall and or be absorbed by a national competitor.
Despite the inroads by other industries into many of its activities, the stock and station agency remains dominant in woolbroking and livestock trading. Both involve strategic facilities of auction rooms and stockyards respectively. As a first step each facility may be treated as a non-contestable natural monopoly. Each (appropriate) region can sustain only one such facility, which experiences economies of scale. Moreover, establishment costs are high, and many are sunk (that is, cannot be recovered if the facility is used for another purpose). This means that the owners of the facilities have some monopoly powers.(If the facilities were contestable, that is – establishment costs were not sunk and there were no costs of exit – then although a natural monopoly the facility would not have monopoly powers because any such powers would be challenged by the threat of entry. (Sharkey 1982))
While ownership of the strategic facility could be used to raise the price (i.e. the commission), that there is usually more than one owner and that there is no longer a collective pricing agreement between them limits this possibility. However, there exists the possibility that the ownership could be used to tie the farmer into the rest of the stock and station agents’ services by giving their clients preferential access to the facility. Note that even if the stock firms have no policy or practice of such a strategy, farmer belief that it existed would be sufficient for the owners to benefit.
Ownership, or more precisely the various property rights, are important in determining the outcome. Stockyards, for instance, tend to be owned either by a group of stock and station agents, or as farmer co-operatives. When Elders approached various yards for access, that is the opportunity to use the facilities for a fee, they got a prompt and favourable response from those yards which were owned by farmer co-operatives while over a year later they were still negotiating, often at a very preliminary stage, for the yards owned by other stock firms. One cannot help conjecturing that farmers concluded that they would benefit from the additional competition provided by Elders, and that the stock firms came to a similar conclusion.
One means of public regulation to eliminate the potential monopoly powers of ‘a non-contestable common carrier is to change the property rights to what is called a “common carrier”. In the United States common carrier analysis applies typically to transport, telecommunications, and energy distribution. In Britain the term is used a little more widely to mean “a seller … required … to sell to all comers without discrimination. Railways, taxis, omnibuses and licensed premises (`pub’ and hotel) have been examples in Britain” (Everyman, 1965). Thus the common carrier need not physically transport a good or service; it can involve a commercial “transport”, such as occurs in freight depots, airports, liquor outlets, and auction facilities.
To see how this applies to wool auction rooms and stock yards, we need to consider each in further detail. Note that we take the usual economist’s approach and consider alternative forms of competition, testing to what degree each facility is a natural monopoly. Nevertheless the important role of an auction setting the tone of other industry transactions means that such competitive alternatives are more dependent upon the auction process than vice versa.
There are currently four wool auction centres: Napier, Wellington, Christchurch and Timaru, although it is possible that eventually there will be only two centres, Wellington and Christchurch, such is the cost of providing facilities and storage space. Recently developed “sale by sample” and “sale by separation” methods mean that the wool need not be assembled at the auction.
Until 1984/85 only stock and station agencies were involved in selling wool by auction. Indeed a condition of being an auctioneer was membership of the Wellington or New Zealand Woolbrokers Association, and in the latter case membership first required membership of the New Zealand Stock and Station Agents Association, which entailed providing a full range of stock and station services: livestock servicing, finance, grain and seed cleaning, merchandising, insurance and real estate as well as woolbroking.
In 1984/85, apparently by a series of accidents, a Wairarapa firm Central Wool Services – gained access to the facilities and secured 23 per cent of the Wellington auction sales “due in no small part to an offered cheaper service” (Office of Examiner, 1986, p.57-58).
A second competitive pressure was sales by private treaty which bypass the stock firms. These have grown from 15 per cent in 1982/83 to 23 per cent in 1984/85 of national wool sales (Office of Examiner, 1986, p.56). We need not here go through the merits and demerits of sales by auction or private treaty. What is evident is that they are in competition with one another, and the Examiner mentions improvements in the auction system in response to competitive inroads from private treaty sales.
Thus while the wool auction rooms may be non-contestable natural monopolies as far as auctioning is concerned (but sales by sample and separation reducing the importance of the region), they are not monopolies for woolbroking. This, however, was not the issue which the Commerce Commission had to consider during the Wrightson/Dalgety merger hearings. They were concerned about the stock and station industry, which is hardly involved in private treaty sales but deeply involved in auctioning. Elders (or any other firm) would be at a competitive disadvantage if they did not have the same access to auction rooms as the merged Wrightson/Dalgety.
In the course of the hearings, Wrightsons advised the Commission that, subject to the agreement of other shareholders, in future “experienced and reputable applicants will have no problems gaining access to wool selling facilities”. Participation of the New Zealand Wool Board, which becomes a part owner, is expected to ensure that these conditions are met.
Obviously, Elders are an “experienced and reputable” operator, and indeed the agreement opens the way for regional stock and station agents to use the auction facilities in another region. Operators who are not stock and station agents, such as Central Wool Services, are also covered. Thus stock and station agents have lost their traditional preserve of wool auctioning.
In effect the auction rooms have been converted to a common carrier; the de jure owners, the stock and station agents and the New Zealand Wool Board, have lost the property right to restrict entry.
Farm sales of sheep and cattle can be divided into three categories; (1) sales to freezing companies or “drafting”, (2) sales between farmers or “store stock”, and (3) sales to others, including for local consumption, or “prime stock”.
Over half of drafting is carried out by the meat works, and there also exist independents and the Primary Producers Co-operative Society. Thus the stock and station agent drafter is one of a number of competitors, and is by no means dominant.
About 47 per cent of prime stock is sold by other than stock and station agents (e.g. private traders and direct purchase), and 90 to 95 per cent of store stock involves stock and station agents. About 13 per cent of prime stock but two-thirds of store stock are sold by auction, the rest by private treaty. Auction sales may be held in the yards on a farmer’s property, but more commonly they are held in sale yards.
Thus while there are alternative selling options and venues, the saleyards are a potent strategic facility in the case of store stock. The sale yards are typically owned by the stock and station agents (in the South Island usually with local farmers also owning shares). However, actual ownership is not decisive for there is a requirement that those who wish. to auction livestock at the yards should be members of the Stock and Station Agents Association which, it will be recalled from the section on woolbroking, involves providing a complete range of services.
There have been cases of entry into the auction industry, but only two examples are cited and they are from some time ago. In the 1960s Rod Weir left a stock firm to set up his own – Rod Weir & Co – which was eventually amalgamated with Dalgetys. And J.F. Jones built his own stockyards in 1972 in the Waikato, mainly for dairy cattle.
However it was the judgement of the Commerce Commission, and the wish of at least 70 per cent of the farmers surveyed by the AERU (Shepard, McCartin, Pryde, 1986) that the stockyards should be open to all stockyard and independent traders. A solution similar to that for the wool auction rooms was put forward and accepted. Wrightson Dalgety said it was prepared to support access to saleyards on a fair basis by any party who was prepared to offer a permanent service for the sale of livestock. They defined the qualification for entry as normal financial standing and integrity provided the entrant is a licensed auctioneer and agrees to sell under the standard conditions of sale established for the yards (arguing that to do otherwise would cause unnecessary confusion to buyers) and accept majority decisions of all participants in the operation of the yards. Thus Elders, the regional stock and station agents, and other livestock traders have reasonable access to the yards, on a fee basis. The stockyards also become a common carrier.
Before drawing general points and prospects, one further behaviour needs to be considered. It may be summarised by noting that the relationship between farmer and agent is essentially that of a “customer market”.’
Okun (1981) applied the concept to the relation between retailer and customer. Because search costs, the seeking of alternative better (or cheaper) products, are high the customer, may not use the best (cheapest) retailer. A similar situation may apply to this industry.
In principle a farmer could continually and actively seek the best/cheapest stock and station agent. In practice there is considerable customer loyalty. The economic justification for the loyalty can be found. in the costs of seeking out a better agency. It is not easy to accumulate the information particularly as this involves assessment of quality of service and may also include reliability over time (i.e. the extent of support during times of hardship). Customer loyalty thus reduces search costs, and provides some security under uncertainty.
Some indication of the strength of customer loyalty can be assessed from the AERU survey of farmers, who were asked whom they would turn to if they could not use their current major supplier:
Respondents reporting they would make “no change” or “unknown” when asked “if in the future you have to change from your present suppliers … [to] … name the supplier you would change to.”
Wool broking -20.1%
Livestock buying/selling – 20.4%
Financial advice – 41.5%
Seasonal finance – 41.2%
Medium/long term finance – 38.8%
Grain/seed services – 22.1%
Fertiliser – 30.3%
Animal health products – 25.2%
Chemicals – 22.0%
Fencing materials – 24.2%
Insurance – 42.0%
Real estate services – 30.7%
Source: Shepard, McCartin, Pryde (1986)
Respondents were not required to give a considered opinion. That between a fifth and two-fifths gave no answer suggests that many farmers have given little if any thought to the issue.
The gate by which the customer/agent relation is important. Real estate services are often crucial, it being claimed that the farmer who receiver satisfactory service in establishing his farm is likely to stick with that stock and station agent. A couple of undocumented instances are revealing. The Rod Weir & Co success came from a network of real estate agencies which led to ongoing relationships in livestock trading merchandising and other industry services. An ex-Wrightson manager described how satisfied Wrightson’s customers from Southland, moving up to South Canterbury, first went to the Wrightson real estate in Timaru for assistance with farm purchase and establishment, and then stuck with the firm. In the light of such experiences it is not surprising that Elders announced extension into a number of regions by the establishment of real estate agencies.
Nevertheless the growth from this strategy may be slow, compared to the heady days of the 1960s when stock numbers were increasing rapidly and Rod Weir & Co was successful. In their evidence to the Commerce Commission, Elders staff remarked that “organic” growth, that is by customers switching to them in contrast to growth by merging established firms, had not been great. Presumably they are expecting some boost from the Wrightson/Dalgety merger, since it is acknowledged that some customers will be lost, some loyalty broken, by the amalgamation and reorganisation process.
Note that the dominance of Wrightson Dalgety in rural real estate (about 47 per cent). There was no great concern about it inhibiting competition, despite real estate’s importance as a customer gateway to the stock and station industry. This activity is contestable, with low sunk costs, although those who provide a national network may have advantages over the individual establishment.
The Future of the Industry
With the losing of its seasonal credit tie in, the conversion of wool auction rooms and stockyards to common carriers, and the evident competitive pressures from specialists, we might well expect the stock and station industry to disintegrate. That does not mean that, say, Wrightson Dalgety will no longer exist. Disintegration would mean that the firm would run a set of separate specialist services, just as already Wrightson has lived off Wrightcars and Wrightson Appliances. Nor would we expect this disintegration to occur overnight. Rather various activities would separate out over time. Prime candidate for the next activity to do so is woolbroking, given the growing importance of private treaty sales, the success of Central Wool Services, and the conversion of the auction rooms to common carriers.
To put the same point somewhat more positively in industry terms: what is there to keep the bundle of stock and station services together, particularly given that in the current regulatory environment any artificial tieing of the industry together is likely to be prohibited?
In order to survive in such circumstances firms in the industry will need to experience some economic advantage relative to the specialists. There are some identifiable examples. For instance, independent livestock traders have been less successful in the South Island than the North, because the industry is more seasonal in the south, and presumably southern stock firms can redeploy their traders in the offseason. Whether such economies of scope are strong enough is to be seen.
The advantages to the customer of the “one-stop shop” should not be ignored. In industry conversations the possibility of the stock and station as a specialist financial and farm adviser gluing together other services was suggested. However, the AERU survey of farmers found that 50 per cent of respondents got their major financial advice from an accountant and 21 per cent from a trading bank. Just on 10 per cent reported Wrightsons, Dalgetys, or Elders as the chief financial adviser. (The regional stock firms were not separately identified.)
Communications technology is a possible glue. The Pappas et al (1986) report identifies the following opportunities:
Impact of Communications Technology
Division – Electronic Distribution Potential
Wool – Catalogues, market reports, absentee bids
Livestock – Market reports, sales
Rural finance – Account information, direct debiting for sales
Trading – Promotion, price comparisons, sales product use information
Real estate – Listings, enquiries
Insurance – Promotion description, price comparisons, sales
Other – Gross margin calculations, cash-flow budgeting, weather forecasts, futures contracts, farm management news and information, travel information and bookings etc
Elders Pastoral has already committed some $A30m to its Australian computer system and is developing a videotex system “farm link”, video selling of livestock, and a system for the electronic marketing of wool called “wool bid” which is expected to cut wool selling costs by 25 per cent. They believe a conservative estimate is that 30 per cent of Australian farmers will be using videotex by the year 2000. About 15 per cent of Elders Pastoral livestock sales are already sold by video auction, and electronic marketing of wool is expected to replace the traditional methods by the turn of the century.
The New Zealand industry appears to be sceptical, although Elders is keen to sell its rural information systems in New Zealand. Start-up costs are high, and there are substantial economies of scale. To what extent the farm culture would take on board the videotex service is uncertain; a problem recognised about related applications of the technology to retailing and personal finance. Despite their higher cost to the farmer, gathering at the stockyard sale, and the sharing of the kitchen cup of tea with the representative are important to the farm way of life. One suspects that the new communications technology will be an adjunct rather than a replacement to the personal contact of the stock and station agent. If it succeeds it could be a powerful glue, giving the stock firm which supplies the service a powerful and legitimate competitive advantage.
Note that there already exist some farm applications of the hew technology including Brierley-owned Bureau of Primary Industry as a videotext operator and a “direct stock sales” company in the lower North Island.
Vertical integration is another possibility. For instance Wrightsons bought into Southland Frozen Meat, partly with the idea of providing better drafting facilities to their clients. This does not appear to have worked, and the two firms are now treated separately in the Fletcher Challenge Group. One surmises, in terms of principal agent theory, that common ownership was insufficient to create the economic integration of the two agencies.
Within the Elders IXL Company is the international group (separate from the pastoral group) whose activities including trading and processing of Australian, New Zealand and European wool, and Australian and New Zealand meat. Its trading network involves 4,000 staff, 3,000 of whom are outside Australia. The Pappas et al report almost sees Elders New Zealand stock and station activities as a means of collecting produce to add to its worldwide trading supply (p.19). Perhaps this is a vertical integration which would hold the industry (or part thereof) together.
Finally we can speculate on the number of firms. The industry view is that in the very near future there will be two nationals, Wrightson Dalgety and Elders, and three regionals. The long run future of the three regionals has already been speculated upon; we suggested that their survival may depend upon a degree of national co-operation between the three. Once Wrightson has digested Dalgety we might speculate that they will enter the Australian market by acquisition.
There are fewer department stores in Christchurch today than when I grew up there. Millers has been taken over by the City Council for office space, the DIC building is now the Cashfields arcade, and the remaining stores offer space for independent dealers. The change is starker when allowance is made for the increase in retailing in the city centre, but the new shops are boutiques and specialists often arranged in (what I must admit are rather pleasant) arcades. The other change evident to this observer is the bankcard stickers on the entrance doors, contrasting with the store accounts my parents used.
If I had grown up in a rural town I would have observed the same reduction in the number of stock and station agents and the increase in specialist-suppliers – perhaps even a groceries supermarket. Like as not the trading bank would be more prominent today too.
In economic terms the two processes are not unrelated. New technologies resulting in the loss of economies of scope, alternative sources of trade finance, changes in the regulatory environment, and a lesser importance of customer loyalty all worked to unbundle the goods and services provided. It is noteworthy however that the personal interaction remains; neither mail order nor electronics have replaced the shop.
The lessening of importance of department stores and stock and station agents does not mean that the phenomenon will be of no significance in the future. No doubt operators will seek out other means of gluing their bundles. The financial supermarket is a noteworthy example of a growth phase of the phenomenon. Retail stores still seek what, to an outsider, appears to be an unusual combination of wares (e.g. appliances and furniture). The arcade of boutique-type shops is, in its own way, a case of bundling.
Even more fundamentally, the processes observed in this chapter of changes in technology and regulation, of changing new sources of competition and services, and of consumer preferences will remain important in the distribution sector, be it the distribution of household goods and services or of rural goods and services to the farm industry.
|Commodity||SSA Share%||Main Alternatives|
|Seasonal finance||34||Trading Banks|
|Agricultural merchandising|| Trading societies, dairy|
companies, vet clubs
|Animal health products||45||“|
|Real estate services (rural)||47*|
|Grain & seed merchandising||55-95||Merchants, farmers|
|Horticulture||50**||Specialist horticultural firms|
|Stock drafting||<50||Meat companies, |
|prime sheep||50||private traders|
|prime cattle||51||direct purchase|
|Deer and goats||about 50||independent traders |
|producer cooperative (mohair)|
|specialist trader (velvet)|
|meat companies (meat)|
|Woolbroking||75||private treaty sales |
Central Wool Services
Source: adapted from Office of Examiner (1985)
* Wrightson Dalgety share only
** Companies associated with SSA