Is your food and drink business at risk of being disrupted by a platform?

Online businesses such as Amazon, Airbnb, and Uber are now part of our everyday lives and represent a large share of consumer spend and stock market value.

These businesses have grown rapidly by attracting millions of users and thousands of suppliers to provide goods or services via their apps and websites. This type of business is known as a ‘platform’.

How do platforms work?

A platform is an online business that facilitates a transaction between two third parties. The platform provides the marketplace and functionality to perform the trade but does not own the inventory or assets involved.

For example, Uber is the world’s largest taxi platform but owns no taxis; Airbnb is the largest hospitality platform but owns no hotels; Alibaba is the largest merchant platform but has no stock.

Platforms upturn conventional business wisdom: rather build assets, acquire customers and sell things the company produces, platforms attract buyers and third-party sellers, facilitate transactions between them on the platform and monetise the transaction either though fees for advertising or sales commission.

Network Effect

The key to a platform’s success is ‘network effect’ – a virtuous growth cycle where the presence of more buyers attracts more suppliers which in turn attracts more buyers and so on.  As a result, the platform develops scale and power. This can result in suppliers becoming dependent on the platform unless they have brand differentiation and direct sales.

The platform gains further advantage by collecting data on transactions that enable it to introduce new users services such as product recommendations, and new supplier services like dynamic pricing (e.g., Uber’s ‘surge prices’) that incentivise additional supply.

Platforms disrupt industries

Platforms increase choice for consumers by introducing new supply to the market that did not exist before, like Uber drivers and AirBnB hosts. The platform disrupts conventional advantages based on local captive market or lack of price visibility.

Levels of platforms

Level 1 platforms are e-commerce marketplaces like Ebay. Participation involves listing goods for sale. There is limited technology integration with the third party suppliers.

Level 2 platforms link supply and demand for specific services, for example, sharing of agricultural machinery. The platform provides visibility and quality assurance.

Level 3 platforms are true ‘big data’ platforms involving third party applications running on the platform. For example, MyJohnDeere collects data via sensors on John Deere equipment and integrates with other agriculture software applications. The platform develops intelligence about farm operations that farmers then use to reduce costs and improve yield.

Platforms in food and drink

Platforms are emerging in many sectors of the food & drink industry, including:

1. Agronomex

Agronomex is an online fruit and veg platform.

Pricing is by auction or fixed price using a ‘Buy Now’ feature.

2. Sellmylivestock

Sellmylivestock is a livestock platform with over 20,000 registered UK farmers.

The platform offers sales of cattle, pigs and sheep for breeding, growing or store.

3. Graindex

Grain types traded on the platform include wheat, oats, barley, peas, beans and oilseed rape.

Trading is both futures and ex-farm.

4. Procsea

Procsea is fish trading platform.

Information on fishing zones, ports, techniques and quality are displayed for each listing.

Procsea arranges collection, customs and delivery through approved transporters.

5. Yumbles and Yumbles Trade

Yumbles is an artisan food and drink platform. It offers independent small-batch artisan producers opportunities to sell direct to consumer or to retailers and restaurants.

6. Farm-r

Farm-r is a platform for farm machinery sharing, enabling farmers to rent idle equipment.

7. FarmPay

FarmPay is a farmer-to-farmer payment platform for livestock trading. It uses escrow accounts to hold payment securely until buyers and sellers complete the transaction.

In future FarmPay aims to become a full supply chain management platform using ‘big data’ to tackle inefficiencies in livestock chains and improve market signal from consumer all the way back to breeder and finisher.

Implications for food and drink businesses

1. Platforms offer a new route to market. However, the price of distribution in the form of listing fees and platform commissions can reduce profit margin not to mention the running costs of maintaining presence on the platform.
2. Platforms are an alternative to traditional intermediaries such wholesalers or physical auction markets. The commercial activities of most producers are designed around these channels and relationships so moving to a platform requires new processes and skills, such as online marketing, to use the new channel effectively.
3. There is a risk of platform dependence if the majority of sales are on a single platform. In this case, changes to trading rules, commission levels or algorithms can result in sudden changes to volumes and margins. It is better to spread business across more than one platform and maintain traditional channels.
4. Maintaining strong product differentiation and brand is also key to ensuring a balance of power between platform and supplier.

Disrupt or be disrupted

Platforms provide new digital tools for practices that have always existed in the industry, like sharing equipment, selling goods at auction or advertising. The benefit of platforms is that they open up capacity beyond the local market and can lead to much more efficient supply chains using big data.

At the same time, food and drink businesses must consider the risk of being disrupted by platforms and develop platform innovation and participation strategies to manage this risk, including establishing platforms of their own, pricing and data policies, and ongoing product differentiation and brand strategies to prevent commoditisation.

For more information please contact Brian Mooney (brian.mooney@aabconsulting.uk) or your usual AAB contact.