The Diversification Dilemma
DEFRA’s announcement of a lump-sum retirement package for farmers seeking to exit the industry from 2022 has grabbed headlines in recent months. This comes after the Agricultural Transition Plan unveiled phasing out of BPS by 2027 with future support for innovation, young famers, and fundamentally a de-linking of public funding from production. It therefore comes as no surprise that farms and estates are feeling increasingly pressurised to focus attention on alternative enterprises that will enable their business to survive and flourish in times of change.
Rural diversification is nothing new; farms and estates have diversified their income streams in a variety of ways over the decades, with most keeping non-farming investment firmly on the agenda. Early adopters of environmental stewardship, farmhouse bed and breakfast, or farm shops may have been seen as trail blazers at one time, but as trends have developed, rural diversification and innovation is now a mainstay. The principles of spreading risk, adding new revenue sources and increasing competitiveness are all valid, but it is vital to step back prior to taking the plunge, rather than acting on compulsion or grasping at the latest trend.
So, how should rural businesses approach diversification?
1. Set clear and achievable objectives
Establishing objectives is the first stage for any business as it will inform constructive decision-making. Objectives can be broad and incorporate high level priorities, such as the business structure in 5-10 years’ time, purpose, a succession programme and financial returns. Purpose is particularly relevant in a rural context given the sensitive balance between economic, social and environmental factors. Defining the motive for the business is often more productive than simply saying “it’s what we do” or a blinkered approach to tangible outcomes above all else. If for example, succession is imminent, the objectives should reflect the next generation’s skill-sets and areas of interest. Equally financial returns can be interpreted in different ways, with varying degrees of emphasis placed on profits, appreciation of capital assets or reinvestment. Lifestyle and farming ethos also forms a key pillar; so it is vital to understand where the consensus lies and to acknowledge that every business is different.
2. Strategy
Once a business has clear sight of its overarching objectives, the next stage is to map out how they can be achieved. The strategy is a vital component and is often the most challenging, as it requires delivery of what can be ‘blue sky’ thinking. That said, the strategy does not have to constitute a rigid field by field game plan. It should instead be a guiding framework for day-to-day decisions, and an agreed anchor for the business. If improving financial performance is an objective, then the strategy will outline the preferred means by which this can be executed; such as adding value to existing commodities, increasing efficiencies of scale, reducing labour costs, or finding new revenue streams. In some cases, the strategy will involve a combination of the above, at which point diversification comes into the equation. The strategy must identify fundamental drivers for the business, such as available resources (land, working capital, talent etc), financial resources/constraints or position in the market. Time taken at this stage is invaluable in mapping the key pillars of the business, together with the proposed direction of travel.
3. Tactics
Having established a strategy, tactics are required for practical delivery. The tactical stage is far more flexible and fluid; it will essentially cover the day-to-day activities required to execute the plan, which may include diversifying into direct sales of existing produce for example. In exploring a new route to market, installation of a milk vending machine alongside a milk-shake parlour may be the first tactic employed. This has the advantage of utilising existing farm produce and opening the door to a new customer base via public engagement. The specific marketing strategy, pricing, staffing and resources deployed are all part of the tactical approach; which should remain under constant review. Depending on sales and feedback, a decision to invest in marketing, on site facilities, or change the offering may be required to achieve the increased margin as part of the wider strategy.
4. Assessment & Repetition
The key is to constantly scrutinise and reinforce performance. While strategy and objectives may need adjusting to accommodate new learnings or fundamental business changes, they should remain relatively constant; if given due consideration at the outset. Tactics will be far more flexible, but ultimately all three phases must remain joined up.
In the example of milk vending, if it proves problematic (as a result of excessive management burden for example) then the tactics shift to new sources of revenue that require less day-to-day labour input. Re-focusing on the growing offsetting market and exploring the potential for carbon sequestration for example is an altogether different tactic, but consistent with the business strategy and objectives. Tree planting, auditing the farm or estate’s carbon balance or exploring nutrient offsetting opportunities can all play a role in improving long term financial performance, so may provide a suitable tactical shift. In any event, the decision taken is reinforced by reference to the strategy and allows the partners or owners to take confidence in making the right call.
Business planning is the key component to navigating uncertainty as farms and estate’s face life outside of the EU. That said, UK rural businesses are hugely varied and are far more adaptable than given credit for. Building a robust strategy over the next decade as markets and trends change, is the most effective way to remain competitive. Diversification in any number of forms may well be an important part of that process, but prior to investing significant time and money, there must first come a process of analysis to ascertain whether it is right for you and what it will deliver. Taking a holistic approach to the future business in setting clear objectives and a strategy is as important as applying the specific (and often more exciting) tactics associated with a diversification project. Faced with the opportunity presented by a generational change in the rural sector, a joined-up approach to business evolution is a more constructive approach than rushing to diversification as a stand-alone panacea.