Western Canadian grain elevator network study

Western Canada grain elevator network study

The western Canadian grain industry has gone through a major rationalization since the repeal of the Western Grain Transportation Act in 1995. Many traditional wood-crib elevators have been closed and numerous concrete and steel high-through-put grain elevators built. The total cost of these new high-through-put elevators is estimated to have exceeded Cdn$1 billion. Currently there are roughly 160 high-through-put grain elevators in operation in western Canada with a rail car spot 50 cars or more (actual number depends on the definition).

Since the rationalization process began, chronic financial losses by the major grain companies has been well documented. One case in point is the drop in value of Saskatchewan Wheat Pool shares from a high of about $20/share to less than $0.50/share (2004). Although the rationalization process wasn't entirely complete, prior to the 2000 to 2003 drought crops, roughly 70% of the new high-through-put elevators were losing money assuming a break-even of 8 turns. Nonetheless, it is clear that the profitability of the new grain elevator network in western Canada will continue to have major long-term profitability issues.

So what happened? How could the western Canadian grain industry collectively build a grain elevator network with significant long-term profitability issues? Although the answer is complex, Trade Area Solutions believes that a significant part of the answer lies in a data gap that exists in the underlying supply and disposition of grains and oilseeds at the regional level in western Canada. In fact, these data form the foundation for agribusiness market research.

The problem is that although regional grain production data is available from Statistics Canada, regional demand data is not readily available. The Canadian Grain Commission publishes grain elevator demand estimates by grain delivery point, but the data is not very current and can't be easily reconciled with Statistics Canada regional production data. As a result, the underlying regional supply and demand picture remains incomplete.

Despite the use of conventional market research tools including producer surveys, the data gap remains. As a result, the industry generally equated regional elevator demand with readily available regional grain production data. Or put another way, the industry implicitly assumed that supply equals demand (spatial equilibrium) in each grain elevator trade area. Although the industry generally understood that some grain does not move through the elevator system, it was generally considered as a small and insignificant "leakage".

Trade Area Solutions analyzed the impact of this false spatial equilibrium assumption on high-through-put grain elevator profitability. We found that if supply = demand, (i.e the major grains and oilseeds are delivered into the primary grain elevator system), virtually all of the high-through-put grain elevators become profitable in western Canada assuming average yields. The problem is that supply does not equal demand.

Trade Area Solutions estimates roughly 30%, and growing, of the current demand for grains and oilseeds in western Canada moves by truck into domestic and U.S. export markets. As a result, this data gap resulted in an error of roughly Cdn$300 million or more in a misallocation of capital in the current western Canadian grain elevator network. Furthermore, the total financial impact is staggering when long-term operating profitability is combined with the impact on the road network from the additional truck traffic that will now occur over the life span of the elevators.

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Urban retail site relocation study

This case study involves a retail site relocation study in a major Canadian urban center done by Warkentine & Associates in 2001 using conventional trade area analysis. Note that Trade Area Solutions operated as Warkentine & Associates prior to 2005.

The analysis began with a significant amount of proprietary customer point-of-sale data which was used to validate the primary trade area boundaries. A thorough analysis of the store's current trade area and new potential site was carried out, including market size, market shares, untapped market potential, competitors analysis, etc.

The study concluded that a relocation of the store to another location west of the existing location would maximize the firm's market potential. Fortunately, a change in the immediate priorities within the organization averted a potentially poor and expensive business decision. Since then, Trade Area Solutions have re-analyzed this recommendation using our new spatial economic framework and estimated the missing regional demand data gaps. We found that the market size of some primary trade area markets within the study had been significantly underestimated while others had been overestimated. Specifically, a significant volume of consumer purchases flowed across primary trade area boundaries to competitors in primary trade areas east of the existing store trade area. A further analysis revealed that the profiles for these consumers migrating across trade areas resembled the client's current customer profile.

The new information resulted in a very different recommendation from the previous. The old recommendation was to relocate the store into a trade area west of the current store using conventional trade area analysis. The new recommendation was to move the store east to a new trade area to take advantage of the growing consumer purchase flows across primary trade areas. The recommendation also involved a much different facility and merchandising plan because of the potential to attract these migrating consumer patterns across primary trade areas.

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Small town retail performance study

This case study involved a performance evaluation of a retail store in a small town in western Canada. The study was conducted by Warkentine & Associates in 2000 using conventional trade area analysis. Note again that Trade Area Solutions operated as Warkentine & Associates prior to 2005.

Like in the urban case study, proprietary customer point-of-sale data was used to validate the estimation of primary trade area boundaries. An analysis of the trade area, including market size, market shares, untapped market potential, competitors and other related market research showed significant untapped market potential within the primary trade area.

The study recommended an upgrade of the retail facility along with an improved offer to help achieve the significant untapped market potential within the trade area. The subsequent upgrade of the store resulted in virtually no additional sales. Since then, Trade Area Solutions re-analyzed the trade area using our new spatial economic framework and estimated the missing regional demand data gap. We found a significant volume of consumer purchases flowing from the trade area in question to a nearby primary trade area. Although some "leakage" of customers into this nearby primary trade area was originally speculated, there was no conventional technique to accurately estimate that this trend actually accounted for roughly half the total market.

Given this new market understanding combined with the firm's existing market shares, the reality became obvious that there was very limited untapped market potential available within this small town primary trade area. In addition, the conclusion became consistent with the sales trend since the time period of the original study. Therefore, conventional trade area analysis resulted in a significant overestimation of the original market size and like in the urban store case study, a subsequent wrong market conclusion occurred. The firm's resulting business decision continues to have long-term financial consequences.