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 Feature Story
The state of the
industry
by Stan Pohmer
2005 was a year of challenges, both new and old, but
floriculture continued to show its resilience and resolve.
The past few years have been pretty tough, almost ugly, for the
floral industry, and hopes were pretty high that we’d all catch
a break in 2005. A return to “normalcy” (whatever that means
anymore) would have been a welcome relief, but it was not to
be—2005 brought some of the same challenges plus some new ones.
The past year had it all—confused consumers, the ravages of
Mother Nature, heightened retail competition and the resultant
financial impact on some major players, the effects of
globalization on U.S. businesses and suppliers as well as
offshore business partners, the high costs of energy, new
business strategies and a whole lot more.
CONSUMERS
Consumer confidence has been like a yo-yo this past year.
Ever-increasing health care costs have hit consumers directly,
taking expendable dollars off the table—dollars that could have
been spent on floral products. And major corporations in all
industries, including supermarkets, have been struggling with
high legacy costs based on union contracts for both current and
retired workers.
To get out from under these costs, some major concessions have
been made by current workers and, in some cases where agreements
couldn’t be reached, there was a rush by corporations to file
bankruptcy before the new bankruptcy laws went into effect in
October 2005, abdicating pension responsibilities to the federal
government (meaning us, the taxpayers). And the ripple effect of
these bankruptcies went deep down into the economy, forcing
delayed or canceled payments to their suppliers, reduced wages,
increased unemployment due to downsizing and fear for those
still employed that their jobs are never secure.
In textbook terms, for every major manufacturing job, the
trickle-down effect supported at least four other jobs; in the
first half of 2005, layoffs totaled more than 500,000, meaning
that more than 2.5 million people were affected by these
actions. Some of these folks moved into other jobs, but it’s no
wonder consumers are nervous about job security and their
confidence is low.
RETAIL COMPETITION
The impact of Wal-Mart Stores Inc. continued to be felt
throughout the retail and supplier playing fields. The company’s
goal of focusing on being the low-cost provider has forced
suppliers to find alternative sources of low-cost production,
including moving production offshore, and to tighten margins.
Winn-Dixie Stores Inc., and others, blamed their bankruptcy
filings and reorganizations on their inability to compete
effectively with the Bentonville behemoth. Winn-Dixie vacated
some major markets affecting 326 stores; 84 eventually were sold
to competitors, but 242 went dark.
And it’s not just regional chains that have been challenged.
Albertsons Inc. is in the process of auctioning off its assets,
and it remains to be seen who ends up with the various
businesses it owns.
But Wal-Mart’s size and strength are generating some negative
push back, with critical press reports on social and civic
responsibility, the company’s impact on lowering wages both in
the United States and overseas, and the indirect costs on the
taxpayer. Real or perceived, Wal-Mart’s image has become a bit
tarnished, and the war of words is getting heated.
But it’s not just Wal-Mart that is changing the way business is
waged. The reverse-auction process of procuring product grew
substantially in 2005 throughout the mass market. As a result,
loyalty relationships that produced long-term win/win
relationships have been diminished as the focus on price has
been heightened and major categories and holidays are put out
for annual bids.
And let’s not forget the rollout of “pay by scan” in The Home
Depot Inc.’s garden centers this year, where suppliers are paid
only for product that rings through the registers. All costs
before the actual sale—inventory, shrinkage, presentation and
display, maintenance, inventory management, store service—are
now absorbed by the growers, with a new set of responsibilities
that had to be learned. Lowe’s Cos. Inc., Target Corp. and even
Kmart Corp. have at least piloted this program in 2005 in their
garden centers, along with some supermarkets in the cut flower
category.
The Sears, Roebuck and Co./Kmart consolidation, with plans to
focus the merged company’s growth in the new off-mall Sears
Essentials prototype, converting many of the Kmart stores in
2005 to a hybrid between the Kmart consumables and the Sears
strengths in power tools, fashion and appliances, stagnated. The
new company’s management structure has been walking through a
revolving door, and there still isn’t any clear strategy on what
this monolith company will evolve into or whether or not floral
products will continue to play a role in its future.
Martha Stewart got out of jail with hopes that her physical
presence could reinvigorate her company, Martha Stewart Living
Omnimedia Inc. Valiant attempts at expanding her publishing
empire through food, wellness and, just announced, a magazine
focused on the age 30-plus woman, have not met expectations. And
some of the other new initiatives—a 24-hour-a-day Martha-driven
content station on Sirius satellite radio, a Martha-inspired
alliance with a home builder—are questionable as to whether they
will make her corporation return to profitability. And her TV
shows, a daily talk show that is struggling and her version of
The Apprentice that isn’t going to be renewed, aren’t doing her
company any favors, either (Martha, you’re fired!).
GLOBAL ISSUES
The direct and indirect impact of globalization on our economy,
our industry and our consumers continued to be significant in
many areas. In some countries whose currency is pegged to the
U.S. dollar, the weakness of the dollar compared to the euro has
devalued their products and, in some, caused major inflation; in
other words, they are getting less for their products when they
sell them into the U.S. market while their costs are higher due
to the inflation factor, all of which is challenging
profitability.
And because we haven’t increased unit consumption of flowers in
the United States and production availability is rising, a quick
return to profitability is highly doubtful, and input suppliers
and lenders may not be willing to continue supporting marginal
operations.
Some domestic growers found that they didn’t have the
availability of workers for their production operations in 2005
due to the lack of a sensible immigration/guest worker program.
ENERGY
The economic explosion in China and India in particular has had
the most impact on the spiking of energy costs here in the
United States in 2005. Their need for petroleum to fuel their
industrial growth has driven world prices sky high, resulting in
the highest gas prices in U.S. history and the anticipation of
significantly higher heating costs (as much as 50 percent to 70
percent higher) for both domestic and offshore suppliers and
U.S. consumers.
Higher transportation costs for inputs, higher greenhouse
heating costs and higher delivery costs placed additional profit
pressures on domestic producers, many of whom either tried to or
had to absorb these costs without passing them on to retailers
because the competitive arena was so volatile. And offshore
producers also faced higher aviation fuel increases that further
challenged their already marginalized profitability.
HURRICANE ALLEY
We thought we had suffered through major hurricanes that
affected our industry before, like Hurricane Andrew back in the
1990s. But this year, they just kept on coming, and the
cumulative effect was devastating—from Dennis to Katrina to Rita
to Wilma. Aside from the human suffering, which was tragic, the
business disruption and losses, especially in the Florida
market, were major; just when the industry started recovering
from one hurricane, it got pounded with another one.
But the Florida grower community is heroically resilient and
keeps coming back for more, looking at the hurricanes as
temporary, not terminal, setbacks. And the Miami importers,
though without power and product supply for days on end, did
their best to get back up to speed in record time, minimizing
the supply-chain chaos. Thank the stars that hurricane season
and the spring floral holidays aren’t concurrent!
 2005
AND BEYOND OVERVIEW
Stop the merry-go-round; I want to get off! That’s a phrase most
sane people would say if faced with all of the challenges our
industry confronted once again in 2005. We’ve been suffering
internal and external conflicts for the past few years that
would cause most folks to just pack it in. But the good news is
that the people in our industry are truly passionate—passionate
about our companies, passionate about the products we deal with,
passionate about our industry. This passion has allowed us to
rise above the chaos and persevere; although, from a
profitability standpoint, this is becoming more challenging—and
never more so than in 2005.
At the Seeley Conference at Cornell University in June, the
discussions again focused on floral consumers. As before, it was
determined that we know consumers universally like our products,
but we still haven’t effectively communicated the real value and
benefits of plants and flowers to them. We’re overly focused on
price as the driver of the purchase; it’s almost as if we’re
racing to see who can have the lowest prices, reducing the
profitability for the growers and retailers until the bottom is
reached—and, unfortunately, we’re almost there.
It’s been said that our products have been commoditized because,
over time, retail prices have dropped and product availability
has increased. Commoditization isn’t necessarily a bad thing if
we’re able to increase consumption of our products, but that’s
something we haven’t been able to do well in the past few years.
Consumers didn’t commoditize our products; we, as an industry,
did, and the only ones who can reposition our products in the
consumers’ minds to foster increased consumption and usage is
us, and having the lowest price isn’t the only way to achieve
this.
Despite all of the challenges our industry faced in 2005, I’m
impressed with our industry’s incredible resilience, and I
believe we’re ready and actually relishing the opportunity to
face the daunting challenges ahead, whatever they may be. But
the most daunting is convincing our consumers of the real value
and benefits of plants and flowers. If we can overcome this
challenge the same way we’ve overcome all of the others we’ve
conquered, our potential is limitless. Who’s up to take this
challenge on?
Stan Pohmer is CEO of Pohmer Consulting Group, Minnetonka,
Minn., and executive director of the Flower Promotion
Organization,
www.flowerpossibilities.com. You may reach him at (952)
545-7943 or
spohmer@pohmer-consulting.com.
To enjoy the rest of this issue, please go to the
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copy of Super Floral Retailing today!!!
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