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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.


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