Call us at 1-800-355-8086

Feature Story

 

 "With consumer spending continuing to be tight and our products not being perceived as essential, it has never been more important to position our industry to communicate the positive benefits our flowers and plants provide."

 

A challenging economy in 2007 put stress

on all segments of the floriculture sector.

 

by Stan Pohmer

Just once I’d like to be able to write in this annual “State of the Industry” report about how our sales grew at double-digit rates, profits for retailers and growers increased even faster, our economic engine was hitting on all eight cylinders, our consumers were flush with cash and our industry was working together to convey the positive messages about the power of flowers to customers to position us for sustained growth.

But alas, the 2007 report doesn’t include this. Like so many other years in the recent past, 2007 was another challenging year. The frustrating part of this is that many of the challenges we faced were external factors that we had no direct control over but could only react to. But though we’re a little beat up and bruised, I view our industry as fundamentally sound and ready to tackle the new challenges of 2008.

 

external factors

Foremost among our challenges was the state of the U.S. economy. Last year, I talked about the “triple whammy”; this year, there were too many whammies to count. The slowdown in the housing market, which drives much of our sales, caused havoc for many consumers. New-home growth has slowed to a creep and the inventory of resale homes has ballooned, with the net result being a major devaluation of housing prices.

Many homeowners had tapped into their inflated home equity based on rising home values in the past few years to get fast cash while taking on additional debt through second mortgages. With the crash in housing prices, many of these consumers now find they owe more on their combined mortgages than the fair-market value these homes command; they now have negative net worth. The subprime debacle in mortgages made headline news for much of the year, and the repercussions will be felt for many years to come. The result will be tighter credit requirements, making it difficult for new homeowners to obtain mortgages.

And foreclosures are at a record high, running about double traditional rates; in October alone, there were almost 250,000 home foreclosures. Add to this the fact that many consumers over the past few years had teaser loans with enticements like zero down and a ridiculously low initial adjustable interest rate for three to five years. When these loans reset, they’ll be at interest rates that are double or triple what consumers initially paid and resetting at a time when many consumers are already hard pressed to keep up with increasing living costs.

Personal debt is at an all-time high while savings rates are at an all-time low. As the baby boomers who have driven our businesses for many years retire, they find that their retirement nest eggs are cracked because much of their net worth was tied to the value of their homes, which has dropped significantly.

Credit will be more difficult to get as banks become more restrictive. And there’s a new subprime concern to deal with—subprime credit cards with usurious rates for those consumers who can least afford it.

The U.S. dollar is hitting record lows against most world currencies, including the euro and the Canadian dollar, further reducing U.S. influence on the global economy.

Most of these economic factors will be with us in 2008 and will have a definite effect on consumer spending. There’s even talk about the U.S. economy going into a recession. Although our economy is fundamentally strong enough to easily withstand a mild recession, just the mention of the word makes consumers panicky, and they generally react by cutting back on their spending.

It often has been said that the floral categories aren’t affected by economic downturns; we may not feel the crunch as severely as other categories, but we’re not bulletproof. The conditions that led to this downturn are different from those experienced in the past, and we’re already being affected by them.

So we’ve been faced with panicky consumers who are nervous about the future—in October, consumer confidence was the lowest since early 2005—and it looks as if they will continue to have to deal with already-high energy costs and the byproduct of higher production cost inputs on the food and manufactured products they buy.

On the international front, Colombian cut flower growers continued to be under pressure from the low valuation of the Colombian peso (COP) to the U.S. dollar while still dealing with higher production costs. Further, while both Colombia and Ecuador got a last-minute reprieve when Congress in 2007 extended duty-free status under the Andean Trade Promotion and Drug Eradication Act (ATPDEA) through February 2008, avoiding a 6 percent duty on imported flowers, there’s no permanence or guarantee that it will be renewed again.

Both the Colombian and U.S. administrations have endorsed a Free Trade Agreement (FTA), but Congress has yet to consider this legislation, which would provide permanent duty-free status for flowers and many other products. A major concern for Ecuadorean growers is that, if Congress approves an FTA with Colombia, it may not renew the ATPDEA, and flowers from Ecuador would be assessed duties. The Ecuadorean leadership has stated it has no interest in pursuing an FTA with the United States.

For outdoor products, sales were affected in many key U.S. markets by severe drought, with local and state governments responding by enacting watering restrictions. Without the ability to water, consumers didn’t buy, and the fallout was significant, especially at the retail level. For example, Pike Family Nurseries of Norcross, Ga., the nation’s largest family-owned garden-center company, filed for Chapter 11 reorganization, and many other independent garden centers closed or are on the brink of financial disaster. The drought also affected the big-box retailers. The result was a ripple effect of slower sales and payments, write-offs and so on that had a significant impact on supply-chain profitability.

 

pohmer's predictions for 2008

PREDICTION External influences again will make sales and profits elusive, and there will be continued closings and consolidations at both the production and retail levels.

  

PREDICTION Major national retailers will dictate to their suppliers which sustainability standards and certification programs they want, and then market those standards and certifications to consumers as a competitive benefit.

  

PREDICTION A national supermarket chain will follow the Tesco-United Kingdom model and start offering a time-specific guarantee on cut flowers.

  

PREDICTION Cut flowers will be introduced in new retail outlets under vendor-managed inventory or leased-space models, as growers, wholesalers and importers look for new distribution channels for their inventories.

 

supply chain and retail issues

All of these issues fostered the continuation of consolidations and closings of domestic and offshore growers and domestic wholesalers.

Another frustrating area of continued concern was the lack of a final immigration policy that would provide legal processes to allow a ready supply of nursery and landscaping company labor. Because this issue is so contentious and divisive, it doesn’t appear that we’ll have a clear-cut direction that addresses our industry’s needs any time soon, especially in the 2008 election year.

On the retail front, sales growth stagnated almost across the board in all retail channels, and profits were fleeting. Retailers reacted in many ways, depending on the way the economic issues affected their individual businesses.

For example, home-improvement retailers like The Home Depot, Inc. and Lowe’s Companies, Inc. were affected by the lack of new home sales and remodeling of existing homes. They lowered both sales and profit expectations for 2007 and at least the first half of 2008 because of lower demand and traffic.

Wal-Mart Stores Inc. went from a price-focused strategy to trying to go upscale to appeal to a demographic segment like Target Corporation, and back to a price-focused approach, all within the same year. Supermarkets opened new business platforms and formats, among them Safeway and Publix Super Markets, Inc., in the hopes of better positioning against price players like Wal-Mart.

And just to make sure no one got bored or complacent, British-based Tesco opened on the West Coast its first Fresh & Easy Neighborhood Market grocery/convenience outlets, a format that’s a cross between a 7-Eleven and a Trader Joe’s. Tesco has major expansion plans; it’s been said that in the next three years Tesco plans to invest between $3 billion and $5 billion in U.S. expansion of this new model. U.S. supermarkets are quickly looking at new business platforms that can compete against the Fresh & Easy format.

A coalition of cut flower industry associations and companies came together under the Floral Logistics Coalition to work collaboratively on issues and opportunities that affect the entire supply/retail chain. Some of the issues being worked on are developing bar-code protocols for boxes and selling units to allow electronic communication of business activities and data-driven inventory management, postharvest care and handling, and grades and standards.

 

sustainability

In 2007, sustainability went from being a word given lip service to a movement that fundamentally could change what we grow, what we sell, and how we produce and market our categories. Wal-Mart has embraced this concept as a cultural change and is looking to change facilities, operations, logistics and merchandise purchased to implement sustainable business strategies. The Home Depot has developed eco-friendly product lines.

Florverde, a voluntary certification process for Colombian flower growers; FlorEcuador, a program for Ecuadorean growers; Veriflora, a voluntary certification standard and label developed for marketing to U.S. consumers; Fair Trade; Rainforest Coalition and more all are competing to become the label of preference for major retailers, causing havoc for suppliers who sell to multiple retail chains and channels.

Scientific Certification Systems (SCS), the for-profit certification company that owns the Veriflora label, has submitted a draft proposal to the American National Standards Institute (ANSI) that would establish a social and environmental standard for agriculture in general, of which floral is a very small part. A significant concern is that the draft standard as submitted could force floriculture products to adhere to business protocols that are designed for consumable products and directs a progression toward organic production practices. (For more information, see www.leonardoacademy.org; this is the Web site for the ANSI-certified standards development organization that is leading the three-year review process of taking this from a proposed draft to a final standard.)

 

promotion

The Flower Promotion Organization (FPO) (of which I am the executive director) funded the research and public-relations activities of the FPO/SAF (Society of American Florists) Alliance, conducting behavioral research at Harvard Medical School and Massachusetts General Hospital to quantitatively identify the tremendous “power of flowers,” and communicating the benefits of flowers directly to consumers.

The Floral Marketing Funding Initiative Coalition, an effort to develop a mandatory assessment on domestic growers/ importers of record on cut flowers under a promotion order that would be administered by the U.S. Department of Agriculture, was unsuccessful in gaining support from the major assessable company blocs, the California Cut Flower Commission (CCFC) and Association of Floral Importers of Florida (AFIF). The lack of permanent duty-free status on imported flowers, the weak sales and financial position of both importers and domestic growers, the concern that the proposed promotion order wouldn’t generate enough funds to promote measurable consumer awareness and behavior change, and a general sense that the timing for such an effort was wrong all contributed to the lack of support in moving the initiative forward. While this particular effort has been shelved for now, the groundwork and research has been done to identify the funding mechanisms that could work, if the industry wants to look at it in the future.

 

2008 and beyond

With consumer spending continuing to be tight and our products not being perceived as essential, it has never been more important to position our industry to communicate the positive benefits our flowers and plants provide. The peace, serenity, and positive emotions and behaviors that flowers and plants evoke can play an important role in helping consumers cope with the stress and anxiety they’re experiencing. Yes, price is important in the purchase decision, but selling products at a price without promoting benefits won’t change the perception that flowers and plants are a deferrable purchase.

Last year was challenging, and 2008 looks to be at least as challenging. But we deal with products that have real value, if we choose to promote that value. sfr

 

report card:

pohmer's predictions for 2007

PREDICTION This will be a tough year for sales and, for growers, profits. Those who were on the brink in 2006 will vacate the market.

GRADE Unfortunately, a B+

COMMENTS Weather, a bouncing economy, high energy costs and a housing market crash all led to a challenging year for growers and retailers alike.

 

 

PREDICTION Imports of cut flowers from new growing areas will start coming into the U.S. market in greater numbers, putting even more pressure on growers and importers to be profitable.

GRADE D

COMMENTS Although we saw rising imports from Africa and China, the strength of other international currencies against the weakened U.S. dollar made it more enticing to ship products from these producing areas into countries other than the United States.

 

 

PREDICTION A repeat from 2006: A national supermarket chain will develop quality and cold-chain standards and offer a consumer enjoyment guarantee.

 

GRADE C-

COMMENTS Although almost all retailers offer a generic customer satisfaction guarantee, none of the national chains offered a time-specific guarantee on their perishable products supported by a concerted postharvest care-and-handling protocol, similar to what Tesco did a few years ago in the United Kingdom that jump-started the movement in Europe.

 

 

PREDICTION Independent garden centers will start marketing themselves more as home centers, offering consumers lifestyle choices, competing effectively against the “big boxes.”

 

GRADE B

COMMENTS Many independent garden centers have done a good job of adding product lines that cater to the lifestyle trend, but few changed their consumer messaging or image to reposition themselves in the marketplace as lifestyle centers.

 

 

PREDICTION Organically grown floral products will be introduced and marketed by a major retailer.

GRADE C-

COMMENTS While growing in quantities, there isn’t enough “organic” product available in the marketplace for retailers to consistently carry on a widespread basis. We did see a rise in the use of certified “sustainably grown” products carrying the Veriflora, Florverde and Fair Trade labels, however, but no retailer has made the commitment to transition its entire assortment to sustainable/organic products and market this to consumers.

 

  

Stan Pohmer writes his exclusive “State of the Industry” report every year for Super Floral Retailing. He is CEO of Pohmer Consulting Group, Minnetonka, Minn., and executive director of the Flower Promotion Organization, www.flowerpossibilities.com. Reach him at (612) 605-8799 or spohmer@pohmer-consulting.com.

 


 

Super Floral Retailing • Copyright 2007
Florists' Review Enterprises, Inc.
Site management by Tier One Media