|The state of the industry
Consumers’ anxieties likely will make 2009 another challenging year.
by Stan Pohmer
In preparation for writing my annual State of the Industry musings, I reread my forecasts from last year in which I spoke about the potential challenges we might face in 2008 by events caused by the housing collapse, tighter credit, higher personal debt and possible recession. Unfortunately, many of my comments were truer than any of us would like them to have been. The floral industry has had a tough year, and it doesn’t look as if it will be much better in 2009.
Two areas stand out in my mind—the lack of consumer confidence and the fact that the financial turmoil is more global than anyone ever thought it would or could be.
Consumer spending accounts for 71 percent of gross domestic product (GDP), and when consumers lack confidence in the future, they simply don’t spend, especially on what are perceived to be nonessential or deferrable items; unfortunately, most floral products fall into this category (unless we can prove otherwise, but more on that later). And consumer confidence has fallen to the lowest level in 41 years. Fear of job layoffs, negative home equity (the market value of a home being lower than the outstanding mortgage amount) leading to foreclosures and the inability to tap into home equity lines of credit, the tightening personal credit, and high debt levels and interest rates all contribute to a lack of willingness and ability to spend.
Although we will have a new president this year, the reality is that it will take months, even years, for the economic stimulus packages and programs (that some are saying will amount to more than $1 trillion!) being discussed and implemented to show meaningful results at the consumer level. And there’s also major concern in consumers’ minds on the long-term impact this stimulus and bailout government spending will have on taxes, services and a rising national debt, all adding to this crisis of confidence.
In past recessionary periods, the lower and middle classes felt the brunt of the economic fallout. The higher-income luxury consumers continued to spend, but not this time around. The financial challenges are far broader and deeper than anything we’ve ever experienced and are affecting all income strata, including the higher-income consumers who traditionally have been the strongest customers for floral products.
And if there was ever any doubt that we are part of a global economy, the financial crisis is proof; virtually every country’s economy has felt the burn. In the past, for example, if the U.S. market softened for roses, there was still strong demand in the Russian market, and South American growers could shift with the market demands. And the African nations have become the dominant supplier of cut flowers to the auction in the Netherlands, but the auction’s sales are off 15 percent to 20 percent, and African growers are looking to other world markets to move their flowers. But this time around, the global markets are all soft simultaneously, creating a severe global oversupply of product.
||pohmer’s predictions for 2009
PREDICTION Though I would like to be able to state otherwise, sales and profits will be challenged due to the outside influences of the global economy.
PREDICTION 2009 will be a shakeout year, with growers and retailers, especially independent garden centers and traditional florists, forced out of the market due to lack of profitability and the inability to obtain working capital.
PREDICTION Growers and manufacturers will further consolidate to gain distribution and logistics efficiencies.
PREDICTION Sustainability initiatives and certification programs will gain traction with producers, and retailers will start to use this as a marketable differentiation advantage.
PREDICTION Because of the worldwide oversupply, products from non-traditional markets, especially in cut flowers, will make inroads into the U.S. market, putting additional cost pressures on existing trade partners.
As consumers are reducing their spending in response to their own financial pressures, there has been a major shift in their buying behaviors, compounded by the need for retailers to try to capture their share of the reduced consumer spending. Consumers are becoming more price and value conscious, preferring retailers that have the lowest prices on commodity/essential-need items and deferring purchases of “want” items.
The challenge we face as an industry is that these changes in consumer behavior may become more permanent, becoming the new norm, even when we pass through this current financial storm. This could fundamentally change the value proposition retailers and their suppliers need to provide in the future, a challenge that will affect both sales and margin management.
We’ve also seen consumers gravitate more to one-stop-shop behavior, patronizing retailers that can provide more of their needs under one roof in a response to higher driving costs. (Although gas prices have plummeted, we’re still seeing this trend continue.) Supermarket and discount retailers had seen a decrease in customer traffic but a higher-ticket spend per visit as a result; however, some supermarkets have recently seen an increase in customer count as Americans are eating out less at restaurants and eating more at home, often using prepared food offerings supermarkets provide. Floral, being an impulse category in the mass market, relies on the frequency of exposure to drive sales, so the number of visits per customer can have a major impact on sales.
supply chain and retail
One of the major issues that has concerned domestic producers for years still hasn’t been resolved—immigration. As critical an issue as this is to our growers in order to obtain and maintain a stable work force, the comprehensive reforms that are needed have taken a backseat to deadlocked serious discussion and resolution. And, unfortunately, Congress will be faced with dealing with the broader economic and housing issues that have a higher priority in their minds, so this important issue most likely will not be dealt with in 2009.
Inconsistent weather in the spring of 2008 plagued garden-center sales in most parts of the country while the cut-flower market was relatively solid in the first half, most notably due to a comparatively stronger Valentine’s Day (Valentine’s Day 2007 posed some major weather challenges for retailers, especially in the Midwest and on the East Coast). However, with the financial problems surfacing in the fall of 2008, retail sales in all categories in all channels fell off significantly. Outdoor product sales are largely driven by and parallel the home building/remodeling market, which has fallen off dramatically, affecting the home improvement, discounter and independent garden-center retail channels.
On the supermarket front, retailers have introduced new, smaller formats such as Wal-Mart Stores Inc.’s Marketside and Tesco’s Fresh & Easy Neighborhood Market platforms as both a convenience and drive-time saver to consumers. As most retailers have reduced their CAPEX (capital-expenditure) budgets as they work through the current sales and margin challenges, it’s anticipated that these new platforms will be a major expansion vehicle when things turn around.
And there’s another victim of the lagging economy—the Internet. For the first time in many years, Internet sales growth has come to a screeching halt; after experiencing 15 percent to 30 percent annual sales increases, in October that sales growth slowed to 1 percent. For mass-market floral retailers, this could be a sales opportunity because a large portion of traditional retail florist sales are driven by fulfillment and delivery of Internet orders, either through a wire service Web site or through florists’ own sites. Traditional retail florist Internet-based sales could be transferred to mass-market retailers if you can convert your existing customer traffic.
||report card: pohmer’s predictions for 2008
PREDICTION External influences will again make sales and profits elusive, and there will be continued closings and consolidations at both the production and retail levels.
GRADE Unfortunately, an A.
COMMENTS The housing market collapse, the crumbling financial sector and the credit market fallout made profits tough or impossible to achieve, forcing many producers and retailers to fail.
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.
COMMENTS Though no retailer put its entire program under one label, some have mandated specific label certifications on select categories.
PREDICTION A national supermarket chain will follow the Tesco-United Kingdom model and start offering a time-specific guarantee on cut flowers.
COMMENTS Though I believe the desire to adopt such a program exists, as an industry we do not yet have the all-standards and cold-chain management protocols in place to provide this to our consumers.
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.
COMMENTS Cut flowers have been introduced into drug and convenience chains on a limited basis. Although growers and distributors need to find new distribution to handle the oversupply of flowers, perhaps the unknown profit and loss in a tenuous economy curtailed this from expanding to new venues.
good news/bad news
Congress unexpectedly passed an extension of the Andean Trade Promotion and Drug Eradication Act (ATPDEA) in October, allowing cut flowers, among other products, to continue to enter the United States duty-free through Dec. 31, 2009, from Colombia, Ecuador, Peru and Bolivia. However, there were some stipulations: The ATPDEA extension for Bolivia was granted for only six months, and Congress must specifically vote on extending it further; and Ecuador will get an automatic extension unless Congress has issues after six months.
The U.S./Colombia Free Trade Agreement (FTA) that was signed by the respective administrations still has not been considered by the U.S. Congress and, with the new president and a Democratic-controlled Congress, the chances for near-term passage are questionable. The FTA would make the ATPDEA duty relief permanent and eliminate duties U.S. companies pay when shipping to Colombia.
Escalated by the current financial pressures, we’re seeing a trend that is both inevitable and disconcerting in both the producer and retailer sectors. For many reasons—new sources of production in new growing areas, oversupply, Colombia/peso valuation pressures, cost pressures, high fuel and transportation costs, etc.—we’re seeing more owners walking away from their farms and more bankruptcies and consolidations taking place at a much greater rate than in the past. And because the sales challenges are global, there’s a more limited response opportunity to move products to different markets, chasing sales opportunities. The oversupply is forcing global prices downward to the point where some growers can’t maintain solvency. While no one likes to see this happen, a reduction in production capacity could be a needed business correction that brings supply closer to demand, shoring up prices for those that survive the shakeout.
We’re also seeing supply-side consolidation taking place:
• Syngenta purchased Goldsmith Seed, Inc. (which included Fischer) and both the name and some product lines from Yoder Brothers Inc.
• Bell Nursery, Burtonsville, Md, expanded its geographic reach through the acquisition of Ulery Greenhouse Company, Springfield, Ohio.
• Dole Fresh Flowers is being sold to a consortium of private investors and an existing Colombian producer; final details are waiting for Colombian government approval of the transaction.
• Syndicate Sales, Inc. purchased the Brody Company and the floral division of Indiana Glass from Anchor Hocking Co.
• Smithers-Oasis purchased Floralife, Inc.
• FTD Group, Inc. was acquired by United Online, a consumer Internet and media service provider.
Distributions and logistics management and optimization will continue to drive mergers and acquisitions such as these in the future.
One of the key areas to help take cost out of the process of doing business and using data to help make better decisions is to utilize technology. In 2008, a Floral GTIN (Global Trade Item Number) Implementation Guide was issued by a coalition of industry associations, including the Produce Marketing Association (PMA), Society of American Florists (SAF), Wholesale Florist & Florist Supplier Association (WF&FSA), Association of Floral Importers of Florida (AFIF), California Cut Flower Commission (CCFC), and California Association of Flower Growers and Shippers (CAFG&S). The publication is a guideline for implementing a common protocol numeric labeling and tracking system for boxes of flowers, similar to the UPC selling-unit protocols. The GTIN process provides the ability to communicate orders to your trading partners electronically and enables back-room labor-saving processes such as systemically matching receivers to invoices for electronic payment. Each of the associations promoted this GTIN process to their respective memberships in late 2008 and will continue to do so in 2009.
The term “sustainability” is becoming more entrenched with consumers, retailers and suppliers. While producers and retailers may have their own eco labels, consumers are becoming more wary of “greenwashing” and looking toward third-party audit and certification to give them confidence in the claims the industry or retailers make. We’re seeing a growth in participation in certified label programs such as Florverde® (cut flowers in Colombia), VeriFlora® (cut flowers and potted plants in North and South America), and Rainforest Alliance and Fair Trade Certified, both of which are umbrella programs covering multiple product categories.
There are also efforts under way to create criteria for a standard that covers all agricultural crops, including floriculture and horticulture products. Initiated and funded by Scientific Certification Systems, this process is being developed and reviewed under the American National Standards Institute methodology and guidance, and shepherded by the Leonardo Academy. Initially the review was started with a draft standard that was to provide a framework to initiate discussion, but the Standards Committee, made up of producers from the various agricultural crop industries; environmentalists and nongovernmental organizations; users (retailers, wholesalers and so on); and general-interest members, elected to start the process from scratch, using the original draft document as a reference resource, along with reviews of other certification programs already in use. Whether or not the committee members can reach consensus on a common standard that applies to all agriculture crops remains to be seen, but they recognize that consumers and retailers are looking for consistency and transparency on sustainability issues.
2009 and beyond
The year ahead will continue to be rife with financial and economic challenges for our industry and our consumers, and most of these challenges are outside our direct control. As we’ve done in the past, we’ll have to be creative and resilient in order to survive and thrive.
We are fortunate that we deal with products that, although not essential to consumers’ existence, do provide for them in ways that set them apart from most other product categories. They express emotion and feelings; provide a sense of well-being and serenity; and beautify homes, offices and gardens, bringing peace and beauty to the lives of consumers—things we tend to forget as we conduct our daily business. And we have behavioral research that has proved that plants and flowers reduce stress, depression and anxiety, and increase compassion—all attributes that our consumers can benefit from as they deal with the momentous challenges they face in today’s troubled times. More than ever before, these experiential benefits of flowers can have a positive impact on consumers’ lives and our sales; focusing just on the transactional value of having the lowest price shortchanges and underestimates the true power of flowers and plants at our industry’s expense.
Yes, 2009 will be a scary journey, but if we change and adapt and play to our products’ strengths, it can be a rewarding one. sfr
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 firstname.lastname@example.org.