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Feature Story
 
State of the Industry
 
by O. Stanley Pohmer Jr.

Floriculture has the opportunity to overcome the challenges of 2004 with positive steps in 2005.

After a relatively disappointing 2003, we all had high hopes for a 2004 that settled down and acted “normally,” whatever that term means anymore, allowing us to manage our businesses rather than reacting to all of the influences that control our destiny. Unfortunately, this was not the case.

THE CHALLENGES
We had hopes that the economy and consumer confidence would improve and help stimulate sales of floral products—products that are a “want” rather than a “need.” (When consumers are worried about their futures, they tend to focus more on the essentials
of life and defer purchases of “want” products like ours.) Things looked as if they would start looking better during the first half of the year with an improving job market, a stronger stock market and low interest rates, but the rising costs of energy and medical insurance and more outsourcing of jobs, especially in the second half, dashed these hopes. As an example, although unions account for only about 8 percent of the U.S. work force, the majority of supermarket employees are union, and contract negotiations forced some or all of supermarkets’ health costs to be pushed back on their employees with little being offset by increased wages, reducing disposable income.

EXCHANGE RATES’ IMPACT
And because we operate in a world economy, we need to be cognizant of the impact of the U.S. dollar valuation versus other world currencies, especially important to countries that export product into the U.S. market, such as cut flowers and some hard-lines products. It’s not a pretty picture. Just recently the U.S.-Euro exchange rate reached the lowest levels in history. Why is this important? Even though import suppliers may be selling product into the United States at the same costs as last year, they are realizing lower profits due to the currency exchange rate. And, due to the highly competitive marketplace resulting from a lethargic U.S. retail economy, the likelihood of them even selling at the same cost is nonexistent, so there are many import suppliers bordering on profitability and even facing bankruptcy, if they continue focusing their export efforts on the U.S. market.

THE WEATHER’S TOLL
And Mother Nature wasn’t kind to many of us this year, either. The spring season in many parts of the country was cool and wet, negatively affecting the sales of annuals, perennials and landscape products. Add to that the back-to-back-to-back hurricanes that roared through the Southeast last August and September, causing major damage to the foliage industry and disrupting the distribution of cut flowers out of Miami. The good news is that the people in our industry are resilient, and it is amazing to watch how the Florida growers have picked up the pieces and are quickly getting back into the game.

VENDOR CONSOLIDATION
The demise of Frank’s Nursery & Crafts, Inc., the largest chain of specialty stores in the United States devoted to the sales of lawn and garden products, hurt a lot of growers. Filing Chapter 11 for the second time in two years and going straight to liquidation left many
suppliers, especially those who had too high of a percentage of their sales committed to one customer, holding the proverbial bag. The adage of putting too many eggs into too few baskets versus putting a few eggs into many baskets came home to roost on this one. With
the trend toward vendor consolidation, individual retailers are becoming an extremely high percentage of a supplier’s production. Unless that supplier has a differentiated program or unique capabilities, this is a high-risk proposition for the producer. In the “old days” when trust and relationship were terms that meant something, this might have been OK. But in too many cases, these terms are hollow today.

Although there will continue to be more acquisition activity in the supermarket segment to better position this channel to compete more effectively in the face of the continued growth of the Wal-Mart Supercenters, in 2004 there were fewer mergers and buy-outs, allowing the segment to start digesting all of the acquisitions that took place in 2002 and 2003, building more infrastructure and platforms to realize the benefits of the consolidations.

THE KMART-SEARS MERGER
Speaking of consolidation, who would have thought that Kmart and Sears would become one corporate entity? While the story line is that they are doing this to reap the synergies
of economy-of-scale and streamlining operations, there is a strong possibility that Ed Lampert, the chairman of Kmart and now the new combined holding company, will turn this into a real-estate play, selling off locations and using the capital for other investments, most likely outside the retail arena (‡ la Warren Buffet).

The Sears Grand concept, a freestanding mass marketer (bordering on a discounter position in the market) has reportedly been successful in the few stores it opened, but Sears was strapped for cash, so it couldn’t expand the concept. My guess is that a number of existing K-marts will be made over into the Sears Grand format, and this will be the company’s expansion and repositioning vehicle. Sears’ Craftsman, Lands’ End and Kenmore brands may end up in Kmart storefronts, and the Martha Stewart brand may end up in Sears. Can two relatively poor performers with identity problems combine efforts and assets and become successful once again? The jury’s out on this one.

And speaking of Martha, now serving time in prison for lying to federal prosecutors, who would have thought that her company, Martha Stewart Living Omnimedia Inc., would have maintained and even increased its price and market capitalization without her at the
helm (more than doubled since she’s been out of the day-to-day picture)? Through some significant restructuring of its operations, the jettisoning of some businesses (flowers made the cut!), some major shakeups in management, the potential that Martha will write a book on her experiences and signing Mark Burnett of Survivor fame to help develop some new TV shows upon her return to public life, the investor world is betting that she’ll make a comeback, and the possibility that her Kmart assortments will get expanded into Sears isn’t hurting, either.

“PAY BY SCAN”
The discussions all year about “pay by scan” are turning into reality. The Home Depot is rolling the process out to some markets in spring 2005 and plans to have all markets involved in it by the end of the year. While some pilot markets have shaken some of the bugs out, the implementation process will test the mettle of suppliers who need to learn new mind-sets and skills. And if it’s successful with the garden-center categories, will there be movement afoot to expand it to other floral categories such as cut flowers?

WAL-MART SHIFTS?
And all isn’t rosy in Bentonville, either. Wal-Mart’s comparative store sales increases have missed or been at the lower end of the ranges it’s been forecasting over the past few months while sales at the higher end department stores have been exceeding predictions. In some cases, Wal-Mart has had weeks where both store traffic and the average transaction have been below the prior year—not a positive indicator for the retail industry since Wal-Mart is the largest retailer reaching the most consumers. Some may say that the cause of this is that the company is focusing on more profitable sales, but the reality may very well be that
there’s a demographic pattern shift taking place where higher-income consumers are feeling better about their futures and spending more freely, and the “masses” are feeling more threatened by all of their economic challenges and living more hand-to-mouth. There is a widening split between those consumers who have the disposable dollars and are willing to spend them on the luxuries of life and those who are looking for the best price value, especially on the essentials.

POSITIVE STEPS
Yes, it’s a tough, competitive world we live in, and there’s more than enough uncertainty to go around. But there are also some extremely positive things happening—most importantly, a change in the mindset of our industry at all levels, a change that has us thinking more
about competing for the consumers’ dollars—and not just on a price value level. There’s more recognition of the fact that we have a product that consumers genuinely like, but we aren’t selling what they’re buying. We’re focused on selling our products more on the merits of price than on the intrinsic and emotional reasons consumers are really drawn to purchase and use our products.

At the Seeley Conference at Cornell University last summer, the topic was the relevancy of floriculture to today’s consumer. After much discussion and input from consumer experts, the consensus was that our product is definitely relevant and can satisfy many of the consumers’ needs and desires, but we haven’t effectively positioned our products to satisfy them. And at a recent Industry Summit sponsored by the American Floral Endowment,
there was a strong cry for not only production related research but for consumer and marketing research, a cry coming not only from retailers but from growers and breeders as well.

While we still have a long way to go to position our products effectively to consumers, the recognized need for doing so is the first step in the process of making it happen. Business as usual won’t allow us to grow and increase consumption; we need to market more effectively against all of the other consumer choices. This is especially true in view of the increase of new producing regions like Africa, Mexico and the Far East; additional quantities will come to market, and, unless we build consumption, it will depress prices, and we’ll end up lowering our perceived value proposition with the consumer because we’ll be forced to continue to market on the merits of price alone.

In retrospect, 2004 wasn’t a great year for floriculture categories, no matter what channel, category or segment you played in. But there is a faint glimmering light at the end of the tunnel, one that can change our relationship with consumers to benefit both them and us. Understanding consumers, their needs and desires, the drivers for their purchasing behaviors, offering not just stuff at a price but rather satisfying their innate and intrinsic needs that our products can do better than most of the other choices available … we have the opportunity to change, but do we have the commitment and motivation?


Pohmer’s predictions for 2005
PREDICTION New growing areas (i.e. Mexico, Vietnam and even China), especially for cut flowers, will start penetrating the U.S. market, causing further competitive/cost challenges to growers from current markets, exacerbating the supply/demand balance. Price will become an even more important component of the negotiating process until we can
start focusing on building consumption.

PREDICTION Because of some of the recent problems experienced with viruses and bacteria on imported products, there will be a movement toward more governmental controls and standards to monitor imported products.

PREDICTION As an industry, floriculture will finally start to take steps to focus on building consumption of our products. These efforts may include new research into consumer purchasing behaviors and barriers; cooperative efforts between channels and
segments; and more support for generic, non-price-focused consumer promotion and education.

PREDICTION Growers, whether they are playing in the “pay by scan” game or not, will begin to better understand the retail process and develop programs and services beyond just providing products.

PREDICTION On the retail level, the supermarket channel will ramp up its consolidation efforts, the warehouse clubs (e.g. Sam’s Club and Costco) will expand their floral offerings and Kmart/Sears will close garden centers as they convert Kmart stores to the Sears Grand strategy and sell off/close more real estate.


REPORT CARD:
Stan Pohmer’s predictions for 2004

PREDICTION The focus on price value will continue to grow and dictate retailer assortments and pricing, especially in the mass markets.
GRADE Unfortunately, an A+.

PREDICTION Larger growers will find themselves partnered with single large retailers, creating high risk.
GRADE B+
COMMENTS The advent of “pay by scan” will force this as a reality, but the challenge is real, too. Just ask some of the former Frank’s Nursery & Crafts suppliers.

PREDICTION As “pay by scan” gets more discussion and payroll pressures at retail become more challenging, suppliers will be asked to take on more in-store activities and absorb more of the financial risks.
GRADE B
COMMENTS Although the concept didn’t roll out in 2004, the discussions have forced suppliers to start the “learning curve” and get set for the rollout in 2005.

PREDICTION Geographic affinity groups and their suppliers will partner with some of the industry’s existing consumer marketing efforts to help increase consumption.
GRADE C+
COMMENTS The Connecticut and Michigan state floral associations partnered with the Flower Promotion Organization in 2004. But as an industry, we haven’t yet embraced the understanding that we all need to focus on the consumer to build consumption.

PREDICTION There will be a consolidation of growers, and the smaller ones that specialize on higher production crops will prosper, but the smaller ones that try to compete
against the mega growers will fail.
GRADE C+
COMMENTS The mega growers continue to take business from the smaller, non-differentiated producers, but other smaller growers have banded together to market cooperatively (e.g. VIVA! branded plants).

O. Stanley Pohmer Jr. is CEO of Pohmer Consulting Group, Minnetonka, Minn., and executive director of the Flower Promotion Organization, www.flowerpossibilities.com. Reach him at (952) 545-7943 or spohmer@pohmer-consulting.com.


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