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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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