The state of the industry With innovative thinking, we can overcome the challenges of a tough economy and changing consumer demographics.
by Stan Pohmer
2011 brought us challenges galore—some new, some just more of the same that we’ve experienced for the past few years—and 2012 looks to be just as challenging!
I won’t bore you with all the details about the troubled economy; you unfortunately hear it every day: the continuing housing crisis (we still have a glut of foreclosures and falling home values), the continued high unemployment rate; and the lack of a real economic recovery policy from our leaders in Washington that results in a crisis of confidence.
We have no control over any of this, so we just have to try to understand the implications of these issues on our customers and businesses—how they affect their behaviors and mind-sets, trying to anticipate the way they think, what drives their purchases and what their priorities are.
so what does this all mean?
• Consumers have less disposable income. With the combinations of wage stagnation, some price inflation, and the reality that many companies are now transferring funding responsibility (or an increasing share) for retirement and medical/dental insurance to their employees, households have fewer dollars to spend.
• Consumers have become, and will continue to be, value conscious. Please don’t fall into the trap of equating low price as the sole determination of value. Yes, price value is important in consumers’ buying decisions, but quality, enjoyment, customer service, signage, display and merchandising, packaging, and communicating the tangible and intangible benefits of plants and flowers all play into the value proposition you promote.
As the noted economic futurist Dr. Lowell Catlett states, “People afford what they want.” In today’s and tomorrow’s challenging marketplace, our mission must be to help consumers understand that they not only want our products but need them!
• In addition to fewer consumers with money to spend because of the high unemployment rate, we’re also facing a demographic challenge. The bulk of our industry’s sales have been to the boomers and seniors (ages 46 and up) who make up 39 percent of the population, 58 percent of the households and 59 percent of all spending.
The generation behind them, the Gen X’ers (ages 29-45) accounts for 20 percent of the population, 36 percent of the households and 37 percent of all spending. The demographic group that everyone is talking about and focusing attention on is Gen Y (age 10-28), who make up 27 percent of the population but only 6 percent of the households and 4 percent of all spending.
The boomers/seniors are the high-income earners who have supported our industry’s growth for the past 25 years. As they age, start to retire and reduce their spending, the replacement group, Gen X, is significantly smaller in numbers. And while we should be excited about the large size of our future customers, the Gen Y group, they don’t have a lot of money to spend now and make up a very small percentage of home ownership and households, and there’s a direct correlation between home ownership and purchases of floral products.
Bottom line, the pool of purchasers for floral products will be shrinking for the next 10 to 15 years. We need to focus on retaining the spending we currently have from the boomers and seniors, getting more Gen X’ers involved in floriculture categories, and starting to educate Gen Y’ers, so that when they do have money to spend, we will have created the demand with them. Remember that there are only three ways to increase sales:
• Raise prices
• Increase your customer count
• Increase the per-transaction value
the business life cycle
Before we get into discussions about what happened or didn’t happen in 2011 and what might be in store for us in 2012, I’d like to make one important observation. There’s an almost immutable law of business called the life cycle that every product, company or industry goes through.
The stages of the life cycle—introduction, growth, maturity and decline—have characteristics in each stage that predict behavior or market performance. Even before the economic recession we’ve experienced in the past few years, our industry was in the mature stage, where most companies or industries spend the most time.
Key characteristics of the mature stage are slowed sales; smaller margins; a focus on managing costs through operational focus and expertise; true innovation being replaced by finessing existing initiatives; supply exceeding demand; commoditization; producers expanding distribution into multiple channels; and a consolidation of players taking place in all areas—growers, wholesalers and retailers. The consolidation we experienced in 2010-2011 was already happening; the recession just accelerated the inevitable process in this mature life cycle stage.
2011 in review
• Sales in every floral category (bedding plants, flowering and foliage houseplants, cut flowers, and silk/dried/artificial) were down compared to 2010, a negative trend we’ve experienced since 2008 (and prior to 2008, our annual growth rates had slowed considerably). Some of this can be chalked up to the barely recovering economy and challenged consumer spending, but a significant factor, especially in the outdoor categories, was the result of weather conditions affecting retail. In many areas of the U.S., we endured major rains and flooding, droughts, and colder-than-normal and hotter-than-normal temperatures that not only affected product availability and timing but also caused such extreme weather conditions that consumers couldn’t even get into their yards and gardens to plant.
• Challenged sales due to weather and the poor economy, inadequate cash flow, a lack of credit availability and restructured retailer-buying initiatives all led to further and accelerated consolidation of growers, both domestically and off shore. In many cases, this resulted in closed farms, and in some cases, acquisition by stronger competitors. Either way, the net result was the same—less availability of products in 2011 and in future years. While any closings are troublesome, one positive result was that supply was positioned closer to actual consumer demand, and higher prices were seen.
• This consolidation isn’t just taking place at the producer level; government data shows that we lost 12.7 percent of the retail florists between 2007 and 2009, and reports indicate that this rate of closure has increased in 2010 and 2011. Locally owned garden center closings; downsizing of department square footage in supermarkets and home-improvement retailers; and reduced, more focused assortments make it ever-more difficult for the supply chain to maintain economies of scale and cash flow needed to maintain profitability, and we saw cutbacks and consolidation in the wholesale, trucking and manufacturing segments.
• On a more positive note, we finally got the U.S.-Colombia Free Trade Agreement (FTA) signed, which will permanently remove duties on flowers (and other products) imported from Colombia. The FTA also eliminates or reduces duties on products exported from the U.S. to Colombia. Also part of this pact was the extension of the Andean Trade Preference Drug Eradication Act (ATPDEA) through July 2013. This retroactively eliminated duties that had been in force since last February for Colombia and Ecuador and allows time for the FTA to be implemented.
One challenge remains, however: What happens to Ecuadorian flowers in July 2013 when the ATPDEA expires and there’s no FTA with Ecuador? Unless the Ecuadorian and U.S. governments establish new trade agreements, it is highly likely that duties on flower from Ecuador will go into effect again in August 2013.
• The California Cut Flower Commission (CCFC) lobbied for funding during the U.S.-Colombia FTA hearings to build a centralized transportation hub that could potentially reduce the outbound freight costs of California-produced cut flowers by as much as 35 percent. While the original request wasn’t funded, CCFC has filed for a grant through the U.S. Department of Transportation and will continue to seek funding options.
what’s in store for 2012?
• The producers that survived the economic downturn and slow sales of the 2008-2011 period have reduced their production levels to become more efficient and profitable, and the availability in all product categories will be reduced. It will be more critical than ever for retailers to commit for product, especially for peak selling periods, earlier and with firm purchase orders. Growers are producing much less on speculation, and prebooks will need to become the norm rather than the exception.
• The next 12 months will yield more partnerships—between retailers and suppliers, and between retailers and their competitors, as the “old guard” of secrecy and the “knowledge is power” mentality that has existed gives way to problem-solving dialogues. Information sharing to gain marketplace and operating efficiencies will have to become more commonplace and trust between trading partners essential.
• 2012 probably won’t be any more challenging than the past three years. However, to maintain and grow in 2012, companies will need a laserlike focus on customers and merchandise. Retailers and their supply partners will have to acknowledge that their past is not their future and learn to serve customers in more innovative ways.
• We need to strike a balance between the tech-savvy consumers who will reward retailers who provide mobile platforms, QR codes and social-media connections with our core customers who spend the most and are more device-challenged and technology averse. No matter how we reach our various consumer segments, we need to be more customer-centered, more relationship-oriented and more transparent. Customers will continue to dictate their needs and wants to retailers, and we need to listen and react or face the consequences.
we can do it
I’ve said this before, and it’s even more important to remember and apply today:
• You grow and sell a product that consumers genuinely like.
• We have products that can help add value to consumers’ lives and lifestyles and enhance their quality of life and sense of well-being.
• It’s our imperative and responsibility to provide consumers with a reason to buy, demonstrating our relevancy (product and venue); we can’t assume that they know the importance of plants and flowers or the benefits they provide.
Our consumers continue to change, and we need to continue to change with them. In the past, we’ve tended to react to change. In 2012, we’ll need to anticipate where consumers will be heading and adapt before consumers do, much like the Great One, hockey star Wayne Gretzky, attributed his scoring success by saying he anticipated where the puck is going to be, not where it is now.
There are tough challenges ahead, but nothing that we haven’t overcome before with a little bit of tenacity, passion and stick-to-it-iveness!
pohmer’s predictions for 2012
PREDICTION The industry, or segments of it, will identify key consumer benefits that either will be promoted by an individual chain or by the industry in general. This could be through industry promotion or campaign. PREDICTION Technology and social media will be executed as part of an integrated marketing campaign that appeals to all customer demographics, including the tech savvy and tech challenged. PREDICTION Product segment and venue-specific associations and organizations will begin to work cooperatively and collaboratively for the betterment of the floriculture industry and our mutual consumers. PREDICTION Unpredictable weather will continue to play some havoc with producers, domestically and globally, and affect retail sales.
REPORT CARD pohmer’s predictions for 2011
PREDICTION Product shortages will occur, especially in the bedding plant, potted flowering plant and cut flower categories, as growers have cut production. GRADE B+ COMMENTS Consolidation of growers, producers going out of business due to slow sales, lack of cash flow and weather issues in both the U.S. and South America all contributed to some shortages in almost all markets. Growers also were more conservative in 2011 and didn’t grow much product on spec, creating a product void if retailers didn’t commit in advance.
PREDICTION While price will still be a consideration, availability assurances of quality product will become more critical in the buy/sell negotiations, especially in the cut flower category. GRADE C COMMENTS It’s still a buyers’ market, and some retailers are still relying on low prices as their value proposition, focusing more on managing costs than on establishing real comparative product value.
PREDICTION A repeat from 2010: Retailers will start to use social media (e.g., Twitter and Facebook) to develop relationships with their customers through reminders, education, and care and handling guidance as well as to communicate/promote sales and events. This is too important a trend for the large retailers to pass on—again. GRADE C- COMMENTS Some independent garden centers and florist shops have active conversations with their customers via social media and have used this as a point of differentiation and a means of developing relationships and loyalty with their customers. However, most supermarkets, discounters and home-improvement chains still haven’t integrated social media into their marketing initiatives.
PREDICTION Someone in the demand chain will develop a broadline message and campaign that speaks to the relevancy of our products to consumers—why they’re important and how they can enhance their lives and lifestyles. GRADE D COMMENTS As an industry, we’re still selling “stuff at a price” and have not yet effectively communicated the true value of plants and flowers—the emotional, psychological, social and well-being benefits. We need to find a way to sell the benefits, not just the “pretty.” When we accomplish this, consumers will find a way to afford our products!
PREDICTION A supermarket will focus on the total consumer experience of purchasing cut flowers, incorporating cool-chain protocols throughout their supply chain and in the store. The only “shelf life” that matters is measured from the time consumers gets the product in their homes! GRADE C- COMMENTS Many retailers are implementing parts of the cool chain from farm to consumer, but no one has yet put all the pieces together.
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., executive director of the Flower Promotion Organization,www.flowerpossibilities.com, and also an editorial adviser for Super Floral Retailing. Reach him at (612) 605-8799 or email@example.com.