by Stan Pohmer


Slowing economy, higher fuel costs and increasing competition combined to put pressure on the floriculture sector in 2006.

It seems there’s never a dull moment in our industry, and 2006 was true to form. And a lot of what happened and didn’t happen in 2006 will set the stage for what we have to deal with in 2007.

the economy
Many of the same increased costs that affected profitability for suppliers also affected consumer purchasing behaviors. The rising petroleum costs caused higher input costs for plastics manufacturers as well as increased gasoline prices for consumers; the higher heating costs for natural gas that concerned greenhouse growers were shared by consumers heating their homes; the costs of transportation rose for supply deliveries to growers and manufacturers as well as for local deliveries and flying cut flowers into the United States from offshore.
Suppliers had a difficult time passing these increased energy-related costs to consumers because of an oversupply of cut flowers, challenging weather for outdoor products in many areas and nervous consumers who had less disposable spending power, creating a highly price-competitive marketplace. If there was any salvation in this, winter temperatures throughout the United States were higher than usual, with the result that demand for high-cost energy was somewhat lower than it could have been.
Consumer confidence, though improving throughout most of the year, still wasn’t strong enough to stimulate retail sales and, coupled with profit challenges, many retailers and suppliers suffered significant margin erosion. Flat sales didn’t allow the leveraging of higher fixed costs, and the retail environment was extremely competitive—the double-whammy effect.
And despite the bursting of the housing market bubble, where many consumers had been real-estate rich but bank-account poor and were living inflated net-worth lifestyles, the Gross Domestic Product (GDP), which is driven by consumer spending, made a relatively soft landing, at an annualized growth rate of 2.2 percent in October 2006. Although the GDP is growing at a slower rate than in 2004 and 2005, it’s actually better than predicted and points to the overall health of our economy. This is small consolation, however, to home-improvement retailers like The Home Depot Inc. and Lowe’s Cos. Inc., who rely on strong new-home growth to fuel their sales. They suffered late in 2006, and the forecasts for 2007 aren’t inspiring.

the retail playing field
Let’s first address the 800-pound gorilla in Bentonville, Ark., that has set the purchase value mind-set of consumers for many years, has forced supermarket retailers to change their consumer value propositions to be more price focused and is a major driver for much of the consolidation that’s taken place in this sector. On one of the key productivity measurements—same-store, or comparative, sales—Wal-Mart Stores Inc. has stalled; in fact, after some disappointing sales performance throughout the year, November 2006 comparative sales for its U.S. operations suffered a 0.1 percent decrease, the first monthly decrease it has experienced since 1996.
Let’s not forget that Wal-Mart is still a behemoth: Its sales increases are greater than the total sales volumes of most other retailers, and its core business model is still sound. Some say that its problems stem from a combination of bad press on labor and business issues; its attempt to go upscale to appeal to new customers who have more disposable income (more like Target Corp.) that may have alienated some of its core consumer base; and its simultaneous launch of a number of complex programs, such as major store renovations, that didn’t execute well.
As Wal-Mart came into 2006 promoting its new strategies, there was some hope that its laser focus on price value would diminish, but, as its sales goals weren’t achieved, it has now recommitted itself to touting price value—and other retailers end up dancing to the beat of Wal-Mart’s drums. Wal-Mart’s refocus on price value implemented in the fourth quarter of 2006 will carry forward into the first half of 2007.
As Wal-Mart has grown rapidly to be the largest retailer of food in the United States, it has caused changes to the supermarket playing field, primarily in the form of bankruptcies, mergers and acquisitions, and image repositioning. Most notably in 2006 was the makeover of Safeway, with the introduction of its new “Lifestyles” store concept and the marketing theme of “Ingredients for life,” with positive sales results. The second was the acquisition of Albertsons, Inc. by Supervalu, Inc., CVS Corp. and Cerberus Capital Management, and the subsequent slicing, dicing and integration of the absorbed company. Winn-Dixie Stores Inc., a victim of Wal-Mart’s growth in its markets, came out of bankruptcy a smaller, leaner and more nimble competitor.
On the discount/mass-market side, the merger of Sears, Roebuck and Co. and Kmart Corp. hasn’t created the synergies forecasted, and comparative sales continue to lag. On the bottom line, however, the merged company is the darling of Wall Street as it cut expenses and invested profits into the hedge-fund market guided by its chairman, Ed Lambert, an heir-apparent to Warren Buffett’s investment crown.
The Home Depot expanded nationwide the “pay-by-scan” strategy, where suppliers are paid only for product that rings through the registers, and also added indoor categories to this mix. In a tough weather year, many new pay-by-scan suppliers suffered as they experienced sales shortfalls in a learning-curve year with ramped-up expenses. The Home Depot also announced its new good/better/best garden-center marketing program that will be rolled out in 2007, with suppliers needing to develop programs to accommodate the new strategies.

supply-side challenges
As “big box” stores expanded their geographic reach and consolidated their buying operations, there was a tendency to favor suppliers who had the ability to supply and service broader areas of the country, and this stimulated some companies to purchase and expand their spheres of control, not always successfully. Hines Horticulture (Nasdaq: HORT) was one of the companies that bought and expanded primarily in the outdoor color category on the East Coast. Because of poor weather during the selling season, supplier changes at some of the retailers the company was servicing and a highly competitive environment, it was forced to sell off these relatively new assets and abandon some markets. But from the ashes rises the phoenix, and Costa Farms picked up some of the locations in its south Florida backyard as well as in the Northeast.
On the cut-flower side of the market, one of the major concerns is with potential duties. Flowers from Colombia and Ecuador come into the United States duty-free under provisions of the Andean Trade Promotion and Drug Eradication Act (ATPDEA). This protection from duties was set to expire on Dec. 31, 2006, but Congress approved a six-month extension just before it adjourned on Dec. 9, with provisions for an additional six-month extension if countries sign a Free Trade Agreement (FTA). Colombia negotiated a bilateral FTA with the United States, which was signed by President Bush in late November, but at press time, it still needed to be ratified by Congress. The permanent terms of the FTA would replace those in the ATPDEA. Ecuador also was in negotiations for an FTA in 2006, but those discussions were halted in May when its government seized assets of Occidental Petroleum, a U.S. company doing business in Ecuador.
With the extension of the ATPDEA, Congress has more time to consider the FTA, but there still is the matter of politics. In Washington, the Democrats, who generally are not as favorable toward free trade as the Republicans, are preparing to take control of both houses of Congress. And in Ecuador, the Occidental Petroleum issue is still open, and the country recently elected a leftist president, Rafael Correa. He is not a supporter of free trade with the United States, so there may be concerns that Ecuador may have to pay duties after June 30, 2007.
Without the current six-month extension, duties averaging 6 percent would have been levied on all flowers entering the United States from Colombia and Ecuador effective on Jan. 1, 2007. The next step to continue that duty-free status is to have an FTA ratified by both the U.S. and Colombian congresses or for FTA negotiations to resume with Ecuador.
As if there isn’t enough supply of cut flowers into our market, production is scaling up in other parts of the world, namely Africa and China. Africa is already the largest supplier of roses to the Dutch auctions. Kenya has made test shipments to Miami, and there are some test standing orders from China to Los Angeles. Higher freight costs and maintaining cold-chain protocols during longer transport now are barriers to expansion into the United States, but the Chinese and African nation economies are built on exports, so it’s only a matter of time until they figure things out. It won’t happen tomorrow, but it may come sooner than many people think.
Immigration reform affecting worker availability for domestic growers is another open issue that was fiercely fought about in Washington in 2006, with one camp pushing for enforcement-only of immigration laws and another camp promoting enforcement with a means of permanent legal residency in the United States. Stopgap measures have been approved, but they do not provide longer-term solutions necessary to ensure adequate labor continuity for growers.

consumer marketing
Consumers are bombarded with more than 20,000 messages daily, most trying to encourage them to buy products for one reason or another. Some make a real impression and promote lasting, positive consumer behavior changes; others aggravate and annoy. Some strike the chords of human emotions, creating an experiential appeal, while others focus on price that is transactional in nature.
Unfortunately, as an industry, we fall into the “focus on price” category more often than not. Maybe it’s because we didn’t have conclusive proof of the benefits of plants and flowers, or maybe promoting price was easier. But the net result is that consumers already in stores walk right past flowers without stopping; we’re missing major opportunities to capture new customers and get existing customers to buy flowers more often.
Research funded by the Flower Promotion Organization (FPO) at Harvard University/Massachusetts General Hospital and marketed jointly by the FPO and the Society of American Florists (SAF) demonstrates the positive effects flowers have on human emotions. The results show that flowers in the home, for even a short period, generate greater feelings of compassion, enthusiasm and energy, and reduce feelings of frustration, anxiety and depression. Follow-up research is being conducted to determine the positive benefits of flowers in the workplace in terms of morale, personal interaction and productivity. Those results will be released and consumer marketing will commence in the first half of 2007.
On a broader scale, the industry’s recognition of the need to increase consumption of cut flowers led to the establishment of a funding coalition to try to identify a mechanism for sustainable mandatory funding to be used in a generic consumer marketing campaign. While these recommendations will be voted on by assessable companies, what is proposed is a promotion order under U.S. Department of Agriculture oversight that mandates an assessment of 2 percent of invoice costs collected by domestic cut-flower and cut-greens growers and importers of record. Growers and importers whose volume is less than $100,000 could be exempt from assessment.
Ideally, this assessment would be passed up the system and ultimately paid by consumers, but this “pass through” would be negotiated between each grower/importer company and its respective customers. This is still a work in progress, and informational meetings are being scheduled in the East and West. And again, nothing can go into effect without a vote from the assessable companies.
The earliest such an order could be in place is 2008, the coalition says. If a promotion order is passed, only then can a committee of assessable company representatives begin discussions on what type of promotional campaign would be developed.

2007 and beyond
No matter where you sit in our industry, 2007 will be daunting and challenging. We really don’t know what the new tone in Washington will be with control of Congress going to the Democrats, especially regarding free trade. We do know that the economy has slowed, not crashed, and that there will continue to be corporate right/downsizing and consolidation. And we also know that while we have a great positive message to communicate to consumers about the benefits of plants and flowers, consumers—and most retailers—will continue to be price focused. We know that sales will be tough to get and profits even tougher. But we’re a resilient bunch, and we’ll find a way to survive and thrive in the face of all these challenges.


Stan Pohmer is CEO of Pohmer Consulting Group, Minnetonka, Minn., and executive director of the Flower Promotion Organization, www.flowerpossibilities.com. You may reach him by phone at (952) 545-7943 or by e-mail at spohmer@pohmer-consulting.com.



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