feature story

A look at the challenges of the past year and those that lie ahead, as well as a plan for surviving and thriving in 2007.

by Stan Pohmer


2006 wasn’t exactly grim for the overall floral industry; it just wasn’t good. But for the traditional retail florist and wholesaler channel, it’s getting grimmer. Here are my analyses of the factors that shaped the past year for our industry as well as those that will challenge us in the year ahead.

supply increases, but not demand
Overall cut flower units available for sale were up significantly, but the retail sales dollars generated were, at best, flat compared to 2005 numbers. This increased supply coupled with no increased demand led to lower prices at wholesale and, worse, lower profits. The future holds even more peril for the supply side, with some African growers looking to ship flowers into the U.S. market and test shipments of flowers arriving from China.

The only salvations we had this year were 1) availability for Valentine’s Day was tight due to weather-related growing conditions in South America, and 2) flooding and political issues in key flower-producing African nations like Kenya cut availability for U.S. export. (Kenya was focused on satisfying its Dutch market, where it is the No. 1 supplier of roses.) Without these factors, our oversupply problem could have been even worse!

Don’t discount China as an import threat in the near future. Some pundits believe that the growing middle class in China will consume most of the expanding flower production and that the costs to ship over the Pacific are too high to be competitive. Remember, however, that China’s economy is based on exports, and I believe the Chinese will find a way to overcome the freight issue.

Others say that China’s flower quality isn’t high enough to serve the export market, but China can buy the expertise and technology (there are already many foreign companies providing technical assistance to China’s flower industry). In addition, the Chinese government has committed to help build the infrastructure necessary to make the country a cut-flower export powerhouse. China has more hectares in flower production than the rest of the world combined; its problem, however, is extremely low productivity, but this, too, will be overcome in the near future.

energy costs take a toll
The economy wasn’t on our side in 2006, either. On the consumer side, higher energy costs for gas and home heating; low wage increases and the bursting of the housing bubble, where many consumers saw their net worths decrease substantially; higher interest rates; and concern about job security all resulted in a lack of confidence in the economy and reduced discretionary spending potential. And since our products are viewed as “luxuries” rather than “necessities,” when budgets get tight, consumers focus on needs, not wants.

Many of these same higher costs that consumers incurred also impacted suppliers and retailers—higher fuel and transportation costs on both imported and domestic product, higher delivery costs for florists and higher interest rates for all. It was difficult to pass these costs on due to 1) the oversupply of flowers and 2) consumers’ focus on price value as their disposable income decreased, so many companies had to “eat” all or some of the increased costs, further eroding already squeezed profits. Things became even more tenuous for producers, importers and wholesalers as their receivables built up and the days to pay increased dramatically, causing them to increase borrowing in order to pay their suppliers, not only incurring higher costs but also increasing their risks.

threat of import duties
There are potentially more cost increases coming in 2007 relating to imported flowers. Flowers from Colombia and Ecuador come into the United States duty-free under provisions of the Andean Trade Promotion and Drug Eradication Act (ATPDEA). The act was set to expire Dec. 31, 2006, but Congress approved a six-month extension just before adjourning Dec. 9, with another possible six-month extension for those countries signing a Free Trade Agreement (FTA). In late November, the United States and Colombia signed a bilateral FTA, which would eliminate all duties permanently, but at presstime this had not received approval from either country’s legislature. Ecuador also was in negotiations for an FTA in 2006, but those discussions were suspended 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 chambers of Congress. And in Ecuador, the country recently elected a leftist president, Rafael Correa, who is not supportive of free trade with the United States.

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 steps to continue the duty-free status are to have an FTA ratified by both the U.S. and Colombian congresses and for FTA negotiations to resume with Ecuador.

florists lose ground
Sales for the floral industry were flat in 2006, but not all retail channels shared in this equally. The mass-market segment enjoyed some minor increases, but the traditional florist segment lost some headway and market share in both transactions and sales dollars, continuing a multiyear trend.

This continuing negative trend for the traditional florist channel has resulted in what I term “channel chaos,” meaning that many companies try to find ways to cannibalize a shrinking pie to gain a larger share. Some importers who normally sold solely through the traditional channel started selling to the mass market; some wholesalers started buying direct from farms and bypassing the importers; some wholesalers started selling direct to consumers; some florists started buying online, bypassing their wholesalers; some retailers started adding nonfloral categories that compete with flowers; and some wire services started buying nonfloral companies so they can sell direct to consumers, bypassing their retail florist members.

I’m not challenging why these changes have taken place—survival—but I think it’s sad that all of this energy and the resources expended to make this happen aren’t increasing consumer sales and demand. Are we just rearranging the deck chairs on the Titanic?

are we relevant?
In last year’s state of the industry article in Florists’ Review, I wrote that there are three key areas where florists could reverse the negative trends and grow and prosper—relevance, value and relationship. All three areas ring more true today than they did last year, but fostering relevance, to me, is of tantamount importance as we head into 2007.

Many say that flowers aren’t a top-of-mind choice when consumers think about needing gifts, the cornerstone of retail florists’ business. But what is the real reason for this? Is it that too many florists have relied too heavily on the wire services to do their marketing for them? Is it that too many florists have built their business models on fulfillment and haven’t effectively marketed themselves within their communities? Or is it that other nonfloral gift and occasion categories have positioned themselves, through advertising and public relations, to become more relevant to consumers than flowers are?

It’s easy to say that florists have lost significant volume in sympathy sales with the increasing use of “in lieu of” in obituaries. But isn’t the real reason for our loss the fact that others, such as medical research associations and charities, have increased their relevance with the public while we’ve lost relevance?

It’s easy to say that the increase in the number of order gatherers and their endorsement by some wire services have siphoned off the sales (and profits) on which many florists have built their business models. But aren’t the real reasons for the order-gatherer explosion that 1) individual retailers haven’t marketed themselves to their local communities; 2) it’s easier for uninformed consumers to order blindly on the Internet because they aren’t familiar with their local florists; and 3) because of their marketing activities, the order gatherers have become more relevant to consumers than some local florists?

creating relevance
The Society of American Florists (SAF) and the Flower Promotion Organization (FPO) both have invested in public-relations promotion on the industry’s behalf to help raise awareness for flowers. In 2006, these two organizations joined forces to conduct research at Harvard University and invest in consumer PR that promotes the emotional and psychological benefits that flowers in the home provide.

An additional research project on the impact of flowers in the workplace is under way, and the results will be released in 2007 followed by the commencement of a new PR campaign. Both organizations have limited budgets but have generated positive awareness for our industry.

Recognizing that more marketing funds are needed, there are serious discussions by the Development Committee of the Floral Marketing Funding Initiative Coalition about developing a mandatory promotion order managed by the United States Department of Agriculture (USDA). (Remember PromoFlor’s “Buzz the Bee” campaign, which ran from February 1996 through June 1997?) Under this promotion order, domestic cut-flower and cut-greens growers and importers of record would be required to pay an assessment of 2 percent of cost of goods to fund a generic promotion campaign. 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.

The end goals of this promotional activity are to raise awareness of flowers in consumers’ minds and to communicate the relevance of flowers, in order to increase the purchase frequency of existing floral purchasers and attract new consumers to flower buying. For the most part, these activities are channel neutral, meaning that they talk about product rather than specific places or venues to purchase.

responsibility and action
It seems as if there’s a lot of reliance by many retail florists on others—be it a generic industry promotion order, the PR efforts of SAF and FPO, or the advertising by the wire services—to provide the marketing for them. This begs a few questions and comments:

1. With the majority of retail florist business coming from electronic means (telephone, Internet, etc.), and with most florists being destination locations rather than impulse stops, will these generic promotions alone increase shop traffic, either electronically or in person?

2. Generic marketing can and does raise consumer awareness and communicate relevance, but alone, generic marketing efforts cannot increase sales. Only when retailers leverage and harness generic marketing messages as their own, incorporating them into their own marketing efforts to their customers, will there be resulting sales.

3. Today’s consumers are highly selective in where and on what they spend their shrinking discretionary dollars. If generic promotion sets real and perceived expectations with consumers for quality, enjoyment and assortment breadth, for example, but the experience they have at retail is lower than their expectations, have we really accomplished anything? If cold chain and post-harvest care and handling protocols aren’t followed, or if the flowers don’t last and the customers are disappointed, did we get a return on our promotional spending, and what does that bode for repeat sales?

I wholeheartedly believe that we, as an industry, need to communicate and educate consumers about the relevance of flowers in their lives on a generic level. But I also believe that all florists need to develop relevance to their customers in their communities, and all florists need to take ownership for communicating on behalf of their own operations. And I believe that retailers’ supply partners must support the retailers with products and services that will help make the retailers’ customers successful.

We have a product that consumers genuinely like and want to enjoy. We have a product that can, better than most others, convey emotions, feelings and psychological benefits. We have true artists who can build magic from flowers that captivates consumers’ imaginations.

But in my estimation, the key component that is holding us back from increasing the demand that can relieve at least some of our profitability challenges is establishing relevance—relevance for our products and for retail flower shops—providing compelling reasons for consumers to use and enjoy flowers and to buy them from flower shops.

If and when we can provide this relevance, we can begin to grow and prosper again. But until we do …

Stan Pohmer is CEO of Pohmer Consulting Group, Minnetonka, Minn., and executive director of the Flower Promotion Organization (FPO), 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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