feature story
 

 

the state of the industry

by Stan Pohmer

 

Facing continuing economic pressures, the floral industry must work to position flowers so they are perceived more favorably in 2008.

 

It seems like the challenges just keep on coming, only at a faster rate, and the grower/importer/wholesaler/retailer channel needs to be more innovative and adaptive just to maintain status quo.

In 2007, external factors caused growers and wholesalers to have to deal with multiple business issues simultaneously, and retailers had to deal with consumer spending challenges over which they had no direct control. “Channel churn,” where suppliers and retailers both seek new outlets to buy merchandise from or sell merchandise to, just to maintain equilibrium, prevailed. And, unfortunately, it looks like the insanity will continue into 2008.

We’re still in an oversupply situation with cut flowers, and demand is not increasing to absorb the available production. As a result, prices are too low for growers to be profitable. This is a good news/bad news scenario. If growers’ prices had been higher, retail prices would have risen, making it more difficult for florists to maintain a competitive value proposition with their customers.

The oversupply situation could have been even more dramatic if the U.S. dollar hadn’t weakened on the world currency markets. If the dollar had been stronger, the increasing cut flower production from growing areas like Kenya and China would have made its way to the U.S. market rather than to other world markets, where growers could get higher prices. Had this not been the case, our oversupply problem could have been exacerbated.

In my opinion, the two major challenges to sales growth for the florist channel in 2007 were economics and marketplace positioning.

 

economic factors

Fuel/energy costs. 2007 saw the continuation of high energy costs and an expansion of the impact of those rising costs, not only in higher costs to consumers for fuel to run their vehicles and for gas or electricity to heat their homes but also in the higher costs they paid for all consumer goods because of the higher transportation costs in getting food and manufactured goods to the stores. And there wasn’t a great enough increase in income to offset these higher costs, so disposable income was down.

 

Mortgages and the housing market. To the rising costs of fuel and energy add the crash of the housing market and the subprime loan debacle. Foreclosures are at an all-time high, and housing values have plummeted—and these are long-term, not just minor, corrections. Many consumers tapped into the equity in their homes through equity loans or second mortgages when housing valuations were skyrocketing, using this cash to fuel consumer spending. But with the falling housing prices, many homeowners now owe more on these loans and mortgages than their homes are worth, resulting in lower or even negative net worth. As a result, these consumers are finding it harder to obtain new credit, and if they can qualify for it, it’s often at usurious rates.

Many of the homes purchased throughout the past few years were financed with zero-down, low-rate teaser adjustable rate mortgages (ARMs). We’re now seeing these rates reset, and already-cash-strapped homeowners are seeing their interest payments double and even triple.

And finally, many of the baby boomers, the core customer base that has driven our sales for years, had much of their net worth and retirement nest eggs in their homes. As the housing prices drop, so does their discretionary spending.

 

Weak U.S. dollar. The U.S. economic situation goes beyond our borders and affects our offshore trading partners, too. The U.S. dollar continues to weaken versus the Colombian peso (COP), providing growers with less return on the sales they make to the United States while they face increasing costs of production. And with flower prices already low due to oversupply, it’s like being hit with a double whammy.

Ecuador’s economy is “dollarized” (tied to the U.S. dollar), so the country isn’t feeling the same impact as Colombia. Further, Ecuador ships most of its cut flower production to countries other than the United States, where currencies are much stronger than the dollar, while Colombia ships about 85 percent of its cut flower production to the United States.

 

Trade agreement uncertainty. Imported flowers from Colombia and Ecuador dodged the duty bullet in 2007 when the U.S. Congress gave a last-minute extension on duties on flowers (and other products) by extending the ATPDEA (Andean Trade Promotion and Drug Eradication Act) that included Colombia, Ecuador, Peru and Bolivia; this extension runs through the end of February. The Colombian and U.S. governments have signed a Free Trade Agreement (FTA) that will provide permanent duty-free status to flowers, but this has not been taken up yet for consideration by the U.S. Congress. Ecuador has stated that it has no interest in entering into an FTA with the United States.

If no extension is approved prior to March 1, flowers coming from Colombia and Ecuador will incur duties of about 6 percent. Further, if an FTA with Colombia is approved by Congress, there is discussion that the ATPDEA would be eliminated, meaning that Ecuador and Bolivia would have to start paying duties. The U.S. Congress approved an FTA with Peru in early December.

 

the marketplace

Business failures. The financial pressures faced by the florist channel had a major impact on the profitability and survivability of businesses. In 2007, some well-respected and long-standing wholesalers closed. Granted, some of the locations were picked up by other wholesalers looking to expand, but others simply closed their doors. It’s been reported that some growers in South America walked away from their farms, leaving them to the banks, because they couldn’t service their debt. And unlike past business cycles where larger, more successful farms picked up the hectares that became available and expanded their production, now these farms are taken out of production.

There’s a ripple effect that permeates the industry during these economic downturns. As sales slowed for retailers, inventories backed up, with higher shrink incurred by their suppliers; receivables grew; and days to pay increased substantially, forcing suppliers to borrow to carry the retailers. The risk of increasingly larger write-offs on companies that closed or went under new ownership increased, all hitting the bottom lines of the wholesalers, importers and growers. And the ripple effect continued down to the input suppliers.

 

Distribution channel changes. To compensate for the slowed sales at the retail level, wholesalers, importers and growers reached out for new sales outlets, bypassing their traditional customer bases and creating the “channel churn” I mentioned at the beginning of this article. Some wholesalers fulfilled for wire services and dot-com merchants, bypassing their retailer customers. Some retailers bypassed their wholesalers, going direct to farms or importers. Some importers and growers developed wedding kits that were offered direct to consumers, bypassing retailers. And some wholesalers now are working to expand distribution into new outlets such as drug-store chains, creating new competition for their retailer customers.

I’m not suggesting that these changes are wrong for the individual companies or the industry. “Necessity is the mother of invention,” and for some companies, these are desperate times. But this has had and is having an effect on the relationships and loyalties that existed in the past, and many feel challenged and uncomfortable with these changes.

One potential major downside to these new distribution channels and retail outlets is that many of these flowers are sold outside of the cold-chain protocols. If we are focusing on short-term sales at the expense of such protocols and if consumers have poor experiences with the products purchased, they may stop buying flowers altogether, and we lose any long-term benefit from these expanded retail outlets.

 

marketing and promotion

The health benefits of flowers.

The SAF/FPO (Society of American Florists/Flower Promotion Organization) Alliance, continued to leverage the positive research findings from the Harvard Medical School/Massachusetts General Hospital, which conclusively identified the power of flowers on human behavior traits such as anxiety, stress, compassion and general psychological well-being. Individually and as an alliance, SAF and FPO (of which I am the executive director) exposed this positive message to millions of consumers through print media in newspapers and magazines, through video news releases, and on the radio.

These efforts, however, can only help raise consumer awareness. By themselves, these public-relations messages don’t generate sales; they just make consumers more predisposed to flowers. It’s up to individual retailers to leverage this increased awareness by reinforcing it in their advertising, on their Web sites, in their newsletters, and through their in-store merchandising; unfortunately, however, few retailers effectively leveraged these positive PR messages to their benefit.

 

National advertising program. In 2006, a coalition of floral associations and companies established and funded the Floral Marketing Funding Initiative Coalition to try to identify a mechanism to raise funds to support generic industry promotion of cut flowers. In 2007, it was determined that a U.S. Department of Agriculture-administered promotion order (similar to PromoFlor in the 1990s) was the best means to raise funds on a mandatory basis from all domestic growers and importers of record.

Because of many factors—including uncertainty about duties on imports and the extension of the ATPDEA or the passage of an FTA, the financial positions and rising costs of the assessable companies, the fact that only limited funds would be raised (based on the proposed promotion order, it would generate between $3.5 million and $4 million), and questions about the impact these funds would have—there wasn’t sufficient support from the major blocs of assessable companies (the members of the California Cut Flower Commission [CCFC] and the Association of Floral Importers of Florida [AFIF]).

It made no sense, therefore, to take this to a referendum vote, which would have required an additional investment of at least $200,000 of industry monies. That said, these efforts did, in fact, identify the funding mechanism that can be used if and when conditions are better and the industry decides it wants to pursue generic promotion.

 

 

operating smarter

 

The Floral Logistics Coalition, a broad-based group of industry associations and companies that includes all facets of the traditional and mass-market retail channels, gained both support and traction in 2007. Efforts focused on improving care-and-handling and cold-chain protocols, establishing grades and standards, and piloting the use of Global Trade Item Numbers (GTINs) and Universal Product Codes (UPCs) on cut-flower boxes and selling units, enabling suppliers to increase the efficiency of their electronic ordering/receiving/invoicing processes and to better track their inventories. The gratifying thing about this coalition is that, for the first time, the entire industry came together to work on issues and opportunities that benefit the whole industry. This is a great model to use for other industry efforts as well.

 

where do we go now?

 

There’s little that retail florists can do about overall consumer spending and the economic pressures that consumers and suppliers will face. That said, there are some things that I suggest can help reposition flowers so they are perceived more favorably in this tight spending marketplace.

 

Position flowers differently. First, I agree that consumers view flowers from a florist as an indulgence, and if we continue to promote flowers based on price, we are at a disadvantage from a value perception standpoint. We have analytical behavioral studies from Rutgers University and Harvard Medical School that clearly tell the stories of the positive benefits flowers provide on human emotions. And today’s consumers, with all the financial pressures they face, are as stressed, worried, anxious and scared about their futures as any time I can remember.

We have a solution that can help them better cope with their concerns, making them feel better about themselves, providing a sense of tranquility and serenity, and helping them achieve a better outlook and mood. Now, more than at any time in the past, is the time to position flowers as a wellness solution, going beyond selling on just the merits of price.

Become relevant locally. Second, I believe that retail florists need to build relevancy for their businesses in their own communities. Yes, it’s great that the wire services spend lots of dollars exposing consumers to flowers. And it’s great that the FPO and the SAF spend dollars on increasing consumer awareness about the vast benefits of flowers. But if retailers don’t take ownership and leverage these dollars to their benefit, these groups have wasted their investments! 

Retail florists should strive to become the hearts and souls of their communities, constantly exposing themselves as the ones who take part in their communities, get involved in the activities, participate in school programs and in the Girl Scouts and Boy Scouts, get involved with garden clubs and business and civic organizations—using each of these as an opportunity to promote the benefits of flowers. Building relevancy is key to creating top-of-mind awareness and loyalty. A wire-service ad or an FPO press release can’t do this for you; only you can do it for yourself!

Yes, times will continue to be tough for retail florists, especially in tomorrow’s economy, but remember the beauty of the product you provide, the artistry you apply and the beneficial value flowers communicate. These are what you should be promoting, not flowers.

 

 

Stan Pohmer is CEO of Pohmer Consulting Group, Minnetonka, Minn., and executive director of the Flower Promotion Organization, www.flowerpossibilities.com. Reach him at spohmer@pohmer-consulting.com or (612) 605-8799.

 

 

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