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the wire-service
conundrum
A look at how the wire-service business has changed for florists and
an analysis of the role wire services should play in florists’
businesses today.
by Kenneth R. Royer, AAF
For decades, the sending and fulfilling of wire orders
has been important business for full-service florists. Unfortunately,
abuses began to creep into the process, seemingly with impunity,
because, in the past, it was a unique service, without parallel.
Today, as a result of those abuses, along with changes
in the marketplace, others have seized the opportunity to capture the
business that was once the exclusive province of florists. That business
is being taken over and reshaped by nonflorist opportunists who gain
large profits taking the orders—while the fulfilling of orders by
florists has become profitless. In addition, the direct shipment of
finished arrangements is beginning to eliminate florists from the
process altogether.
economic realities
Florists join wire services primarily to “get orders,”
and the primary measure of a florist’s satisfaction with that membership
revolves around whether he or she receives enough incoming orders to
offset the wire service’s monthly fees.
Sources inside wire services have told me that gaining
members is not difficult. Retaining members is nearly impossible if the
wire service cannot provide at least the approximately 13 orders a month
needed to offset fixed membership costs.
The number of
members a wire service can retain is in direct proportion to the
number of orders it can provide to keep them satisfied.
Unfortunately, avoiding a month-end cash outlay to
cover membership costs “feels good” to many florists,
but, in reality, it amounts to an important financial loss
for them.
rebates and the rise of
the order-gatherers
The original concept of wire services, with the 20
percent/75 percent/5 percent split of revenue between the sending
florist, the receiving florist and the wire service, respectively, along
with $15 monthly membership dues, worked well. Everyone was happy.
Change began to take place in the early 1970s, when the
fledgling American Floral Services (AFS) began to pay rebates for
outgoing orders to attract members. One unintended consequence of the
rebates was that it also attracted nonflorists (“order-gatherers”), who
figured out that by combining the 20 percent sending commission (which
now averages more than $10) with a rebate of as much as $6 and a service
charge of $10 to $15, they could make a large profit. The
order-gatherers first appeared in large Yellow Pages ads and later
mushroomed on the Internet.
As the order-gatherers gained market share, taking the
profitable outgoing wire orders from retail florists, the wire services
needed to replace those lost orders for the florists in order to
maintain florist memberships, the dues and fees from which provided the
wire services’ primary revenue flow. At first, at least five wire
services were bidding against each other for the growing volume of
orders the order-gatherers controlled by offering ever-increasing
rebates.
The rebates, which had been funded with clearinghouse
fees (the wire services’ 5 percent take on outgoing orders), reportedly
increased to as much as $8 and finally consumed most or all of the
revenue generated by the clearinghouses. In response, the wire services
began to raise dues and fees to replace that revenue, and soon those
dues and fees became the wire services’ primary source of revenue,
costing a small florist as much as $450 a month.
wire services compete for
consumer business
The wire services watched the order-gatherers, to whom
they were paying rebates, thrive on the business of taking and sending
the profitable outgoing wire orders, which passed through the
wire-service clearinghouses on the way to florists for fulfillment. The
potential profit from taking those orders themselves was very compelling
to the wire services, but they knew they risked a potential membership
rebellion by competing with their own members for those orders.
However, when the wire services began to take orders
directly from consumers, by directing consumers to the wire services’
Web sites or phone banks rather than to their florist members, they, in
fact, experienced little opposition from florists.
In my opinion, there is little concern today on the
part of florists regarding the source of their incoming wire orders or
on the part of the wire services regarding the florists’ potential
profit (or lack thereof) on those orders. Even more importantly, there
is little concern on the part of the order-gatherers and the wire
services about consumers’ satisfaction with the value they receive.
enter direct shippers
Currently, order-gatherers keep approximately 45
percent of a customer’s expenditure, and 55 percent goes to the florist
who actually provides and delivers the flowers. (See the sidebar, above
right, for a real-life example.) The increasingly large share that is
being kept by the order-gatherers results in 1) consumers receiving less
and less value for the dollars they spend and 2) price points that are
rising faster than the Consumer Price Index.
The inefficiency of the wire-service flower-sending
process provided a large opportunity for the direct shippers, like
ProFlowers, who bypassed the wire services and the florists and
orchestrated a more efficient direct-from-farm-to-consumer process. This
business model gave consumers the price points and value equation they
desired—albeit with unarranged flowers in a box delivered by FedEx or
UPS.
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gross
inefficiency: a real-life example
On Nov. 21, 2009, an order (No. 81369331), for “Fine Fall
Roses,” was placed on the ProFlowers Florist Express (same-day
delivery) Web site.
The order was for the deluxe $59.99 version, to which
was added a $14.99 service fee and a $4.99 same-day fee. The
total the customer paid was $79.97. The order was relayed to
Royer’s Flowers & Gifts for fulfillment through the
Teleflora wire service from a member named From You
Flowers, for $59.99.
ProFlowers/From You Flowers received $19.98 in fees, a
20 percent senders commission of $12 and, most likely, a rebate
of $6, for a total of $37.98. With the rebate, that’s equal to
47 percent of the customer’s expenditure. Without the rebate
(which the customer doesn’t get charged for), it’s still 40
percent of the customer’s expenditure.
Royer’s Flowers filled the order for full value
($59.99, less our $6.99 delivery fee, or $53), and we received
$43.79 (73 percent) to do so. Worse, that’s only 55 percent of
what the customer spent.
Teleflora took a 7 percent clearing fee of $4.20 and
likely paid a $6 rebate to From You Flowers.
If a florist who undervalues orders had received the
order and filled it for the net of $43.79, almost half (45
percent) of the customer’s $79.97 purchase price would have been
wasted on fees and commissions.
Ironically, many customers are incensed at the value
they receive, and they call the delivering florist, who they
believe is responsible for the travesty—and the delivering
florist has the responsibility to soothe the customer, which
often means a replacement or an adjustment. |
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the internet effect
With the advent and expansion of the Internet,
consumers had a place to price shop for the first time. The
order-gatherers, the wire services (who had joined the order-gatherers’
ranks) and the direct shippers began competing for business on price.
ProFlowers and other direct shippers obviously had a distinct advantage
due to their more efficient farm-to-consumer process.
the financial facts for
florists
Most successful florists strive to gain an overall net
profit of approximately 8 percent, which means that costs consume 92
cents of each sales dollar. Florists must agree to fill incoming wire
orders for full value, yet they receive only 73 percent of the face
value of the orders.
It should be clear that the math of this scenario does
not work. It suggests that a florist loses 19 percent on every fulfilled
order.
a faulty rationale
In an attempt to counter the financial facts presented
above, wire-service salespeople have taught florists, over the years,
the principle of incremental sales. The principle is based on the
assumption that florists always have unused capacity. It says: “If you
have an extra order every day that is an incoming wire order, it is
nearly all profit because you already have paid all of the expenses of
the day with the earlier orders.”
The problem is that 25 percent to 40 percent of the
sales of many small shops are incoming wire orders, which is not
incremental and may not generate enough profit to pay the expenses of
the day. And the problem is compounded at holiday times, when,
typically, more wire orders come in and florists have higher payroll
costs because of additional staff and overtime.
undervalued orders
An unexpected consequence of the commission structure
of incoming wire orders is that many florists realize they are losing
money on them. Therefore, they feel justified in breaking the rules and
undervaluing the orders by fulfilling them at only 80 percent, or less,
of the face value.
This is a rather common practice, and many shops
believe it is necessary for their survival. This devaluing of the orders
has created a multitude of customers who have bad feelings about sending
flowers by wire. Unfortunately, it is the florists who bear the brunt of
those negative feelings.
order rejections
Many florists are also selectively rejecting incoming
wire-service orders. It often occurs at holidays or other
times when florists are busy with local orders. Sometimes
it has to do with the profitability of the incoming orders.
It is a problem for wire services that will likely continue
to grow.
If wire service
membership is not a valuable part of florists' businesses, why do
they join and remain members/
the bait
Building a flower business is a slow, painstaking
process. It may take a florist years to achieve a top-of-mind position
with consumers. Not surprisingly, those who enter the flower business
with a small reserve of capital often become impatient waiting for sales
to grow, and they seek quick and easy ways to build order volume;
joining one or more wire services is one such method. Also, during times
of economic recession, when sales are declining, it becomes
counterintuitive to relinquish orders, even if they are unprofitable.
the trap
Many florists who receive a high number of incoming
wire orders become aware, early on, that there is not enough cash at the
end of the month to pay the bills, which then generally causes them to
conclude that they must raise their prices. Unfortunately, there are
unexpected consequences that follow a decision to raise prices. The
ability of a florist to gain new local customers, who see those higher
prices, is severely compromised, and the dependence on incoming wire
orders becomes even greater.
the conundrum
Are incoming wire orders profitable for florists, or
aren’t they? Is it better to remain a member of a wire service or to
drop out?
It all depends. It is not just a matter of orders. All
wire services provide other benefits to their members that may be
valuable.
In the case of orders, though, the florist who has the
most difficult decision is the one who has more incoming orders than
outgoing orders. A florist who receives 15 incoming orders a month and
sends out none is in the worst possible situation—and should probably
cancel membership. In this case, the florist would fulfill approximately
$750 in orders a month and would have little to show for it other than
offsetting membership costs.
A florist who sends out 30 orders and receives 15 is in
a better situation and can probably rationalize retaining
membership—particularly if he or she earns the rebates wire services pay
on outgoing wire orders. However, it is an unfortunate fact that the
rebates earned go unpaid to many florists because those florists don’t
pay their wire-service bills by the required due date.
reducing your costs
Every florist should do whatever is possible to reduce
the costs of membership, including price-shopping different wire
services or sending options.
In some cases, as a result of a continuing decline in
wire-service membership, maintaining coverage in some cities and towns
is a challenge for the wire services.
When that occurs, florists may have an opportunity to
reduce services and negotiate lower dues and fees. A small florist I
know recently did so and reduced costs by $175 per month—$2,100 a year.
In this time of falling sales, a florist may have time
to do some things the “old way”—trade time for dollars. A small florist
may be able to use a simple computer and Quicken to do billing and
payables rather than a wire-service system that may have expensive
legacy fees and network service, support and license fees. It also might
be possible to create and maintain Web sites with local companies at
lower costs than the wire services’.
There may be an opportunity for an entrepreneur to
start an old-fashioned-style wire service, but using the Internet for
communication, with the old 80/20 split and clearing orders on the
florists’ credit cards. Florists, especially small florists, do not need
all the bells and whistles of the clearinghouse and computerized
sending.
effects on consumers
The sending of flowers by wire has long been
frustrating for consumers. In my experience, the complaints on outgoing
wire orders have exceeded those from all other causes combined.
Because sending flowers by wire was a unique service
offered by florists, with no other comparable alternative, there was
little motivation for those involved to strive to improve customer
quality or value. An attitude of “whatever the market will bear” seemed
to prevail. Poor past performance “set the table” for those who have
moved to take the business away from the florists.
When dues and fees became the primary source of revenue
for the wire services, member quality became a low priority—with
predictable results.
strategies for florists
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Do
not covet incoming wire orders. A profitable flower business
must be built on a foundation of local customers.
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Join only one wire service unless you have a very special
situation.
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If
you have a small volume of outgoing orders, search for a way to
send them without joining a wire service.
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Pay your bill on time. Be sure you get the rebates you earn.
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Report all incoming phone orders. It is a fact that a meaningful
percentage of incoming wire orders is not reported by florists, and
some order-gatherers phone in their orders to take advantage of
that.
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The
day is coming when coverage (having a fulfilling florist member) in
many communities will become a problem for wire services. If you
are the only florist in your community, work to negotiate your dues
and fees.
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Read your bill carefully each month. It is complicated, but do
it anyway. Evaluate the services you are paying for and whether you
can do without them.
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Make sure you please customers on incoming wire orders. Treat
them like your local customers.
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Plan for future reductions in both incoming and outgoing orders.
I expect the current decline to continue as consumers find new ways
to obtain better value and wire services find new ways to circumvent
florists.
The key to success is to
build your local business. I hope this series of articles will be of
some help to you in doing so.
For more information on this subject, access Mr. Royer’s book,
Retailing Flowers Profitably, at
www.usretailflowers.com.
Click on “About Us,” then click on the book icon.
If you would like to comment on this article or respond to Mr. Royer,
send an e-mail to ken.royer@royers.com or
editors@floristsreview.com.
To read the six previous
articles in this series, click here.
Kenneth R. Royer, AAF, is
a lifetime florist who expanded the business started by his mother in
1937 into what is now, arguably, the largest traditional florist
business in the United States—U.S. Retail Flowers, Inc.—which is
operated today by his three sons.
Throughout his career, Mr. Royer has served the industry in numerous
ways—holding positions with the Society of American Florists (SAF), the
American Floral Marketing Council (AFMC) and the American Floral
Endowment (AFE); conducting seminars; writing articles; and authoring a
book, Retailing Flowers Profitably.
Mr. Royer also is the recipient of many awards, including SAF’s Golden
Bouquet Award (now named the Paul Ecke Jr. Award) and lifetime
achievement awards from FTD and Teleflora. |
