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.

 

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.

 

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

  1. Do not covet incoming wire orders. A profitable flower business must be built on a foundation of local customers.

  2. Join only one wire service unless you have a very special situation.

  3. If you have a small volume of outgoing orders, search for a way to send them without joining a wire service.

  4. Pay your bill on time. Be sure you get the rebates you earn.

  5. 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.

  6. 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.

  7. 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.

  8. Make sure you please customers on incoming wire orders. Treat them like your local customers.

  9. 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.


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