Growing In The Green: September 2006
By Melhem Sawaya
By Melhem Sawaya
Times have been changing in the market, but has the industry kept pace? Either we reduce production or we increase demand.
Changes in any industry happen all the time and the horticulture industry is no different. Taking note of the changes and adjusting to them on a continuous basis is the key to success. Ignoring the changes for even one year makes it twice as hard to adjust and then we will be always trying to catch up. Ignoring the changes for more than three years means we are out of touch completely.
In the late 1970s, when flower demand was growing by a whopping rate of eight to 10 per cent each year, many growers didn’t take advantage of this growth and were satisfied with the volume of business they were generating and the profit margins. Others were busy building greenhouses and expanding as fast as possible. And a third group was moderately expanding but mainly strengthening their company’s position so they could better face the future.
The operations that did nothing to take advantage during those market growth years were soon faced with completely different customer requests that demanded they be able to provide a large enough portion of their product. By being unable to meet this requirement, they were dropped as a supplier.
The second group, those operations that were expanding size wise with the demand during the boom years, did very well until the late 1980s. That’s when production costs started increasing at a much faster pace than in previous years. If your operation is not mechanized and built with efficiency in mind, you get to a point when the cost of production is much higher than the selling price you’re able to obtain to offset this increase. Retrofitting a large greenhouse operation is impossible when profit margins are slim.
The third group adjusted with the trends and reacted to market demands. They tested new varieties on a small scale, expanding production on the successful ones and dropping the ones that did not work. At the same time, they built a solid foundation with a good management team and a facilities infrastructure that allows the use of mechanization and maximizes efficiencies. They are in position to withstand the stronger storms of lower prices and higher costs.
It is simple economics; if you want to succeed or exist in the future, you have to invest NOW. In the 70s, 80s and 90s, when production costs from input materials were escalating, the industry made up for this increase by:
1) Increasing production per square foot. It is easy to increase production per square foot, and very rewarding, when demand for the product is quite strong.
2) Decreasing the use of chemicals, and depending more on IPM.
3) Understanding and applying production schedules for different crops to exactly what is required, which reduced crop times, energy inputs and labour requirements.
4) Adding new varieties that required shorter crop times.
5) Incorporating new crops that are excellent garden performers, namely impatiens, which single-handedly increased the consumers’ appetite for gardening. Impatiens are excellent garden performers whether planted in the sun or shade, are tolerant of dry conditions, and they recover quickly even when poorly treated. Such gardening success encouraged homeowners to enlarge their gardens and use more plants.
6) Supermarkets and chains continue to use more products every year.
7) Even when the product left the greenhouse, a good percentage ended up in the garbage due to a lack of plant care by retailers. However, it was accepted for a store to have 15 to 20 per cent product shrinkage because profit margin targets were more easily achieved since their costs weren’t as high as they are today.
8) Since demand at that time was greater than available supply, there was no shrinkage due to product backing up.
These are some of the factors that compensated for cost increase in the 70s, 80s and 90s.
So what has happened over the past few years with the start of this decade, and why have we especially felt the impact off this past season?
(i) Costs have increased at a much faster pace than in previous years.
(ii) Breeders/Brokers often push items through buyers that are not proven in production and by consumer acceptance, which translates into slow sales and a turned-off ultimate consumer who has experienced inferior to disastrous garden performance.
(iii) Energy costs have increased dramatically since 1999. This has resulted in unbearable heating, lighting, and transportation costs.
(iv) With more pressure on profit margins, we tend to increase production and speculate on improved margins. This tendency towards increased production caused more costs, especially when the product does not sell on time, which leads to inferior quality and more shrinkage.
(v) Some stores are under pressure to come up with greater returns, so new programs of different container sizes are added and in different varieties. This is done without increasing sales display areas, and with one bad weather weekend, the product is backlogged. This results in inferior products that consumers do not want. It also means growers cannot ship fresh product, because the limited display area is full of plants that are not saleable.
(vi) Growers sometimes have shipped products on planned dates, not taking into consideration whether the store needs the product or not.
(vii) There are still many companies growing products for which the demand isn’t what it used to be.
(viii) Product grown on speculation won’t find a home as easily as in the past.
(ix) Many products are grown and sold at a very low price because there is no home for them otherwise.
(x) In summary, there is too much supply compared to the demand. The total sales for most garden centres and other retailers increased from last year by 2-5 per cent, but production increased by over 10 per cent. This has created the minor over-supply.
This brings us back to the original question, “where do we go from here?” Here are suggestions that will not just alleviate the problem, but will boost your spring crop to new levels.
• Grow only what you can sell and definitely five per cent less than last year.
• Review your product mix and see which items sold well and which items you had to push to get out. In other words, grow what the consumer wants, not what you like!
• Review your production schedule and see how you can make it more cost-effective. Check all prices with more than one supplier, but don’t just change suppliers if only for a slightly cheaper cost, especially if you are getting good service from your old supplier.
• When reviewing production timing and start-up times, having a few cheaper items that will require opening the greenhouse four to eight weeks earlier is not a good idea. Buy these materials as rooted cuttings, plugs or pre-finished plants, whatever the case requires.
• Monitor carefully the material in your combination containers. Some varieties planted in these combinations may disappear at shipping time.
• Use some seed material, either in combinations or separately, and even in large containers. With our container trials this summer, we do have some seed materials in large containers and they look great, especially since we didn’t dose them with growth regulators and have let them show their full potential.
• If you don’t calculate your cost of producing each item, then you will never be able to make effective decisions. Detailed costing is the basis for prudent decisions.
• If every operation in Canada decreases production by five per cent, then profits will increase by two per cent. If every operation in North America decreased production by five per cent, then profits will increase by four per cent.
• We have done a great job on production efficiencies, but a poor job on marketing and that is where the main problem lies.
• Either we reduce production or we increase demand, that latter of which will require everyone in the industry becoming involved, including growers, buyers, universities, government officials, and industry associations.
• Lobby with your industry association for more marketing programs, rather than more production programs.
• Be proactive in every aspect of the operation to have the consumers interest as Priority #1.
Melhem Sawaya of Focus Greenhouse Management is a consultant and research coordinator to the horticultural industry. Comments on this or any other article are always welcome by e-mailing him at email@example.com.