Online Only: Have A Plan Before You Expand
Green industry economist Charlie Hall says growers must be very clear on their competitive landscapes before considering expanding production.
May 13, 2009
With interest rates so low, could now be a good time for growers to reinvest in their businesses or even expand, if market growth supports it and they have strong banking relationships? We asked Charlie Hall, an economist who holds the Ellison Chair in International Floriculture at Texas A&M University, for his take on the situation. Is there opportunity in a down economy? He says expansion can be feasible if it's done for strategic purposes.
"In a recent webinar and my presentation at ANLA's Management Clinic about surviving the economic downturn, I said the number one action point is conserving cash," Hall says. "Expansion is not conserving cash. It's not the time to get bigger for bigger's sake, but if you have a clear strategy in mind and a firm idea the market can support, expansion can be feasible."
Before moving into a new trade area, growers need to ask themselves if their market can handle additional product, he says. "The key to profitability is not selling more plants but getting more for the plants you do sell," he explains. "Yes, per capita consumption is not where it should be, but you can't simply move into a new trade area and expect to sell more bedding and flowering potted plants. Will the market handle additional product in the area you are looking into expand? You also have to look at infrastructure and the availability of inputs, such as pots and growing media. Are their localized suppliers to feed the new site? Are you expanding your carbon footprint too much? More retailers are implementing sustainability requirements and purchasing locally."
Being clear on a differentiation strategy also is important, he adds. "The two primary strategies are low cost or differentiation. Some can do both. They fill an anticipated market need at a lower per unit cost. You don't do yourself a favor if you answer one and not the other. You need to anticipate the market demand out there."
Assessing demand requires investigation by the grower, Hall says. "If you want to supply box stores in the Dallas-Ft. Worth market, have there been stockouts? Is there latent demand that is not met?" he asks. "Look at the nature of the competition. Who is already there? What will their response be when you enter their market? You've got to buy your way into the market with price, which creates a potential for a price war, and nobody needs that in our industry."
Perhaps the most important factor of all is the relationship with your customer, the retail buyer. "It takes a relationship developed over time with a lot of trust," Hall says. "We hear all too often they will buy all you can grow, but that's not always the case."
The big trend is not expansion but growers working together to serve their markets. "Anecdotally, we're hearing about an increased number of contractual arrangements with smaller and midsized growers," he says. "I think we'll see more cross-docking arrangements and more of an emphasis on logistics. We're going to see more sophisticated contract alliances."
Hall estimates our industry lost between 10 and 15 percent of the growers last year. "Although I don't want to wish anyone ill will, a reduction in growers is actually better. A lot of the glut is filtered out and there are greater efficiencies for those left," he says. "Some businesses had it too good for too long. People were in business in spite of themselves."
Even though we're seeing consolidation in the supply chain and a reduction in growers, the green industry is still highly fragmented. "A concentration ratio reflects the market share of largest producers," he explains. "We don't have an Albertsons or Safeway as a high proportion, like in the supermarket industry. Our retail market share is 38 percent box stores, 32 percent independent garden centers and 30 percent Walmart. There are a few large major but still a whole bunch of other folks. We're still on the fragmented versus concentrated side of the spectrum."