The Top 100's Changing Business Model
The mega retailers have had the greatest effect on how the Top 100 Growers do business. Let's look back at how the Top 100 have changed over the last three decades.
April 19, 2011
Grower business models have undergone dramatic changes over the past 20 years and, in particular, since the beginning of the 21st century. In the so-called “good old days,” growers had little problem selling their goods because the demand was far greater than the supply. The focus was primarily production driven with the goal of just being a great plant producer. The law of supply and demand took care of the sales.
Between 1960 and 1985, it was not uncommon for growers to build five to 10 acres in the summer because they were having very profitable years. In many cases, these capital expenditures were paid for out of operating profits. Gross margins were at an all-time high during this period, and the growers had most of the control selecting varieties, sizes and packaging. In many cases, growers also had the power to determine the seasonality of the retailers.
In the 1970s, the foundation for a retail revolution was developing with the creation of Home Depot, Lowe’s changing its business model from a local hardware store to a full-line home center, and the rapid expansion of Walmart. These three national retailers have done more to change the way ornamental horticulture operates than any other factor.
If you would have suggested back in the 1960s or ‘70s that you would be doing business with your biggest customer via a vendor-managed inventory (VMI) method, people would have questioned your sanity. No one would have envisioned the retailers going to the California Spring Trials to select their varieties and tell the growers to grow them. No one would have envisioned the breeders and brokers going directly to the retailers in attempt to influence their product decisions, either.
Clearly, the retailer is making more decisions than ever and will continue to take a leadership role relative to what goes on the shelves, how product is packaged and, of course, set the retail price point.
In 1980, the three national retailers combined had 494 stores, or 2.5 million square feet of outdoor garden-selling space. By 2010, they had a combined 7,317 stores and 128 million square feet of outdoor garden-selling space. This rapid growth has caused the changing of many business models for those supplying these huge retailers.
Grower’s Product Portfolio
In the 1960s and ‘70s, most bedding plant growers had no more than five to seven SKUs. The SKUs usually included one high-density pack size, two to three potted items and perhaps two hanging basket sizes (8 inch and 10 inch). Today, many large growers have 60 to 80 SKUs, and that number continually grows as the retailer selects more products.
Growers find it more difficult to keep their margins stable because the retailer is price sensitive and will not allow their direct competitors to sell main-line items at lower prices. Certainly, items that many consider commodities, like the 606 pack of the 4-inch basic annual, are not items in which cost increases will be tolerated. But with all the new items and sizes, the real opportunity is new items in which there are little to no relative comparisons available. It’s still about adding value that excites consumers to open their wallets. Pricing is far more complex in today’s world, but some understand how to get paid for the value they add.
Sales & Marketing
There are two business disciplines that have undergone significant change over the past 10 years, with the industry recognizing no matter how great products are you still need people to understand the market, the consumer and the retailers. Then, you need sales professionals to sell it, and there is a lot more to selling than just making a presentation to the target customer. Professionals understand customers know a lot about the competition and, in today’s world, they understand what motivates consumers to buy our products.
Over the past five years there have been a number of sales and marketing professionals brought into the industry that are making a huge difference for the companies they represent. We are seeing more come in from consumer companies that offer a depth of knowledge and experience in consumer marketing.
With tightening margins, low-cost, high-efficiency production is an important part of the business model with crop times and controlling labor costs two of the most important elements. Another area of production that’s receiving a lot of attention is capacity utilization. In the “good old days,” many growers would shut down after spring and maybe produce poinsettias. But the spring season generated enough revenue and profit to carry the business until the following season. Not true in today’s world. That is one of the many reasons growers are now investing more in the sales and marketing arenas to grow sales in other parts of the year.
These costs have been some of the fastest growing in the past 10 years as retailers demand more fresh product and growers realize they can reduce their discard rates by smaller but more frequent deliveries. What we know is grow carts have become retail-selling platforms, and that is another cost driver. When carts become selling platforms, they dictate less shelving per cart in order to make it easy to shop for the consumer. As the retailers have gone to a supply chain of fewer but larger vendors, that has expanded the distribution area for many another element of cost increases.
Computer systems can quickly and accurately analyze sales date by store. Many have discovered that date analysis is one of the most accurate methods of putting the right products in the right quantities at the right time on retail shelves.
Growers continue to adapt and change their business models to meet the needs of their customers. This will continue as the needs and wants of the retailer and the consumer change over time. Retailers keep providing the industry with more retail selling space, and it is our job to satisfy their needs while making good returns.
Jerry Montgomery operates Montgomery Consulting Services and can be reached at 407-808-4077 or email@example.com.