Keeping costs under control. That’s every grower’s goal. Our 2017 Top 100 Growers survey asked several questions to get a feel for where these growers are with managing costs and prices, which includes their biggest issues, current goals, areas to invest, the use of the latest technology, sustainability efforts, and how they respond to increasing demand from retailers — just to name a few.
First, we asked about their biggest issues. With virtually all aspects of labor topping the list of concerns, 42% also cited transportation, including cost, availability, regulation, etc., as a major issue, and 41% said production costs, including energy and equipment, are top issues. Price pressure from retailers was mentioned by 33% of respondents.
Increase Efficiencies to Control Costs
So it comes as no surprise to learn that when asked about operational goals over the next three years, efficiency, increasing profit margins, adopting automation and technology, and finding ways to lower overall production costs were at the top of survey respondents’ lists.
Ways to increase efficiencies should be at the core of any business, says Barry Sturdivant, Senior Vice President, Wells Fargo Commercial Banking, National Food and AgriBusiness Group.
“A good business focuses on bottom-line profitability,” he adds.
To help focus on profitability, several growers said their production practices have become more efficient, streamlined, and accurate, and they have saved on labor since they invested in automation, equipment, and technology.
“We are always looking for ways to improve efficiency through automation and computerization,” William Swanekamp of Kube-Pak says. “The biggest paybacks in recent years have come from improvements in the computer software that runs the business.”
Several growers indicated they have invested in various processes to increase efficiencies. Some of these processes include implementing lean practices, the use of handheld scanners and handheld inventory control and dock checks, shade curtains for energy efficiency, and the use of robots.
As controlling costs also has a direct link to sustainability efforts, we asked Top 100 Growers what they are doing to educate retailers and consumers about their sustainable production practices. The responses varied from using recycled pots and offering a product line that is neonicotinoid-free, to scheduling open houses and inviting retail partners to visit facilities. One respondent is increasing communication with customers via social media.
Abe VanWingerden of Metrolina Greenhouses, Inc., an operation that extends an invitation to retail partners to visit facilities, said those partners “are very interested in sustainable production practices on all levels, including the ability to control costs, improve quality, and do what is right for the environment for long-term sustainability.”
Pricing: Consider Costs
What about the delicate task of communicating price increase? The majority of the Top 100 Growers said they base plant prices on costs.
“No one wants to hear there is a price increase,” says Bernard Heimos of NG Heimos Greenhouses Inc. “We let [our customers] know by category how the future pricing looks.”
One error growers can make regarding pricing is to fail to analyze their costs, which impacts how they negotiate price increases, Sturdivant says. He also mentioned that some growers will take on a new sales territory, which may be unprofitable.
“Growers tend to jump at the chance to take on a new territory offered by a customer,” Sturdivant says. “Later they find out the territory contains a disproportionately high number of stores with low sales volume. This needs to be figured out up front.”
How to Keep Retailers Happy
We also asked Top 100 Growers: “How has your operation responded to increasing demands from retailers?” One respondent said “raise prices.” Others said they have responded to these demands by focusing on cutting waste, improving their offerings, and increasing the production pipeline.
Collaborating with retailers was cited by other survey respondents. Specifically, growers need to work with retailers to manage inventory, reduce labor, and increase turns and profitability.
“We partner with [retailers] closely to find out what we can collaboratively do together to grow our mutual business,” VanWingerden says. “We need each other to be successful, and that is the basis of our work with [retailers].”
To achieve the desired result, growers need to know which products retailers can move quickly.
“We know that we need to produce and deliver the product that our customers can be successful selling,” says Lisa Ambrosio of Wenke/Sunbelt Greenhouses. “This impacts our assortment, varieties, sizes, pricing, etc.”
5 Tips to Help Manage Costs and Improve Revenue
How can you ensure your success in managing costs to improve revenue and profits? Barry Sturdivant, Senior Vice President, Wells Fargo Commercial Banking, National Food and AgriBusiness Group, offers five pointers to keep you on the right track.
- Find help to begin costing inventory.
- Consider contacting someone to help with a lean flow analysis.
- Do not overproduce inventory. Your spring grow plan should be along the lines of your toughest year in the past five, not the best year.
- Don’t fall in love with your plants, equipment, or structures. Have a good and well-thought-out reason for investing in all three that includes how they will pay for themselves in a reasonable time.
- Start each year by preparing a budget. Start each budget with an earnings goal in place. That goal should be the sum of cash needed to make term debt principal payments, purchase fixed assets outside of bank financing, and building working capital level over a three-year period to a level where all bills are being paid on a time basis to all suppliers.
Cost Management Concerns
What are some of the issues large growers are having as it pertains to cost management?
One area of concern is with inventory costing and how to apply direct labor to the inventory value, explains Barry Sturdivant, Senior Vice President, Wells Fargo Commercial Banking, National Food and AgriBusiness Group.
“This inhibits growers’ ability to negotiate a fair price and to ensure they are getting an adequate profit margin,” Sturdivant says. “I do not believe a company has to hone it down to the cost per SKU. That kind of detail usually isn’t necessary. However, a grower needs to generally know if a size category is profitable compared to another size category; if one customer is profitable compared to another customer; and, if one customer’s region is profitable compared to another region that is being, or will be, served.”
The industry continues to struggle with profit compression, Sturdivant adds, saying “They’re profitable, but they still haven’t generated the needed level of cash flow to sustain even slow growth. If not corrected with higher earning levels, this results in a slow death as cash gradually gets eaten away.”