Last fall, I embarked upon an unexpected project that will certainly carry forward well into this year, but I think it’s worth talking about as part of our January 2019 State of the Industry issue, since it pertains to our industry’s health and viability. The topic: Consolidation of grower operations and how it affects the industry at large.
It all started when I was talking with a key industry influencer, who told me he and a colleague had started building a list of companies that had filed for bankruptcy over time. From their combined decades of industry knowledge and memory, the list had reached 40 companies, but they expected that number to grow. Intrigued, I began working on a similar list. We exchanged notes and ultimately landed on a much higher number of companies that had filed bankruptcy, changed hands, or closed doors over the past couple of decades.
I decided to narrow the parameters a bit to look at the years since the big recession of 2008. It turns out the bulk of the businesses on our list actually experienced their financial difficulties from 2008 to 2018. According to Dr. Charlie Hall’s 2017 study on margin suppression, costs from 2007 (before the recession) to 2017 increased by 21.7%.
Hall’s index of the major grower production costs make up about 64% of a grower’s overall costs. Included in that were some astronomical cost increases for labor (34%), shipping and transportation (17%), and propagation stock (24%). While other costs, like energy, spiked and then went down, Hall warned geopolitical issues could lead to higher fuel costs before 2023. He also said in that same timeframe, freight costs are expected to increase another 20%. And labor costs have definitely gone up since 2017 due to increased minimum wage in several states, which also raises the adverse effect wage paid to H-2A guestworkers, not to mention the labor shortages driving costs even higher.
The industry has not offset these significant increases by raising prices for our products and services. Growers are often not confident in asking for higher prices from their retail buyers for fear of losing business. But this needs to change for growers to remain financially healthy. My hypothesis is that a large number of the growers who have had financial difficulties and filed bankruptcy, sold their businesses, or have closed their doors directly correlates to compressed margins. In addition to grower consolidation, a significant number of suppliers consolidated, as well, showing that growers’ compressed margins aren’t good for anyone.
Or are they? If growers going out of business means a reduction in the glut of product in the marketplace, allowing other producers to ask for higher prices thanks to supply and demand, is consolidation actually what we need? This was where the discussion turned when I presented this topic during Greenhouse Grower’s 2018 GROW Summit last month, and the conversation was riveting. While we’re not going to see grower operations take one for the team and volunteer to go out of business for the good of the industry, we know that there are many businesses that don’t know their costs. And in this day and age, there’s just no room for bad business models anymore.
Meanwhile, it’s a buying economy (at least right now — though another economic downturn is looming), and the current market will bear higher prices. In fact, we’ve heard some pretty significant success stories about growers asking retailers for higher prices and receiving them as a result of candid conversations about operating costs and the value growers bring to the table.
Meanwhile, 54% of the grower respondents to Greenhouse Grower’s 2019 State of the Industry survey said they plan to increase their prices between 1% and 5% in 2019, and 7% said they’ll increase prices by more than 5% this year.
These complex issues aren’t going to get solved right now, but it’s a conversation I want us all to continue to have. Send me your thoughts on the topic, and please be candid.