The Spring of Hope: 13 Strategies to Keep Your Business Strong
May 5, 2024 
These members of the horticulture industry met with U.S. Rep. Salud Carbajal, D-CA, on policy matters. From left: Rob Lando of AgriNomix and AmericanHort board chairman, Marc Englert of Florep, Karen Limbert of AmericanHort, Denise Godfrey of Olive Hill Greenhouses, Michael Frantz of Frantz Wholesale Nursery, and Emily Rooney of the Agriculture Council of California. Photo: AmericanHort
Every industry has a certain level of business turnover, some of which is celebrated, and others that cause concern. In the past year, we’ve seen some long-established businesses close while others announce expansion plans. Is it management challenges or great timing?
In some ways, now is a great time to “cash out” if your business has had a good run and there is no obvious generational succession plan in place. Costs are going up, labor is a challenge, consumers are experiencing price-increase fatigue, tax rates on the rise, estate taxes changing, and we had several strong years in the industry. With real estate prices increasing across the country, for some taking the winnings and putting them in the market might make great sense. We are experiencing the “wealth effect” of a strong stock market and – at least for now –you can find risk-free investment returns of 5%.
Other businesses may have been “squeezed” out by margin, cash, and debt. Declining margins can quickly tip profit to loss, cash tied up in slow moving inventory grinds the business to liquidity problems, and reliance on any debt — for working capital or growth — has doubled in cost and become more difficult to obtain. That formula has likely impacted several businesses in our industry who were unable to improve their balance sheet over the past couple of years. If you haven’t had a strong grip on cost, cash, and debt over the past few years, running a business has become increasingly challenging.
But the majority of businesses in our industry are managing well in our current environment. At AmericanHort we work to build programming to help our members and the industry improve operational, organizational, and financial health. We are developing a point of view about how businesses can stay resilient and that informs some of the programming topics we will have at Cultivate’24 and throughout 2024
Inflation and Consumer Spending Impact our Industry
Rising costs of materials, inventory, and labor continue to squeeze profit margins. The average compound effect of inflation is up 18% from January 2021 to January 2024. In our industry major cost drivers for growers including labor, propagative materials, and fertilizer are each up double digits in this same period.
The good news is consumer wages are up an average of 15.4% over this same period – but personal income isn’t keeping up with spending. These are averages, and remember that many household essentials — gas, groceries, rent, and car insurance — are up more.
Consumer spending continues to exceed expectations and keeps the economy growing. The current pace of growth is sustained by households adding new debt and spending the savings they built up during the pandemic. That means this pace of spending is not sustainable in the long run. Eventually, households will run out of excess savings and/or reach a ceiling on their ability to borrow. Consumer spending should hold up in 2024 but grows a bit slower than overall economic growth.
Recent data from USDA suggests that the percentage of income that households spend on food is now at its highest level in three decades. That reflects both the fact that food prices have increased faster than other prices, and that households prioritize essentials when having to make cutbacks due to higher prices. These distributional changes have impacts on the amount of disposable income households have to spend on other items – like plants and landscape. Recent polls and consumer sentiment show less than 40% of Americans call this a “good” economy — despite strong growth, unemployment below 4%, the stock market at record highs, and inflation back around 3%.
At our core we sell consumer products (through garden retail and to homeowners in the landscape) and we are working to understand if our products become discretionary in consumer budgets if inflation continues. Will consumers prioritize spending on plants and landscape this spring and summer? We’re optimistic.
Ways to Maintain Financial Resilience
- Margin Management – Margins can be difficult to manage when production costs continue to increase, and we start to test consumer price elasticity — how sensitive consumers are to price fluctuations and how their buying behavior adjusts in response to price changes. Growers will need to analyze costs frequently and adjust prices strategically to maintain profitability. Be mindful of inflation and adjust spending budgets accordingly.
- Focus on Optimization: In times of market uncertainty, business leaders need to consider a pivot from maximizing to optimizing and put additional focus on maintaining margin and cashflow. Some may attempt to diversify revenue streams and explore new markets, products, or services to spread risk. Know the difference between profit percentage and dollars. As costs have increased 20%, it’s critical that you don’t deleverage the business by accepting a smaller profit percentage (by only focusing on profit dollars).
- Cash is Critical – Focus on optimizing the cash tied up in inventory and anticipate inventory turns. Prioritize margin mix, stock-keeping unit (SKU) rationalization, and turns in inventory build. Try to maintain healthy cash reserves to weather unexpected disruptions and work to develop flexible financing options for short-term needs.
- Cost of Debt – Sometimes borrowing is unavoidable or beneficial for growth. Use debt strategically and understand how the availability and cost of debt has changed in the past two years. The average corporate borrowing rate shot up to nearly 7% at the end of 2023, up from a low of 2.3% in 2020 (small business rates are likely higher). A growing dependence on debt to operate the business can result in a liquidity crunch if the funding source dries up.
Operational and Workforce Challenges
Not just production costs, but looming workplace and environmental regulations have a steady impact on our businesses. Whether from restricting operations or the costs of “red tape”, operating a business is becoming more difficult. Our Advocacy team at AmericanHort is focused on the key legislative, regulatory, and tax initiatives that burden our industry. We are also working to identify and provide the industry with best operating practices for growers, updates on emerging pests and diseases, and identification and implementation of the latest technologies to improve business operations.
We are also working to help you find and retain qualified talent in this competitive job market. Labor is among our highest production input costs and labor productivity is a big key to success in most of our businesses.
The February jobs report sent mixed signals but shows some slowing labor demand. Nonfarm payrolls rose by a healthy 275,000 jobs, but employment gains in December and January were revised down by a cumulative 167,000 jobs and the unemployment rate rose to a two-year high of 3.9%. Importantly, the robust employment momentum is non-inflationary, with wage growth cooling 0.1 percentage point to 4.3% year over year. At AmericanHort we continue to work on the cost and availability of H-2A and H-2B programs that drive our production and that won’t change anytime soon.
Ways to Maintain Operational Resilience:
- Continue to Drive Operational Improvements: Use technology to streamline operations, improve efficiency, and enhance customer service to create additional customer value and manage costs.
- Competitive compensation and benefits: Strive to offer competitive salaries, health insurance, and other benefits to attract and retain top talent.
- Invest in employee training and development: Enhance employee skills and career prospects to boost retention.
- Promote a positive work culture: Create a work environment that fosters engagement, well-being, and work-life balance.
Not just at Cultivate’24, but throughout the year, AmericanHort offers training and programming in each of these important areas to help you maintain a winning edge in your business.
Other Factors Affecting our Industry
We are monitoring a variety of other factors that may affect our markets and economics.
Housing starts, and to some degree existing home sales, drive continued strength in the landscape sector. Even with interest rates high and home prices still climbing, we are enjoying a strong housing market. A limited inventory and lack of turnover have been pushing housing prices up. According to the National Association of Realtors, the median sales price for single-family homes was $372,000 at the end of 2023, up 42% from the end of 2019. The good news is that high home prices should lead to higher starts as builders respond. The level of housing starts is projected to stabilize at just over 1.5 million homes per year. This is above the pace of building from 2008 to 2019, and about in line with what we have seen since the pandemic. We look for this landscape market to have continued strength.
Election year politics may not bring too many changes in 2024, but promise to bring a new look to taxes, regulations, and possibly environmental rules in the future.
Global conflicts dominate the news and could impact oil prices, interest rates, commodity prices, inflation, and many other macroeconomic trends. While we don’t have much control over these issues, we can think about ways to maintain resilience in the event of these ongoing conflicts.
Ways to Maintain General Resilience
- Embrace agility: Be prepared to adapt your business model and strategies in response to changing circumstances.
- Embrace data-driven decision making: Build capabilities to use data to gain insights into customer behavior, market trends, and operational efficiency.
- Build strong relationships: Cultivate strong relationships with customers, suppliers, and other businesses for support and collaboration.
- Stay informed: Keep yourself updated on industry trends, economic forecasts, and government regulations.
By acknowledging these challenges and implementing these strategies, small businesses can increase their chances of not only surviving but also thriving in 2024’s dynamic environment.
The good news is you don’t have to face these challenges on your own. At AmericanHort we are here to help you navigate today’s business environment, and there are many other resources across our industry to provide support and advice for the road that lies ahead. What we do together matters.
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