October 2007

Are You Ready For… By Stan Pohmer

…The New Future?

I attended a Distinguished Lecturer presentation at Texas A&M recently; the featured speaker was Anna Ball, president and CEO of the Ball Horticultural Co. Anna is an industry visionary rooted in reality who has the unique ability to see how our products fit in the grand scheme of the world around us. It was quickly apparent that she is concerned about the future of our industry. While she is optimistic about our opportunities to continue to grow and flourish, she recognizes how we're currently conducting business and positioning our products may not be the way to address the changing dynamics that do and will exist in the future.

Anna's concerns mirror some conversations I've had recently with a number of forward thinkers in our industry. While these individuals are currently successful in their businesses, they also share the reality that what made them successful in the past will most likely not be what makes them successful tomorrow. There are a number of changes taking place over which they have absolutely no direct control that will fundamentally change the formula for success. Here are just a few of the changing realities we'll need to address in the not so distant future.

The demise of the middle class: Until postÐWorld War II, a middle class as we know it today didn't exist in this country. Under the GI Bill, many veterans went to college, got their degrees and elevated their earnings and spending power to a much higher level than their parents had previously. The growth and prosperity of the nouveau riche middle class fueled the growth of our industry, and still does today, especially as the Boomers, many whom are gardeners, are into their highest earning stages.

But as the Boomers head into retirement — and with higher costs of living eating into the comfortable retirement nest eggs — their spending power will decrease, and those who continue planting will do so on a smaller scale. At the same time, we're facing the challenge of the sons and daughters of the Boomers, and the X and Y generations not being nearly as involved with our products as their parents were.

Economists are predicting that, because of the social and financial conditions that are becoming more evident, the middle class (our core customer base) will shrink, and the gap between the very wealthy and the economically challenged will widen.

The challenging housing market: Though some pundits say the softening housing market is cyclical and will correct itself as it always has, I think the current situation is deeper and will result in some major fundamental changes that will have longer-lasting consequences. A few examples to consider: First, as real estate values were skyrocketing, many people bought more house than they could afford, thinking they could safely increase their net worth through price escalation. And many Boomers planned a large part of their retirement nest egg on their rising home equity. But since the housing-market crash, many retirement-age homeowners are finding their net worth (and future spending power) is taking a major hit. Add to this the crisis of the sub-prime loans and the zero-percent-down ARMs that many of the younger families bought into, where the loan amounts now exceed the value of their homes. This will only get worse as these ARM rates reset at significantly higher interest rates. Tighter credit is a result of what we now recognize as fiscally irresponsible loans, which make it more difficult for people to purchase real estate, especially their first homes.

(It's interesting to watch the reaction of homebuilders to this crisis. They simply cut prices to reduce their inventories and then slowed down construction to get the supply in line with demand and reduced their overhead by scaling back on their workforces. If only it were that easy for growers to adjust to tightening demand.)

The shift from do-it-yourself to do-it-for-me: We've already seen this as an emerging trend, and it will accelerate as people want the benefits of our products but lack the time or inclination to plant themselves. This will create demand for more services, but with all of the other financial pressures they're facing, will they be able to afford to pay for these services?

Retail formats: The home- improvement chains built their businesses on new-home construction, remodels and upgrades; with the slowdown in housing, how will they compensate for this suppression of demand? With more products becoming available in competitive store formats, how will they build loyalty? How will abundant and sophisticated technology impact how consumers get information, and how they shop and interact with retailers?

These are just a few examples of outside influences that will affect our businesses. Any one of them individually can have serious implications. Combined, they will force intrusive and far- reaching impacts.

Growers always have been a resilient bunch, adapting to change and finding ways to wait out the various economic and business cycles. But I don't see the demographic and economic changes we're facing as being temporary, something we can just wait out. What we're seeing will be permanent and fundamental. We need to rethink and retool our businesses and industry — and the way we conduct business — in anticipation of the realities of this new future. Sounds like a great topic for discussion at a think tank like the Seeley Conference.

…Certification Programs?

Sustainability is now more than just a buzzword. It's becoming more evident in the consumers' vocabulary and is starting to play a part in their purchasing decisions, and retailers are giving the mindset more than just lip service: They now want to prove to consumers that they are doing more.

Home Depot internally identifies what products are "green" and can be promoted under their sustainability banner. Wal-Mart, on the other hand, is looking to have third parties set sustainability standards, inspect to ensure compliance and certify the sources of supply.This lifts the "burden of proof and truth" from the retailer and places it on the more believable and credible third party. In concept, this makes tremendous sense. But this also creates a potential problem for growers. What if each one of your major customers wanted you to be certified under their own preferred third-party programs, each with different standards and a separate cost to participate? For competitive and differentiation purposes, it's totally feasible that Wal-Mart, Home Depot, Lowe's and Costco, for example, could each demand compliance from all of their suppliers for a different program; the retailer-mandated UPC bar-code problems we've dealt with in the past would pale in comparison.

Retailers are embracing the sustainability issue more seriously than most growers. And until growers collectively determine which certification program makes the most sense for them and actively get involved in selling the benefits of this selected program to their retail customers as the better alternative, we run the risk of retailers dictating their suppliers' sustainability standards. Unless growers get ahead of this issue, retailers may start telling us how to grow our products.

Individually, it will be difficult for each of our businesses to address these issues. Now more than any other time in our industry's history, we need to act together to discuss these challenges and develop solutions. In the past, individual companies and their trading partners could overcome obstacles. But these fundamental concerns have the potential to reach to the core of our industry and our future growth. We need the collective power of every company and leader.

Are you ready?