June 2010 Big Grower

The Ups and Downs of Business Today By Dean Chaloupka

We have worked and sacrificed to get to the top of the mountain. Let's not forget that getting down often claims more victims.

I recently read Into Thin Air, which is about an ill-fated expedition to climb Mount Everest. I was fascinated by the story and continued to research the climbing of Everest as well as other high peaks. Aside from the sheer determination it took to climb these peaks, it also amazed me how many times I read about the accidents or tragedies that occurred once climbers reached a summit. After the exhilaration of getting to the top and reaching that goal, these people faced the daunting task of descending knowing that their life still depended on how well they did that — and that the descent could be more difficult than getting up the mountain in the first place.

Reading these amazing stories made me think of our industry, all that we have been through in the past several years and the possible pitfalls that lie ahead.

Let's first take a look back at our several-year climb and the work that it took for much of the country to have a successful spring 2010 season.

A History Lesson
Pay by scan and other forms of risk transference from retailers to suppliers began six years ago. This has been assimilated into the business model of the industry. While some growers did not survive, others grew. The biggest adjustment was figuring out the volume needed to supply consumers so that shrink at retail did not bankrupt suppliers.

The grower community dealt with skyrocketing oil and natural gas prices three or four years ago. Some innovated by investing in biomass boilers, which reduced their costs and helped them gain predictability. Plastic, fertilizer and transportation costs increased at the same time. Again, the growing community adjusted but continued to consolidate as some suppliers were not strong enough to survive.

Two years ago, gasoline prices jumped to between $3.50 and $4 a gallon, meaning discretionary income for consumers was greatly reduced. Most economists now say we were in a recession in early 2008, and horticulture sure felt it. Later that year, the financial meltdown began and the whole world took notice.

With this crisis, lending institutions tightened guidelines on new or renewing loans. Operating lines of credit have been tougher to get, and now-unstable companies that somehow survived everything else found themselves in a position where they could no longer operate.

The Silver Lining
One of the great benefits for growers in this has been a reduction in costs for oil, natural gas and transportation that just a couple of years ago threatened the existence of many. Another is that with the unemployment rate rising, talented people who might otherwise not have been available are now open to becoming part of suppliers' leadership and management teams.

Over the last two years, growers have seen resurgence in demand as consumers have stayed home more and spent on gardening and landscaping projects. Retailers have also seen that the lawn and garden category is extremely important to them and their bottom line and have now put the resources into it like continual, national advertising on TV which had been nonexistent prior to now.

Coming Back Down
So we have made it through a tumultuous five- or six-year period and have enjoyed a very successful spring 2010. Demand is high, costs are under control and retailers see the lawn and garden category as crucial and continue to promote it throughout the country. So what are the future perils or risks on the descent from this "peak"?

The greatest risk going forward is inflation. At this point, most people just roll their eyes because inflation is low and the experts predict that it will remain low through 2011. What about after that, though? Thinking only into next year is very short term. Inflation of 4 to 6 percent doesn't sound like much until you consider that most leaders in our industry have never had to operate with inflation at that level over an extended period of time. What would consistently rising costs like that do to your company and its forward-looking plans? Does your business model include or anticipate such a scenario? Can you say you have prepared to survive something like this?

Many believe the Fed will control inflation. I assume those same people also thought the Fed had banking and the economy under control, and we know how that turned out. It also assumes that inflation is just a factor of what goes on in the United States. An article in the April 23 issue of the Wall Street Journal, "High Cost of Raw Materials" by Liam Pleven, points this out. Commodities such as rubber and lumber have seen surges in prices. Emerging countries and their resurgent economies are fueling the growth well ahead of the U.S. rebound. Think about what this might mean in future years for oil, steel, transportation costs and other inputs necessary to drive our industry. It is not only what happens here that matters: Inflation will be dependent on the world, not just what we do in the United States.

It should also be a concern that banks will not change their more restrictive lending practices to account for inflation. Just consider what it would do to your cash needs in building spring inventory if costs rise 5 to 6 percent each year and your ability to fund that is capped at today's levels.

Beware of Sale Prices
Horticulture and lawn and garden, along with every other product category, have trained consumers that everything is on sale while we have been in the recession. If input costs rise and we do not break the trend of selling at cheaper retail prices, suppliers will get caught in the squeeze. There needs to be a reason for the consumer to pay more going forward to break the cycle, and it will be up to the industry to develop the products and services that resonate with consumers, meet their needs and show them the value in paying more.

The future will demand every bit as much hard work and tenacity as the past several years. As with a mountain climb, there will be as many challenges on the downward climb as there were going up.