1

Understanding and Competing in a Mature Marketplace

Dr. Charlie Dr. Charlie Hall, charliehall@tamu.eduHall, charliehall@tamu.eduEllison Chair in International FloricultureEllison Chair in International FloricultureTexas A&M UniversityTexas A&M University

Ellisonchair.tamu.eduEllisonchair.tamu.edu

2

About 15% of firms have already exited About 15% of firms have already exited the industry.

About 35‐40% of those left are holding steady (flat sales).

About 40‐45% have had declining sales d   j t h i  and are just hanging on.

The last 15‐20% or so have increased sales during this time period.

MINING

OIL WELLS

FORESTRYFISHERIES

Extractive & Manufacturing

PAPER MILLS

Wrappings,C t i

PLASTICSMANUFACTURING

PETROLEUMPRODUCTS

FERTILIZER;PESTICIDES

CHEMICAL PLANTS

FERTILIZERPLANTS

METAL WORKING

TOOLS &MACHINERY

AG COLLEGES;RESEARCH FARMS

FragmentedFragmentedBipolarBipolarComplexComplex

DISTRIBUTION &LANDSCAPE FIRMS

PRINTED MATERIALS:(Catalogs; signs; packaging)

ContainersPackaging materials

LabelsIrrigation materialsProduction

Nursery& Greenhouse

Firms

Marketing

INDIRECTMARKETING

FIRMS

• Installation• Maintenance• Storage• Transportation• Financing• Information

FUNCTIONS

• Brokers• Landscape contractors• Lawn maintenance firms• Re-Wholesalers• Terminal market firms• Cooperatives• Auctions

DIRECTMARKETING

IMPORTS:• Columbia, The Netherlands,• Ecuador Mexico Canada

EXPORTS:• Market Area to

Market Area• Other states• Canada• Europe

TRADE PRESS & PUBLICATIONS

TRADE

ASSOCIATI

ppMatureMature

Derived Derived DemandDemand

Consumption

RETAILING• Garden centers• Retail nurseries• Retail greenhouses• Florists• Supermarket floral depts.• Discount mass merchants• Home improvement centers• Farm markets• Mail order & internet sales

INSTITUTIONAL• Schools; Churches• Hotels; Resorts• Hospitals• Restaurants• Interior landscapes• Malls• Corporate landscapes• Public buildings• Community parks

Ecuador, Mexico, Canada, • Guatemala, Australia, Israel,• England, Costa Rica, Hawaii,• Philippines, Japan, China,

Africa

PUBLICATIONS

Trade AgreementsTrade Barriers & Import RestrictionsAPHIS/PPQPatents, Royalties & CopyrightsEnvironmental ProtectionPesticide and other chemical regulations

ONS

Regulatory

End Consumer

3

EconomicEconomic

IndustryIndustry

EnvironmentEnvironment

Threat of new entrantsThreat of new entrants

Power of suppliersPower of suppliers

Power of buyersPower of buyers

5General

TechnologicalTechnological

Power of buyersPower of buyers

Product substitutesProduct substitutes

Intensity of rivalryIntensity of rivalry

Effect of weather???

4

The American consumer accounts for two‐ The American consumer accounts for two‐thirds of all economic activity in the United States and unexpected changes in weather and climate averages may either improve or worsen the sale of certain items (Starr‐M Cl   )McCluer, 2000).

For the past 12 years  the correlation  For the past 12 years, the correlation between U.S. same‐store sales and national temperatures was 81.9 percent.

The past six U.S. recessions (1971, 1974, 8   8     d  )  d d i  1980, 1982, 1990 and 2001) occurred during 

very unfavorable years weatherwise.

5

Weather variability does have impacts on  Weather variability does have impacts on economic activity in every state and in every sector. Aggregated over all sectors and states using 70 years of historical weather data, this is estimated to be approximately 6    f  l GDP     6  billi  (i  3.6 percent of annual GDP, or $260 billion (in 

2000 dollars).

Agriculture —which has been the sector  Agriculture —which has been the sector most studied for weather impacts on specific production for specific crops — is less able to undertake temporal or geographic substitution within a year and h  i     f  h     i i      thus is one of the most sensitive sectors at 12.1% sensitivity. 

6

‐0.4%

7

MINING

OIL WELLS

FORESTRYFISHERIES

Extractive & Manufacturing

PAPER MILLS

Wrappings,C t i

PLASTICSMANUFACTURING

PETROLEUMPRODUCTS

FERTILIZER;PESTICIDES

CHEMICAL PLANTS

FERTILIZERPLANTS

METAL WORKING

TOOLS &MACHINERY

AG COLLEGES;RESEARCH FARMS

FragmentedFragmentedBipolarBipolarComplexComplex

DISTRIBUTION &LANDSCAPE FIRMS

PRINTED MATERIALS:(Catalogs; signs; packaging)

ContainersPackaging materials

LabelsIrrigation materialsProduction

Nursery& Greenhouse

Firms

Marketing

INDIRECTMARKETING

FIRMS

• Installation• Maintenance• Storage• Transportation• Financing• Information

FUNCTIONS

• Brokers• Landscape contractors• Lawn maintenance firms• Re-Wholesalers• Terminal market firms• Cooperatives• Auctions

DIRECTMARKETING

IMPORTS:• Columbia, The Netherlands,• Ecuador Mexico Canada

EXPORTS:• Market Area to

Market Area• Other states• Canada• Europe

TRADE PRESS & PUBLICATIONS

TRADE

ASSOCIATI

ppMatureMature

Derived Derived DemandDemand

Consumption

RETAILING• Garden centers• Retail nurseries• Retail greenhouses• Florists• Supermarket floral depts.• Discount mass merchants• Home improvement centers• Farm markets• Mail order & internet sales

INSTITUTIONAL• Schools; Churches• Hotels; Resorts• Hospitals• Restaurants• Interior landscapes• Malls• Corporate landscapes• Public buildings• Community parks

Ecuador, Mexico, Canada, • Guatemala, Australia, Israel,• England, Costa Rica, Hawaii,• Philippines, Japan, China,

Africa

PUBLICATIONS

Trade AgreementsTrade Barriers & Import RestrictionsAPHIS/PPQPatents, Royalties & CopyrightsEnvironmental ProtectionPesticide and other chemical regulations

ONS

Regulatory

End Consumer

8

Hypercompetition

i t   d  d   t  innovate and reduce costs within the supply chain.

tweak existing or develop new value proposition(s).

have enough financial capital to outlast competitors.

9

You can’t manage what you don’t measure!

You can’t manage what you don’t measure!

10

Companies who benchmark achieve 69% faster growth and 45% greater productivity than those who don’t.

PWC T d B SPWC T d B SPWC Trendsetter Barometer SurveyPWC Trendsetter Barometer Survey

11

Profit Profit marginmargin

Asset Asset turnoverturnover

ROI ROI (ROA)(ROA)

x == xx Leverage Leverage factorfactor

== ROEROE

Strategic Profit ModelStrategic Profit Model

Net profitx

Net sales Net profitxTotal assets Net profit

Net sales

x  Total assets Total assets

x Net Worth Net worth

Sales Gross Margin

$1,345,803 35%

less Gross Profit

COGS $467,170

$878,633 lessOperating 

ProfitOperating 

Expenses$74,246

$392,924 lessAfter‐tax 

Profit

Expense percentFederal 

Taxes$74,246

29% $0 dividedNet Profit 

MarginMargin

by 5.52%

Sales

$1,345,803Inventory 

TurnoverInventory X

Return on 

Assets1.61 $833,393 Sales 4.84%

+ $1,345,803

Age of Accts. 

Rec.Accts Receivable

Current 

Assetsdivided

55 $202,085 $1,070,980 byAsset 

Turnover

+ + Total Assets 0.88 X Return on Equity

Cash Fixed Assets $1,535,303 6.19%

$35,502 $464,323

Total Assets

Total Assets $1,535,303

Current Liab $1,535,303 divided byFinancial 

Leverage$69,406 less Net Worth 1.28

+ Total Liab. $1,198,927Long‐term 

Liab.$336,376

$266,970

12

ROIC = (net income – dividends)/capital

ROIC > Cost of capital = value created

Nursery grower 3.9% / 24.1%

NY Greenhouse growers 7% / 40%

Design/Build Firms 14.2%

Maintenance Firms 16.3%

13

Delay non‐strategic investments  but be  Delay non‐strategic investments, but be aggressive with opportunities.

Refinance what you can. Exercise the full length of credit terms. Sell unused assets (if possible)A l  f   di  l  b f     d i Apply for credit long before you need it.

Reduce estimated tax payments. Review your insurance premiums.

14

Since a watering ban was implemented in June 2007, 43% of Georgia’s 920 licensed greenhouses have shut down or declared bankruptcy.

25% had just come off one the their best years ever in 2006.

Costs establish the price floor  Know them! Costs establish the price floor. Know them!

Everyone’s costs are different!Everyone’s costs are different!

You have to You have to calculate the costs calculate the costs for your firm!for your firm!for your firm!for your firm!

…or be eaten alive!…or be eaten alive!

15

“Potting” process generally accounts for g p g y20‐25% of total direct labor.

“Care as needed” cultural practices account for about 25% of total labor.

“Harvesting and shipping” process can consume up to 50% of direct laborconsume up to 50% of direct labor.

Look for the repetitive, tedious, time‐consuming tasks and look to automate!

Every time you touch a plant, y y p ,it costs money!

Source: J. Bartok, GPN, June 2003.

16

The The 

• Retail consolidation• Fewer buyers• Oversupply

• Retail price pressure• Lowball competitors

• Oversupply

Ri i f lCostCost‐‐Price Price SqueezeSqueeze

• Product tags/labels

• JIT delivery, setup & care

• Barcode/pre‐pricing

• Returnable shipping equipment

• Pay‐by‐scan

• Take back unsold product

• Rising fuel costs

• Labor costs (wages) and availability (H2B)

• Increased costs of materials (top soil, mulch)

• Increased workers’ compensation rates

Take back unsold product

• Consistent pricing

• Continuous volume replenishment

• Rising input costs (e.g. fuel)

• Labor availability

• Cost of health care insurance

• Increased equipment costs

• Regulatory compliance (air & noise)

17

“These staggering costs have us scared to death”“These staggering costs have us scared to death”

Emotional reactions to rising costs?Emotional reactions to rising costs?

“We are surviving, but profit“We are surviving, but profit‐‐wise, it’s a squeeze.”wise, it’s a squeeze.”

“Costs of energy, labor, fumigants, pots, “Costs of energy, labor, fumigants, pots, polyethylene, delivery polyethylene, delivery –– everything is going up. It’s everything is going up. It’s really beginning to hurt ”really beginning to hurt ”really beginning to hurt.”really beginning to hurt.”

Quotes from article in Florists Review.

MAY 10, 1979!MAY 10, 1979!

Costs establish the price floor  Know them! Costs establish the price floor. Know them! Lower your break‐even – go lean. Analyze employee productivity. Lock in energy contracts at lower rates. Look at long‐term distribution options.B  i   fi i h d  d    h   i Buy in pre‐finished and turn the margin.

Do NOT cut marketing expenses!

18

Increase marketing expenditures! Increase marketing expenditures! Cull your bottom feeders. Cultivate the top ten percent. Pay attention to who shakes out. Analyze your product/service offerings & 

li i  l i   ieliminate low‐margin categories.

Have been looking for a “gloom” antidote Have been looking for a  gloom  antidote. Are even more time‐constrained. Are transforming their spending/saving. Are “information omnivores.”  Still value the shopping experience.

19

Are they buying?

Yes, if…Yes, if…

Objective value (OV)

Marketing efforts

Prices of substitutes

It’s all about value!It’s all about value!…and relevance!…and relevance!

Product price (P)

Perceived value (PV) = ∑ of perceived benefits

Objective value (OV) = ∑ of all benefits

{{Customer’s incentive 

to purchase: (PV‐P)>0 (economic utility)

Prices of substitutes

?

Cost of goods sold (COGS){Firm’s incentive to 

sell: (P‐COGS)>0

$0 Source: Note on Behavioral Pricing, Harvard Business School, 9‐599‐114.

20

Moving from the least valued Moving from the least valued landscape to the most valued landscape, perceived home value increased, on average, 9 percent.

A landscape is a good investment (returning > $1 in value for every $1 invested) which increases in value (and size) over time.  Will kitchen, bath, or deck investments do that? No way!

J. Environ. Hort. 23(3):127–133. September 2005

Action Point: Examine your value proposition!

21

A concise statement which articulates why ythe target customer will “choose to buy”  your product/ service offering over other alternatives in the market.

The Value Proposition is the distilled essence  The Value Proposition is the distilled essence of the company’s mission/strategy.

help customers increase their revenue (profits) help customers decrease their costs help customers better respond to the needs of their customers, to new opportunities that might be presented by their customers, or to threats in the marketplace

help customers improve their productivity help customers improve their productivity help customers improve the satisfaction, retention, and growth of their customers

help customers improve their quality

22

the relationship the customer has with your p ycompany;

the ease of buying your product or service; the reputation of the company; the trustworthiness of your sales people.

Create a Value Proposition Value Proposition for your pp ycompany in a single sentence such as:

[Name of firm] provides [products/services], which are [statement of key differentiators], for [target customers]  and thereby creates for [target customers], and thereby creates [statement of social value/impact], unlike [competition].

23

Is it the end itself or the means to the end?

Different is not always better, but better is always different!

“value innovation”

24

2008 Pack Trials, Photos by Chris Beytes

Ellison’s Greenhouses, Brenham, Texas

25

26

“…innovative new plants designed to “…innovative new plants designed to solve specific landscape challenges.”solve specific landscape challenges.”

27

Objective value (OV)

Marketing efforts

Prices of substitutes

It’s all about value!It’s all about value!…and relevance!…and relevance!

Product price (P)

Perceived value (PV) = ∑ of perceived benefits

Objective value (OV) = ∑ of all benefits

{{Customer’s incentive 

to purchase: (PV‐P)>0 (economic utility)

Prices of substitutes

?

Cost of goods sold (COGS){Firm’s incentive to 

sell: (P‐COGS)>0

$0 Source: Note on Behavioral Pricing, Harvard Business School, 9‐599‐114.

Discounts can be very dangerous. There is usually a wide variation in prices in a region. Money can be left on the table.

28

$45.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$0.00

$5.00

1965 1975 1985 1995 2005 2007

Retail  ‐ INF Whole ‐ INF Actual  Wholesale

Action Point: Test Your Elasticity!

29

Know where you stand! Know where you stand!

Conserve your cash!

Control your costs!

Stimulate demand!Stimulate demand!

Price appropriately!

Test your elasticity!

30

Ellisonchair.blogspot.comEllisonchair.blogspot.com

Ellisonchair.tamu.edu