As a supplier of plants to the major retailers for the past 25 years, I have been able to observe some pretty strange behavior. Much of this observation was done at a less than comfortable distance. Whenever a grower is very close to a mega-retailer, there is always the danger of being pulled into the black hole, to be utterly crushed and to disappear for all time.
The particular behavior that I now write about can only be described a kamikaze retailing. This happens when a retailer finds out about an ad that will run in their competitor's stores, and they plan a preemptive, predatory strike. Recently, a major buyer told me how she had humiliated her competitor, who, thinking they had an exclusive on an item, ran a large ad for the item at a normal profit margin. Seizing the opportunity to embarrass the competition, she advertised the very same item a little below cost. She went on with the thrill only victory in battle can produce.
"The other company was so angry; we really go them good." How did she know the other side was angry? I think it was probably because, having been on the other side of that battle, she knew just how they would feel. All of the really major buyers I know seem to live for the chance to take this kind of shot at the competition. It is clear that this behavior is encouraged and rewarded by the most senior management.
What really got accomplished in this game? These retailers are huge national organizations, selling lots of different products to consumers. Imagine an aircraft carrier 10 times the size of the biggest ships. Lots of momentum, very hard to turn. Every so often, a buyer gets to take our a piper cub and smack the guy's deck with a loud noise. The carrier may even have to hose the deck and lower the price of a plant for two weeks. In the end, a lot of noise was made but no real damage was done to the competitor.
If there is no damage done to the competitor, the benefit of this action must come from somewhere else. The customers must love it. Well, actually, no. Retailers all know exactly what customers want in the garden department. They have asked them many times and the answers are always the same. The No. 1 most important thing to consumers is the quality of the product. Number two is the information on the care and use of the product. Number three is the variety selection available to buy. Way down at No. 4 is price. I would think that the buyer would concentrate on the things that are most important to the customer, like quality, information and selection.
It must be that I just do not understand the subtleties of major retailer strategies. Selling stuff below cost to embarrass your competition, when the customers do not care and it hurts your profits, just does not seem all that smart. the ways of giant American retailers will never be understood by growers. We think we need to sell our products at a profit, the biggest retailers do not agree with our efforts to do so. Maybe they are trying to make some of us into kamikaze growers so they can have some company. Unfortunately, if growers engage in this sort of unstable behavior, we quickly go out of business. Then we have only our unhappy bankers to chat with, and only for a little while.
I saw a notice that three major retailers in Germany, one of them Wal-Mart, were ordered by the government to stop selling food below cost. Apparently, the German government thinks the behavior is so bizarre and destructive that there is actually a law against it. In America, there are far fewer rules to protect retailers from their own behavior. How disappointing it must be for the American retailers to find the games that they customarily enjoy so much here are against the law in Europe. The only possible explanation I can come up with for this pricing practice is that the competitor outweighs the financial pain that is self-inflicted. I have three quite young children and have seen similar kinds of self-destructive behavior, but they learn quite fast and do not continue year after year to make the same mistakes.
Showing posts with label FloraCulture International. Show all posts
Showing posts with label FloraCulture International. Show all posts
Friday, September 12, 2008
The Outsider's View of the Dutch Auction System (part 1) - Jan. 2001
For close to 25 years I have been exposed to the Dutch horticultural market. While most of my exposure has been as a customer, I have sometimes been a seller, and I have always been a student of what to do and sometimes what not to do. My first impressions were made when the guilder was a very weak currency. The plants coming across the auction seemed almost free. There were huge numbers of exporters competing for the world's business and they seemed to be getting it.
A few short years later, many big export companies were broken. From the outside, the reason looked the same: Companies were able to buy unlimited amounts of very cheap product at the auction and then sell at gigantic profit margins to foreign clients. Unfortunately for the exporters getting the big profits, the customers accepting the offers never intended to pay for the product. The remaining exporters learned who to sell to and who not to sell to.
In the past, growers only needed to concern themselves with the most efficient possible methods, as sales and payments were guaranteed by the auction system. For many years, the only customer was the auction; after all, the growers own the auction and it would always act in the best interest of the owners. If the prices were below the cost of production in the summer, it was not the auction's fault. There was just too much supply for the demand and profits would be made at the other times of the year. The only important thing for growers to do was to become more efficient than their neighbor so they could break even at ever-lower prices. In other words, which grower could endure the most pain for the longest time?
Today, these qualities are still considered virtues among growers. Each grower feeds from the same kettle, each trying to make a bigger and better spoon, but the kettle is not getting any bigger. Very efficient over supply was the market reality for many years. Worker rules became more difficult for growers to afford and environmental regulation became crazy, as if the Dutch government had decided to kill the industry slowly and painfully. At least the growers had the auctions to take away the danger of the marketplace and all of the efficiently-produced plants would be sold, somehow. (Well, if for some reason they did not sell, the grower would not be charged a large fee to dump the plants. This did not happen often, after all it is not the auction's fault if too many ferns or roses were bought to the clock that day.) And the growers have no other choice because they sign something saying they will sell only to the auction.
I used to think that the auction was a huge savings to the growers because the cost of selling directly to retailers is so high. But then you must calculate the rental fee for the trolley, the rental fee for the the tray or bucket, the handling fees per trolley, the transport cost to the auctions and, of course, the auction's well-deserved commission. The auction becomes neither a cheaper sales vehicle nor is it more efficient than direct sales. All this could be reasonable if the auction helped the growers get good prices for their products. But the growers very often do not get good prices for what they produce. The fees and commissions are set at a fixed rate, so low prices compound the grower's loss. When growers can get more from exporters directly without the price risk of the clock, the paper they signed is not so important. If they auction did its job, the growers would not be forced to sneak around them. Perhaps that is why we see so much more product going from the growers directly to exporters.
As someone who has only sold directly to retailers, the complex Dutch system has always been questionable. In this last year it has become abusive to the growers. In my March column I will tell you why.
A few short years later, many big export companies were broken. From the outside, the reason looked the same: Companies were able to buy unlimited amounts of very cheap product at the auction and then sell at gigantic profit margins to foreign clients. Unfortunately for the exporters getting the big profits, the customers accepting the offers never intended to pay for the product. The remaining exporters learned who to sell to and who not to sell to.
In the past, growers only needed to concern themselves with the most efficient possible methods, as sales and payments were guaranteed by the auction system. For many years, the only customer was the auction; after all, the growers own the auction and it would always act in the best interest of the owners. If the prices were below the cost of production in the summer, it was not the auction's fault. There was just too much supply for the demand and profits would be made at the other times of the year. The only important thing for growers to do was to become more efficient than their neighbor so they could break even at ever-lower prices. In other words, which grower could endure the most pain for the longest time?
Today, these qualities are still considered virtues among growers. Each grower feeds from the same kettle, each trying to make a bigger and better spoon, but the kettle is not getting any bigger. Very efficient over supply was the market reality for many years. Worker rules became more difficult for growers to afford and environmental regulation became crazy, as if the Dutch government had decided to kill the industry slowly and painfully. At least the growers had the auctions to take away the danger of the marketplace and all of the efficiently-produced plants would be sold, somehow. (Well, if for some reason they did not sell, the grower would not be charged a large fee to dump the plants. This did not happen often, after all it is not the auction's fault if too many ferns or roses were bought to the clock that day.) And the growers have no other choice because they sign something saying they will sell only to the auction.
I used to think that the auction was a huge savings to the growers because the cost of selling directly to retailers is so high. But then you must calculate the rental fee for the trolley, the rental fee for the the tray or bucket, the handling fees per trolley, the transport cost to the auctions and, of course, the auction's well-deserved commission. The auction becomes neither a cheaper sales vehicle nor is it more efficient than direct sales. All this could be reasonable if the auction helped the growers get good prices for their products. But the growers very often do not get good prices for what they produce. The fees and commissions are set at a fixed rate, so low prices compound the grower's loss. When growers can get more from exporters directly without the price risk of the clock, the paper they signed is not so important. If they auction did its job, the growers would not be forced to sneak around them. Perhaps that is why we see so much more product going from the growers directly to exporters.
As someone who has only sold directly to retailers, the complex Dutch system has always been questionable. In this last year it has become abusive to the growers. In my March column I will tell you why.
An Outsider's View of the Dutch Auction System (part 2) - March 2001
In my January column, I promised to tell you what the Dutch auction/exporter system has done in the last year that I think is so bad for growers.
First, I will tell you what I think works well in their distribution system. The cash and carry outlets that sever small retailers make a great deal of sense to me. They offer the real convenience of one-stop shopping for the florist or independent garden center. They do not overly increase the price through markups. It could be interesting for some larger growers to come together and make one of their own. Just kidding-if growers owned it, they would ask fair prices year-round and we know that is not allowed under the Dutch system.
Now, what is so bad for growers about eh Dutch auction/exporter duopoly? At the beginning of 2000, the auction raised the annual membership fee quite a bit for buyers on the clock. This was to increase the speed of the product flow on the clock. The idea is that the smaller buyers were only going to buy what they need and that would be one or two shelves off a trolley, not a whole trolley. The truth is that the exporters did not want those independent buyers driving up the prices.
What is so bad about that? If exporters buy in volume, every day, why should they have to wait for the little guys to finish paying too much before they can begin to buy? The exporters are buying exactly and only what they have sold. You can see them in their seats on the clock every day with a list of needed product. On the same shopping list, they include the names of one or more sources where they can buy direct from a grower at a fixed price. If the exporter can pay less on the clock, he buys on the clock. if the clock is not cheaper, he uses his phone to immediately call the grower and buy the product direct. The exporter has already made a price for the customer based on the highest direct price, so any money he can save on the clock goes in his pocket. The grower receives the lower price, whatever it is.
Now that the auction has gotten rid of those annoying high price paying buyers, there is more fun for the exporters. When you consider that the average minimum exporter markup is 30% to good customers, any low prices on the clock are very good for them. When I talk to growers and ask them what they think exporters mark up products, the always say only a very few percentage points due to the heavy competition. Wake up and smell the strong Dutch coffee! The auctions are so afraid of these guys that they kicked out the customers that pay high prices; anything is justifiable when it comes to keeping exporters from "going direct" to growers. But what the auction's recent actions have actually accelerated the number of growers going direct to exporters, since the clock has fewer buyers.
If the auctions want to serve their owners (the growers), they would increase the number of buyers by opening the auction up to the international buying world and smaller domestic buyers. This would surely upset the exporter, so the possibility may not be spoken about. As an outsider, it is quite strange to see growers enslaved by an organization they own and that should be acting in their best interest. It is also interesting to see the auction system enslaved by the organized export community, who are only going to act in their own extreme self-interest. The terrifying truth is that the only two parties that really matter are the producer and the final consumer. Everyone in between is an added cost.
The retailer is most likely always necessary, but neither the auction nor the exporter must exist to make the business mover forward. Yet, they are now sitting on top of the food chain. Growers must do more than just rattle their chain or they will only get more and heavier chains as a gift from their masters, the incestuous auction/exporter duopoly.
First, I will tell you what I think works well in their distribution system. The cash and carry outlets that sever small retailers make a great deal of sense to me. They offer the real convenience of one-stop shopping for the florist or independent garden center. They do not overly increase the price through markups. It could be interesting for some larger growers to come together and make one of their own. Just kidding-if growers owned it, they would ask fair prices year-round and we know that is not allowed under the Dutch system.
Now, what is so bad for growers about eh Dutch auction/exporter duopoly? At the beginning of 2000, the auction raised the annual membership fee quite a bit for buyers on the clock. This was to increase the speed of the product flow on the clock. The idea is that the smaller buyers were only going to buy what they need and that would be one or two shelves off a trolley, not a whole trolley. The truth is that the exporters did not want those independent buyers driving up the prices.
What is so bad about that? If exporters buy in volume, every day, why should they have to wait for the little guys to finish paying too much before they can begin to buy? The exporters are buying exactly and only what they have sold. You can see them in their seats on the clock every day with a list of needed product. On the same shopping list, they include the names of one or more sources where they can buy direct from a grower at a fixed price. If the exporter can pay less on the clock, he buys on the clock. if the clock is not cheaper, he uses his phone to immediately call the grower and buy the product direct. The exporter has already made a price for the customer based on the highest direct price, so any money he can save on the clock goes in his pocket. The grower receives the lower price, whatever it is.
Now that the auction has gotten rid of those annoying high price paying buyers, there is more fun for the exporters. When you consider that the average minimum exporter markup is 30% to good customers, any low prices on the clock are very good for them. When I talk to growers and ask them what they think exporters mark up products, the always say only a very few percentage points due to the heavy competition. Wake up and smell the strong Dutch coffee! The auctions are so afraid of these guys that they kicked out the customers that pay high prices; anything is justifiable when it comes to keeping exporters from "going direct" to growers. But what the auction's recent actions have actually accelerated the number of growers going direct to exporters, since the clock has fewer buyers.
If the auctions want to serve their owners (the growers), they would increase the number of buyers by opening the auction up to the international buying world and smaller domestic buyers. This would surely upset the exporter, so the possibility may not be spoken about. As an outsider, it is quite strange to see growers enslaved by an organization they own and that should be acting in their best interest. It is also interesting to see the auction system enslaved by the organized export community, who are only going to act in their own extreme self-interest. The terrifying truth is that the only two parties that really matter are the producer and the final consumer. Everyone in between is an added cost.
The retailer is most likely always necessary, but neither the auction nor the exporter must exist to make the business mover forward. Yet, they are now sitting on top of the food chain. Growers must do more than just rattle their chain or they will only get more and heavier chains as a gift from their masters, the incestuous auction/exporter duopoly.
The Circle Of Trust - Aug. 2001
Last spring I attended the Asia Pacific Orchid Conference in Nagoya, Japan. I always love to travel to Japan because I know it will be both clean and safe. Those are virtues not available in may places in the world. Although their economy has suffered recession and deflation for the last 10 years, it is still a very expensive place to travel. Through a bilateral treaty, the airfares are artificially high to help protect the Japanese carriers. It does not hurt the profits of foreign carriers, who are required to overcharge all of their passengers going to and coming from Japan.
One of my favorite indulgences in Japan is sushi. This trip was the first time I was brave enough to try one of the automated sushi places. This particular place was located in a subway tunnel, along with several hundred other retail shops and restaurants.
There is a two-level, T-shaped conveyor belt that carries product from the kitchen and chef to waiting customers. Cups for tea and soy sauce are on the lower belt. The sushi, fried eel, etc., ride on the upper belt just a little above eye level and, presumably, sneeze level. I was looking for the wasabi (very hot horse-radish) and saw a glass container of green powder that looked like the dehydrated wasabi powder I have purchased in the United States. Just before I put the powder into my soy sauce, the nice man to my left stopped me and pointed at the empty teacups passing in front of me, indicating that I should put my wasabi in one of those instead. He now has a good story to tell family and friends because I learned that in Japan, unlike the United States, the sushi chefs put the correct amount of wasabi inside the sushi. We Americans demand control of the amount of hot stuff we get.
At this little sushi restaurant, the consumer receives a wide variety of choices from a continuously moving flow of small plates. You take only and exactly what you want; the rest goes on by for someone else to select or not, as they desire. The chef can gauge the demand for the various offerings in real time. Anything not selected goes past his eye every four minutes. He can also just look up and see what is left on the whole belt. Each individual portion is quite small, so there is no food waste like a traditional restaurant.
I also shopped at the Mitsucoshi department store while I was in Japan. What a study in contrast: this store was nine floors of everything you could ever need. The store is crowded even when there are no customers because you are always within sight of at least 40 employees. But at the automated sushi restaurant, there was only one waitress for 40 seats. Her job was to bring you a beer or soda if you called for it. She also took away the used plates when you left the restaurant. The most important of her jobs was to count the color-coded plates-five different colors for the five price points. You get your bill from her and take it up to a register to pay. If you sit close to the register, the cashier counts the plates.
With all the scanning power and data collection modern retailers have, they do not come anywhere near reacting to customer demand like this little sushi restaurant does. With our highly mechanized greenhouses, we cannot come close to serving our customers as efficiently, with as little wasted product and human effort, as this little subway tunnel restaurant.
There is a circle of trust in the sushi restaurant. The restaurant has to trust their fish supplier and I have to trust the restaurant that the fish is fresh. The fish is served raw. If the bacteria count exceeds a level that my body can process, very bad things happen. Very fresh fish is tricky, because it does not stay fresh for long. If it is mishandled anywhere in the distribution chain, the length of time the product stays fresh drops drastically.
Does this remind you of any other perishable product? Maybe the difference is that when the fish is not fresh people get sick. When the flowers are not fresh, people only get cheated.
I do not think it is that different. I think people get sick of being cheated.
One of my favorite indulgences in Japan is sushi. This trip was the first time I was brave enough to try one of the automated sushi places. This particular place was located in a subway tunnel, along with several hundred other retail shops and restaurants.
There is a two-level, T-shaped conveyor belt that carries product from the kitchen and chef to waiting customers. Cups for tea and soy sauce are on the lower belt. The sushi, fried eel, etc., ride on the upper belt just a little above eye level and, presumably, sneeze level. I was looking for the wasabi (very hot horse-radish) and saw a glass container of green powder that looked like the dehydrated wasabi powder I have purchased in the United States. Just before I put the powder into my soy sauce, the nice man to my left stopped me and pointed at the empty teacups passing in front of me, indicating that I should put my wasabi in one of those instead. He now has a good story to tell family and friends because I learned that in Japan, unlike the United States, the sushi chefs put the correct amount of wasabi inside the sushi. We Americans demand control of the amount of hot stuff we get.
At this little sushi restaurant, the consumer receives a wide variety of choices from a continuously moving flow of small plates. You take only and exactly what you want; the rest goes on by for someone else to select or not, as they desire. The chef can gauge the demand for the various offerings in real time. Anything not selected goes past his eye every four minutes. He can also just look up and see what is left on the whole belt. Each individual portion is quite small, so there is no food waste like a traditional restaurant.
I also shopped at the Mitsucoshi department store while I was in Japan. What a study in contrast: this store was nine floors of everything you could ever need. The store is crowded even when there are no customers because you are always within sight of at least 40 employees. But at the automated sushi restaurant, there was only one waitress for 40 seats. Her job was to bring you a beer or soda if you called for it. She also took away the used plates when you left the restaurant. The most important of her jobs was to count the color-coded plates-five different colors for the five price points. You get your bill from her and take it up to a register to pay. If you sit close to the register, the cashier counts the plates.
With all the scanning power and data collection modern retailers have, they do not come anywhere near reacting to customer demand like this little sushi restaurant does. With our highly mechanized greenhouses, we cannot come close to serving our customers as efficiently, with as little wasted product and human effort, as this little subway tunnel restaurant.
There is a circle of trust in the sushi restaurant. The restaurant has to trust their fish supplier and I have to trust the restaurant that the fish is fresh. The fish is served raw. If the bacteria count exceeds a level that my body can process, very bad things happen. Very fresh fish is tricky, because it does not stay fresh for long. If it is mishandled anywhere in the distribution chain, the length of time the product stays fresh drops drastically.
Does this remind you of any other perishable product? Maybe the difference is that when the fish is not fresh people get sick. When the flowers are not fresh, people only get cheated.
I do not think it is that different. I think people get sick of being cheated.
Happy Minds - Feb. 2002
I have an addiction to books on tape. One provider of great stuff on tape is The Teaching Company. They have a website, www.teachco.com. The business these guys are in is to have top professors from universities around the Untied States develop courses fro presentation on audio tapes and CDs, and even videos for people who need to watch television. They have some really great courses for sale. many larger libraries have some of their tapes and videos available to borrow.
One I recently listened to, a course in economics from Dr. Timothy Taylor, gave me some things to think about. In his introduction, Dr. Taylor states that one measure of society's wealth is the amount of happiness people have in their minds. He did not explain how the experts go about measuring this happiness, but I accept it as a basic fact of economics that they can and do.
This simple statement explains so much about our industry. The consumers who buy our products cannot eat them or wash their with them; they can only get happiness in their minds. That is what they are seeking.
The question is, are we delivering enough happiness?
I have spent a little time in stores that sell our products, just watching the customers. One very strong impression I have gotten through the years happens when a customer (usually a woman) stands at a flower cooler that is filled with beautiful bouquets. You can see and even feel the strong emotions of desire and fear that she is experiencing. She is thinking "the beauty that is now in the cooler could be on my table for me to enjoy." But, there is the fear that, "When I take it home, it will quickly wither, and that would make me unhappy."
We know for sure that desire for our floral products is always present. How do we know? Because at all of the most important events in our lives we are compelled to enhance the events with floral products. We could not fit all the flowers in the car when I took my wife home from the hospital after the birth or our first child. Can you imagine a wedding without flowers? Even in death we seek to soften the blow for the living by sending flowers. We have a holiday that equates love and flowers. Valentine's Day. Consumers overcome their fear at these times because the events are too important not to include flowers.
People desire our product because just being around it makes them happy. They are happy when the product performs well, but unhappy when it does not. All we have to sell is happiness, so we need to maximize the stuff that makes people happy and reduce the stuff that makes people unhappy.
It sound so simple. Well, it it, sort of. If people know what to expect and then they get it, there is a much better chance that they will not be unhappy with our product. We can make specific guarantees on vase life (or flower life for flowering plants) that will take away risk. This would help a great deal, but if the product does not perform, it is usually going to be too much trouble for the consumer to take it back for a replacement.
The only way to grow the market for our products to its full potential-which I think is many times greater than current sales-is to grow better, stronger products, and to distribute and retail them quickly and in a manner that will not destroy them. We also need to tell the consumer what to expect and how to care for the product every time she buys something.
I know, I know-you have heard it before and maybe even said the very same thing before. Growing better plants is not nearly as exciting as some snazzy advertising campaign that will magically jump our sales volume without any real work on our part. It is all pretty dull, hard work. Basic execution of the right things every time is beyond tedious. I do not especially like it myself. I just do not see any other way to get consumers back to happy.
We have spent many years teaching our customers to fear the stuff we grow. It will take years of solid product to get them to trust us.
One I recently listened to, a course in economics from Dr. Timothy Taylor, gave me some things to think about. In his introduction, Dr. Taylor states that one measure of society's wealth is the amount of happiness people have in their minds. He did not explain how the experts go about measuring this happiness, but I accept it as a basic fact of economics that they can and do.
This simple statement explains so much about our industry. The consumers who buy our products cannot eat them or wash their with them; they can only get happiness in their minds. That is what they are seeking.
The question is, are we delivering enough happiness?
I have spent a little time in stores that sell our products, just watching the customers. One very strong impression I have gotten through the years happens when a customer (usually a woman) stands at a flower cooler that is filled with beautiful bouquets. You can see and even feel the strong emotions of desire and fear that she is experiencing. She is thinking "the beauty that is now in the cooler could be on my table for me to enjoy." But, there is the fear that, "When I take it home, it will quickly wither, and that would make me unhappy."
We know for sure that desire for our floral products is always present. How do we know? Because at all of the most important events in our lives we are compelled to enhance the events with floral products. We could not fit all the flowers in the car when I took my wife home from the hospital after the birth or our first child. Can you imagine a wedding without flowers? Even in death we seek to soften the blow for the living by sending flowers. We have a holiday that equates love and flowers. Valentine's Day. Consumers overcome their fear at these times because the events are too important not to include flowers.
People desire our product because just being around it makes them happy. They are happy when the product performs well, but unhappy when it does not. All we have to sell is happiness, so we need to maximize the stuff that makes people happy and reduce the stuff that makes people unhappy.
It sound so simple. Well, it it, sort of. If people know what to expect and then they get it, there is a much better chance that they will not be unhappy with our product. We can make specific guarantees on vase life (or flower life for flowering plants) that will take away risk. This would help a great deal, but if the product does not perform, it is usually going to be too much trouble for the consumer to take it back for a replacement.
The only way to grow the market for our products to its full potential-which I think is many times greater than current sales-is to grow better, stronger products, and to distribute and retail them quickly and in a manner that will not destroy them. We also need to tell the consumer what to expect and how to care for the product every time she buys something.
I know, I know-you have heard it before and maybe even said the very same thing before. Growing better plants is not nearly as exciting as some snazzy advertising campaign that will magically jump our sales volume without any real work on our part. It is all pretty dull, hard work. Basic execution of the right things every time is beyond tedious. I do not especially like it myself. I just do not see any other way to get consumers back to happy.
We have spent many years teaching our customers to fear the stuff we grow. It will take years of solid product to get them to trust us.
In Praise For A Conference - Oct. 2002
I recently attended the Sealy Conference at Cornell University, Ithaca, New York, United States, which is organized by a board of directors and faculty at Cornell University. Each year a "victim" is coerced into being the conference coordinator. The chosen one this year was Rej Picard of Westbrook Floral, Ontario, Canada. This is the kind of job for which you do not get paid, yet it requires huge amounts of time and work. The work done by the coordinator pays everyone who attends the conference. The blend of speakers and topics that Rej put together was perfect for the people attending. The conference's title was "Floriculture's Profit and Market Crisis: Charting a New Course."
One of the ironclad rules of the conference is that nothing said at the conference may be attributed to the person who said it. This allows extremely free and open discussion without fear of future consequences for words spoken in this private, public forum. I am sure this is a good idea most of the time, but it makes my job a little harder. Even the paid professional presenters from outside the industry may not be quoted under this rule. Go figure. With that said, I will try to share some of the terrific stuff that was presented at the conference. If you want to see the program for this conference, check out their website at www.hort.cornell.edu/seeleyconference.
One of the more powerful messages we received concerned the continuing consumer trend toward wanting to live a richer, fuller quality of life. Most people believe they are smarter than average, and most want to feel affluent even if they are not. The most interesting idea for me was that people want a good experience more than just more stuff. Even though you sell it cheap, people still expect quality.
This idea is enough to start us down a path that is different from the path of price-the only one the industry has followed for several year. Where do we fit in? Flowers are pure experience. It is super critical that people have a good experience with our products, or they will find another place to spend their money. For $3.50, Blockbuster will rent you a DVD of a popular movie for a week. I do not know what their policy is if you do not like the movie, but I know Blockbuster is a line item on my household ledger. I digress.
Flowers are a pure experience that always starts out good. Bedding plants are very much experience driven. I love the annuals we plant in the fall here in Florida (the ones most of you plant in the spring). Potted plants are a bit harder to place. Potted flowering plants make a strong case for being an experience-based item. But what about foliage plants? They are part home decor and part lifestyle choice. On balance, they must go into the experience category.
People have a relationship with their plants. When plants thrive, owners are happy. They feel smart and competent about their purchase. When a plant slowly withers and dies in their home, they feel terrible about the seller and the whole experience.
This knowledge demands that we stop growing and retailing the cheapest, nastiest plans to consumers through our most important retail channels. How will this happen? Growers will give retailers what they demand even if it is the wrong thing. Retailers must demand much higher quality with defined specifications.
I believe that a bad trend toward cheap, nasty plants is finally beginning to reverse. Retailers are learning that price does not mean value. As retailers demand more value, growers will produce more value. Only when we understand that value is a bundle of product and total experience, and deliver that to consumers, will we see the kind of healthy marketplace we all want.
So much more was learned at the the conference that will not fit here and is difficult to write without attribution. I highly recommend this event to anyone who has not attended. Ithaca is a beautiful little city in the middle of the summer. The Cornell staff runs a great conference. Many of the people attending come year after year and attendance is very restricted. If you want to go, you should make plans early. I, of course, will wait until the last minute and not be able to get in. I will write a column complaining about it.
One of the ironclad rules of the conference is that nothing said at the conference may be attributed to the person who said it. This allows extremely free and open discussion without fear of future consequences for words spoken in this private, public forum. I am sure this is a good idea most of the time, but it makes my job a little harder. Even the paid professional presenters from outside the industry may not be quoted under this rule. Go figure. With that said, I will try to share some of the terrific stuff that was presented at the conference. If you want to see the program for this conference, check out their website at www.hort.cornell.edu/seeleyconference.
One of the more powerful messages we received concerned the continuing consumer trend toward wanting to live a richer, fuller quality of life. Most people believe they are smarter than average, and most want to feel affluent even if they are not. The most interesting idea for me was that people want a good experience more than just more stuff. Even though you sell it cheap, people still expect quality.
This idea is enough to start us down a path that is different from the path of price-the only one the industry has followed for several year. Where do we fit in? Flowers are pure experience. It is super critical that people have a good experience with our products, or they will find another place to spend their money. For $3.50, Blockbuster will rent you a DVD of a popular movie for a week. I do not know what their policy is if you do not like the movie, but I know Blockbuster is a line item on my household ledger. I digress.
Flowers are a pure experience that always starts out good. Bedding plants are very much experience driven. I love the annuals we plant in the fall here in Florida (the ones most of you plant in the spring). Potted plants are a bit harder to place. Potted flowering plants make a strong case for being an experience-based item. But what about foliage plants? They are part home decor and part lifestyle choice. On balance, they must go into the experience category.
People have a relationship with their plants. When plants thrive, owners are happy. They feel smart and competent about their purchase. When a plant slowly withers and dies in their home, they feel terrible about the seller and the whole experience.
This knowledge demands that we stop growing and retailing the cheapest, nastiest plans to consumers through our most important retail channels. How will this happen? Growers will give retailers what they demand even if it is the wrong thing. Retailers must demand much higher quality with defined specifications.
I believe that a bad trend toward cheap, nasty plants is finally beginning to reverse. Retailers are learning that price does not mean value. As retailers demand more value, growers will produce more value. Only when we understand that value is a bundle of product and total experience, and deliver that to consumers, will we see the kind of healthy marketplace we all want.
So much more was learned at the the conference that will not fit here and is difficult to write without attribution. I highly recommend this event to anyone who has not attended. Ithaca is a beautiful little city in the middle of the summer. The Cornell staff runs a great conference. Many of the people attending come year after year and attendance is very restricted. If you want to go, you should make plans early. I, of course, will wait until the last minute and not be able to get in. I will write a column complaining about it.
Thursday, September 11, 2008
Marginal Utility - June 2002
I just learned some new economic stuff and tried to apply it to my business. The "law of diminishing marginal utility" caught my eye as something important. It goes like this:
The marginal utility of a product declines as more of it is consumed in a given period of time. The textbook gives the example of a box of popcorn, stating that you will get more satisfaction from the first box than you will from the second. By the time you eat the fifth box, you are in negative territory. You can even calculate the marginal utility by dividing the change in total utility by the change in quantity. That means someone has to assign utility values to each unit marginally consumed. I am not making this up. This is a serious course.
I decided to try to figure out how this "law" would work in the floral business. So as to not be unreasonably prejudiced, I decided to look at cut flowers instead of pot plants.
First, what constitutes a unit? Is a unit one flower? If so, then according to the "law," each additional flower I add will bring incrementally less pleasure than the first. But that does not work. Since i know this is an economic "law," I must have the units wrong: Maybe I should switch to a bouquet as the marginal unit. Now I have one nice bouquet. I add one more, knowing it should not bring as much pleasure as the first. Oops, something is wrong: I enjoy the two bouquets more than twice as much as the one. As I add flowers, the effect is the same-more satisfaction.
Well, I am in this business, so maybe its just me. I better think about how people use flowers in the real world: People get serious about flowers at weddings. Does the bride's mother calculate that they should have fewer flowers because each additional bouquet declines in satisfying or bringing pleasure? How humiliating if the guests started to grumble about the wedding having too many flowers! I personally have never heard that complaint, no matter how opulent the floral arrangements. My experience is just the opposite. People rave when the flowers are fabulous. Now, we are talking about a serious economic "law," so maybe weddings do not count for some reason. I better dig a little deeper.
Funerals are known to have an excess of flowers. Do the grieving just hate them? No, they really seem to like flowers. Okay, forget funerals. What about flowers after a child is born? Mom wants one bouquet (maybe two, at most) and will reject additional flower arrivals on the basis that the next flowers do not mean anything. I have never heard of that either. How about the floral holidays? Surely the mothers of the world would like a reasonable number of flowers. If you send your mother a bunch of really nice flowers, and so does your brother, and your sister, by the time Dad brings home more, Mom wants nothing to do with them. No, that does not seem quite right. On Valentine's Day, we know the way to get on the right side of our significant other is to send a small but meaningful bouquet to the office. Under no circumstances should we have more of the same at home because according to our economic law, the marginal utility is not there.
I attend a lot of orchid shows. They are among the most beautiful type of flower shows on may attend. In all the years of doing this, I have never heard anyone say, "I just wish there were not so many flowers. I would like to see some tires or tractor parts to get me to optimum consumption, allow me to maximize utility." That has never happened.
I must conclude that we have one of the very few consumer products that breaks the law of diminishing utility. If that is as true as it seems, then perhaps we should be selling a lot more flowers. Could it be something, as producers and retailers, we are doing or not doing? No, that statement violates the law that states we will judge others by their actions and ourselves by our good intentions.
The marginal utility of a product declines as more of it is consumed in a given period of time. The textbook gives the example of a box of popcorn, stating that you will get more satisfaction from the first box than you will from the second. By the time you eat the fifth box, you are in negative territory. You can even calculate the marginal utility by dividing the change in total utility by the change in quantity. That means someone has to assign utility values to each unit marginally consumed. I am not making this up. This is a serious course.
I decided to try to figure out how this "law" would work in the floral business. So as to not be unreasonably prejudiced, I decided to look at cut flowers instead of pot plants.
First, what constitutes a unit? Is a unit one flower? If so, then according to the "law," each additional flower I add will bring incrementally less pleasure than the first. But that does not work. Since i know this is an economic "law," I must have the units wrong: Maybe I should switch to a bouquet as the marginal unit. Now I have one nice bouquet. I add one more, knowing it should not bring as much pleasure as the first. Oops, something is wrong: I enjoy the two bouquets more than twice as much as the one. As I add flowers, the effect is the same-more satisfaction.
Well, I am in this business, so maybe its just me. I better think about how people use flowers in the real world: People get serious about flowers at weddings. Does the bride's mother calculate that they should have fewer flowers because each additional bouquet declines in satisfying or bringing pleasure? How humiliating if the guests started to grumble about the wedding having too many flowers! I personally have never heard that complaint, no matter how opulent the floral arrangements. My experience is just the opposite. People rave when the flowers are fabulous. Now, we are talking about a serious economic "law," so maybe weddings do not count for some reason. I better dig a little deeper.
Funerals are known to have an excess of flowers. Do the grieving just hate them? No, they really seem to like flowers. Okay, forget funerals. What about flowers after a child is born? Mom wants one bouquet (maybe two, at most) and will reject additional flower arrivals on the basis that the next flowers do not mean anything. I have never heard of that either. How about the floral holidays? Surely the mothers of the world would like a reasonable number of flowers. If you send your mother a bunch of really nice flowers, and so does your brother, and your sister, by the time Dad brings home more, Mom wants nothing to do with them. No, that does not seem quite right. On Valentine's Day, we know the way to get on the right side of our significant other is to send a small but meaningful bouquet to the office. Under no circumstances should we have more of the same at home because according to our economic law, the marginal utility is not there.
I attend a lot of orchid shows. They are among the most beautiful type of flower shows on may attend. In all the years of doing this, I have never heard anyone say, "I just wish there were not so many flowers. I would like to see some tires or tractor parts to get me to optimum consumption, allow me to maximize utility." That has never happened.
I must conclude that we have one of the very few consumer products that breaks the law of diminishing utility. If that is as true as it seems, then perhaps we should be selling a lot more flowers. Could it be something, as producers and retailers, we are doing or not doing? No, that statement violates the law that states we will judge others by their actions and ourselves by our good intentions.
New Varieties - Aug 2002
Everybody likes new. New cars, new boats, new computers are just great. The reason people like new stuff is that they expect it to be better. What about plants and flowers? Retailers want new stuff all the time so the customer will have an exciting new shopping experience. Growers want new varieties that give them a marketing edge. The best new plant for growers is the one that is less expensive to grow.
I decided to ask Ted, our produce guru, about how "new varieties" work in the produce industry. Ted explained that tree fruit must go through extensive testing to determine if the new variety is worth the huge investment the grower would have to undertake to produce it in any volume.
Even if the product were then proven to be clearly superior, there would be considerable resistance from the professional buyer community. The problem was that the new variety would be a little more expensive that the old ones, and would need to be priced differently at retail. This would be confusing to the store and very confusing to the customer. Therefore, only upscale retailers would embrace the improved varieties.
The upscale retailer would make the effort to educate their customer base about the superior qualities of the more expensive product. However, Ted says, if someone improves a yellow squash, it would be an enhancement for the grower and would pass into the market with nobody knowing and no change in price. How does this relate to the floral side of the buisness?
The risk for trying new stuff is all placed on the grower and retailer. Yes, the breeder took a lot of risk and made a big investment in the research and development. Still, too many new things are not better. Too often we try new things and find that they are distinctly inferior in many ways to the item they are meant to replace. In my experiences, when that happens the breeders give little shugs to their shoulders and offer another newer, better variety with the same risk.
In our category of goods, I have to say that less than ten percent of the new, improved plants are better than the stuff available already, and over fifty percent are inferior to exisiting varieties.
As an industry, we are looking at hundreds of new varieties offered by breeders every year. It is impossible to look at all the new stuff coming out. Somehow, someone needs to be a little more judgemental about what is introduced as new and better. It is not credible for the breeding industry to claim that the several hundred introductions made yearly are all better stuff. From the outside, it seems like there is a contest every year for who can claim the largest number of new introductions. The California pack trials look more like a mental and physical endurance contest every year.
New does not always mean better. I think we should demand that stuff actually somehow be better. This does not mean a new color of something old and previously unsvailable has no value. We need to ask quesitons like what does it do better for the consumer? The breeder should make a list of the improved qualities of the plant or flower. This list could be used at store level as a selling tool and for consumer education. Of course as soon as you promise this list of improvements, people will expect the product to live up to the promise. If the product is better and does what it promises, it will lead to a virtuous circle where growers and retailers and consumers will trust and embrace the new and improved promise.
A grower friend years ago told me that he grew new varieties so he could sell his plants first. They were not higher in price than the old plants. They were new and therefore appealing to the retail buyer, satisfying their need for "new".
As growers trying to make our customers happy, we are assaulted by the demand for new. Often our retail buyers get bored with the same old good stuff and demand somehting new. Both growers and retailers get tired of products long before the end consumer does. And the last time I checked? It is those guys that pay us all.
I decided to ask Ted, our produce guru, about how "new varieties" work in the produce industry. Ted explained that tree fruit must go through extensive testing to determine if the new variety is worth the huge investment the grower would have to undertake to produce it in any volume.
Even if the product were then proven to be clearly superior, there would be considerable resistance from the professional buyer community. The problem was that the new variety would be a little more expensive that the old ones, and would need to be priced differently at retail. This would be confusing to the store and very confusing to the customer. Therefore, only upscale retailers would embrace the improved varieties.
The upscale retailer would make the effort to educate their customer base about the superior qualities of the more expensive product. However, Ted says, if someone improves a yellow squash, it would be an enhancement for the grower and would pass into the market with nobody knowing and no change in price. How does this relate to the floral side of the buisness?
The risk for trying new stuff is all placed on the grower and retailer. Yes, the breeder took a lot of risk and made a big investment in the research and development. Still, too many new things are not better. Too often we try new things and find that they are distinctly inferior in many ways to the item they are meant to replace. In my experiences, when that happens the breeders give little shugs to their shoulders and offer another newer, better variety with the same risk.
In our category of goods, I have to say that less than ten percent of the new, improved plants are better than the stuff available already, and over fifty percent are inferior to exisiting varieties.
As an industry, we are looking at hundreds of new varieties offered by breeders every year. It is impossible to look at all the new stuff coming out. Somehow, someone needs to be a little more judgemental about what is introduced as new and better. It is not credible for the breeding industry to claim that the several hundred introductions made yearly are all better stuff. From the outside, it seems like there is a contest every year for who can claim the largest number of new introductions. The California pack trials look more like a mental and physical endurance contest every year.
New does not always mean better. I think we should demand that stuff actually somehow be better. This does not mean a new color of something old and previously unsvailable has no value. We need to ask quesitons like what does it do better for the consumer? The breeder should make a list of the improved qualities of the plant or flower. This list could be used at store level as a selling tool and for consumer education. Of course as soon as you promise this list of improvements, people will expect the product to live up to the promise. If the product is better and does what it promises, it will lead to a virtuous circle where growers and retailers and consumers will trust and embrace the new and improved promise.
A grower friend years ago told me that he grew new varieties so he could sell his plants first. They were not higher in price than the old plants. They were new and therefore appealing to the retail buyer, satisfying their need for "new".
As growers trying to make our customers happy, we are assaulted by the demand for new. Often our retail buyers get bored with the same old good stuff and demand somehting new. Both growers and retailers get tired of products long before the end consumer does. And the last time I checked? It is those guys that pay us all.
It Is The Product - Feb 2003
I just finished a book-on-tape about managing companies for the marketplace. After detailing entirely too much history of corporate strategic thinking, the authors finally arrived at a point of current agreement: Superior product results in companies gaining market share and profitability. My company has always invested in the improvement of product for the market. According to this book, we have been going in the right direction. Something happened last week to change my mind.
I took my teenage son, Andy, shopping for shoes, because my wife refused to go through the agony and frustration involved. According to my son, shoes never fit. After one day of this, i understood my wife's frustration. Then I remembered my great friend Mike telling me about an amazing experience he and his wife recently had in the shoe department of the new Nordstrom department store. I thought this could be the answer to an otherwise impossible situation.
We entered the store and were cheerfully directed to the shoe department. Upon arrival there, I selected an unsuspecting victim...I mean salesman...named Chris. I told him, "Your mission, should you choose to accept it, is to find and fit shoes on my son." He said he would accept the mission if I agreed not to explode. Looking down at my feet, he said "I will sell you shoes, too, since the ones you are wearing do not come close to fitting you."
Andy chose three different styles. Chris measured Andy's feet, then went to the store-room. He came out with about eight boxes, so Andy could see which cut of shoe fit him most comfortably. The first three pairs "felt funny," according to Andy. Chris assured me he would find shoes that fit. Andy needs an extremely wide shoe: In American foot sizes, that means he is a 4E. Every box Chris brought out was 4E, but, as he explained, every manufacturer cuts their shoes a little differently. Andy needed to try on shoes until something fit. Finally, a pair felt comfortable! We even found a second pair of shoe for occasions where athletic shoes are not appropriate. While Chris was fitting Andy, he explained the differences between good and not-so-good shoes, including the manufacturing methods.
Next, it was my turn in the chair. My shoe size is 9.5 wide (European 41). Chris asked if I knew my instep size. I did not...it is a size 11 (European 42.5). I am as difficult to fit as my son! I never had difficultly fitting shoes before, though: I just bought really wide boat shoes on size too large; got them wet; squeezed into them; and let them stretch. I also have one pair of dress shoes. They hurt my feet, so I wear them only when I must and get them off as quickly as possible.
This is how shoes are and always have been. I had concluded life for me meant ill-fitting shoes. Now that's all changes, because the shoe guy at Nordstrom insisted I have shoes that fit.
Having had a Nordstrom experience, I have a question. What is the product?
I took my teenage son, Andy, shopping for shoes, because my wife refused to go through the agony and frustration involved. According to my son, shoes never fit. After one day of this, i understood my wife's frustration. Then I remembered my great friend Mike telling me about an amazing experience he and his wife recently had in the shoe department of the new Nordstrom department store. I thought this could be the answer to an otherwise impossible situation.
We entered the store and were cheerfully directed to the shoe department. Upon arrival there, I selected an unsuspecting victim...I mean salesman...named Chris. I told him, "Your mission, should you choose to accept it, is to find and fit shoes on my son." He said he would accept the mission if I agreed not to explode. Looking down at my feet, he said "I will sell you shoes, too, since the ones you are wearing do not come close to fitting you."
Andy chose three different styles. Chris measured Andy's feet, then went to the store-room. He came out with about eight boxes, so Andy could see which cut of shoe fit him most comfortably. The first three pairs "felt funny," according to Andy. Chris assured me he would find shoes that fit. Andy needs an extremely wide shoe: In American foot sizes, that means he is a 4E. Every box Chris brought out was 4E, but, as he explained, every manufacturer cuts their shoes a little differently. Andy needed to try on shoes until something fit. Finally, a pair felt comfortable! We even found a second pair of shoe for occasions where athletic shoes are not appropriate. While Chris was fitting Andy, he explained the differences between good and not-so-good shoes, including the manufacturing methods.
Next, it was my turn in the chair. My shoe size is 9.5 wide (European 41). Chris asked if I knew my instep size. I did not...it is a size 11 (European 42.5). I am as difficult to fit as my son! I never had difficultly fitting shoes before, though: I just bought really wide boat shoes on size too large; got them wet; squeezed into them; and let them stretch. I also have one pair of dress shoes. They hurt my feet, so I wear them only when I must and get them off as quickly as possible.
This is how shoes are and always have been. I had concluded life for me meant ill-fitting shoes. Now that's all changes, because the shoe guy at Nordstrom insisted I have shoes that fit.
Having had a Nordstrom experience, I have a question. What is the product?
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