Tactical economics

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The green industry is coming off a hot streak as we kick off the new year. Operations across North America, save for a few regions where lockdowns didn’t exempt greenhouse growers, saw historically positive sales volumes last spring, stretching into summer and fall.

Now that the wild and seemingly never-ending 2020 is firmly in the rearview, many horticulture operations that are flush with cash find themselves at somewhat of a fork in the road: is it wise to take advantage of grower-friendly finance rates and invest in expanding production to meet the new demand we saw in 2019? Or should they pay down debt and prepare for the possibility of yet another economic downturn? Hold market share and keep on keepin’ on, hoping for better days ahead?

Of course, many believe that any decision in this regard should strongly consider that the virus appears likely to stick around with us at the very least through yet another spring production season.

So, is 2021 the year for growers to make some big moves? Build that shiny new Dutch double-gutter expansion, or snap up that new environmental controller you have been eyeing?

Let us see what some experts in the industry have to say on the subject:

2020: outlier or new normal?

Mintel is a well-known market research firm that has been tracking and reporting on all kinds of consumer trends throughout the COVID-19 pandemic. The group conducted green industry focused research this summer, finding that 84% of American consumers are spending the same or more time in the garden than before the pandemic, and 10% have increased plant purchases from the year prior.

Purdue University’s Ariana Torres, an associate professor in the school’s ag economics department, warns not to read too deeply into those numbers, however.

“We believe that this is more due to a regional-specific effect, and we are finding evidence that non-essential shopping (including plants) has actually decreased. Consumers are feeling less confident about the growth of the economy going forward,” she says.

That said, Torres is seeing a significant shift in how people acquire plants, and greenhouse operations are also looking for new customers and markets.

“Data from the [Mintel] tracker also shows that 36% of plant purchasers are buying more online. One way growers can address new and complex industry trends is to aim direct sales as much as possible,” Torres says. “Today you’re seeing that happen with many growers that previously were only selling wholesale now trying to bypass the traditional brick-and-mortar retail route to market by selling to consumers online.”

Torres says that since March, a bunch of new businesses have sprung up as a response to the online demand to deliver plants, flowers and other green products directly to consumers. In the greenhouse world, this is especially true with the proliferation of delivery and curbside services.

“And retailers that were not traditionally plant-purchasers (e.g. Aldi) have agreed to support farmers and local centers and channel their products through this retail market,” she says. “Using social media marketing and other types of digital marketing can help businesses reach local customers in a cost-efficient way, often without a large up-front capital investment.”

Associate Professor Ben Campbell lectures on applied economics at the University of Georgia’s Department of Agriculture. Campbell himself advocates a restrained approach when it comes to the long-term investment and expansion question going into 2021. His own market research in 2020 revealed a mere 4% increase in consumer spending on plants compared to 2018 levels.

“I myself am a very risk-adverse person, and there are just too many uncertainties right now with coronavirus and what will happen with consumer buying next year,” he says. “There’s some optimism about a vaccine, but the odds of all of us having received it by spring 2021 are not great. Right now, I just don’t think we’ll see the same plant-buying boom that we saw in 2020.”

Campbell foresees more people returning to their normal office work routines, and more unemployed workers without the same unemployment compensation safety net they had in 2020, contributing to a return to pre-pandemic plant demand. Or possibly even lower levels of demand.

“Unless you have a local market already setup, and the demand is there and it is firm and stable, I would be very concerned about how 2021 is going to go from a sales standpoint, and I’d want to watch what I am doing as far as expanding,” he says. “We’re probably not going to have 2020 happen again in 2021, at least not anywhere near the size or scale that we saw. And if everyone expands their operations at the same time, we’ve seen in the past that can have a compressing effect on prices, and then demand likely will go down. That’s a big double whammy.”

Texas A&M University Professor and Ellison Chair Charlie Hall does not envision 2020 sales levels becoming the new normal in horticulture, either.

“Are all of the ‘newbies’ going to come back for a second helping of this whole lawn and garden thing?” Hall wonders. “A big part of that is whether they were successful or not with their plants. If they were successful, then sure, maybe. At the same time, it’s not like I’d be building 50 acres of greenhouses right now expecting this giant tidal wave of demand to be there.”

Hall bases that analysis on preliminary data from independent garden center pre-bookings for the upcoming spring season.

“Right now, including the lawn and landscaping side of the industry, it’s looking like we’ll probably see something in the neighborhood of about a 10% bump in demand from pre-pandemic levels,” he says.

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Consumer spending habits are evolving.

Economists across the board are sounding alarm bells on what businesses can and should expect to happen in 2021. Federal Reserve Chairman Jerome Powell recently cautioned that the economy is likely to shrink substantially across both the first and second quarters of the new year, with unemployment projected to increase up to near the 10% mark.

As of press time in mid-December, congressional passage of a new stimulus package had just been passed to help boost consumer spending. President-elect Joe Biden’s transition team has reportedly also been warned of the potential for a particularly devastating “double-dip” recession.

This would almost certainly have devastating consequences for the green industry. Generally, when consumers lack confidence in the economy, they save money and pay down debt while decreasing discretionary spending on goods and services until the economy recovers, or a stimulus is disbursed.

One of Hall’s many fortes is analyzing consumer spending trends and making sense of what those trends mean for the green industry, and more specifically, for growers themselves. Looking at the data of late, Hall is seeing a near future featuring less consumer spending on things like plants and flowers and trees.

“As we go through this pandemic, it is important for business owners to find technologies that reduce labor needs."

“Durable goods purchases have been extremely strong (during the pandemic) and consumers are still spending money on durable goods, some of which we attribute to the last stimulus payments putting a little extra cash in people’s pockets,” Hall says. “In most recessions we do see a bump in flower and other plant sales early on in the recession, but once the recovery starts consumers start spending more on durable goods, and there’s less to spend on flowers. It seems like that’s where we’re headed right now.”

For her part, Torres agrees that we will likely see a drop in consumer disposable income outlay during this second wave of the pandemic.

“Over time we will likely hit a demand-supply equilibrium, and it is better for growers to behave conservatively by paying off their debt with the highest interest, investing in cost efficient equipment, automating activities and processes, and reducing costs and increasing efficiency,” she adds.

Even with Americans’ discretionary fund spends likely to decrease in the short term, there are a couple positive developments that Torres thinks could help soften whatever blow the industry ends up absorbing.

“Plant demand from the Baby Boomers is increasing, and this segment of the population has spending power and is prioritizing local purchases and purchasing online,” she says. “And private home improvements continue to increase due to the fact that Americans are spending more time at home and prioritizing quality of life and gardening more.”

Torres also believes a strong and only growing stronger real estate market will continue to prop up demand for plants and new landscape features, benefiting garden centers and growers alike.

Photo © Nuthawut | Adobe stock

Labor a constraining factor, too

Long before anyone knew what the coronavirus even was, the green industries’ labor situation has long been singled out as the top constraining factor for growers looking to scale up.

“If you expand production and invest in new structures, then you’re going to need that much more labor,” Campbell says. “But the question still remains for many growers: Can you get it?”

The ag labor pool was essentially taking hits from all sides in 2020. Global travel restrictions made a very competitive immigrant labor pool that much tougher to maneuver, and laid off domestic laborers largely stayed home and collected the controversial $600 per week Pandemic Unemployment Assistance (PUA) payments rather than take lower-paying, manual labor intensive positions in farming.

“If you expand production and invest in new structures then you’re going to need that much more labor.”

These developments are only going to continue to exacerbate, according to Torres.

“Labor issues are becoming larger due to the pandemic,” she says. “Labor is one of the most important and expensive inputs for industry businesses, and it promises to remain a major worry due to lack of mobility, government unemployment payments, and immigration issues.”

Therefore Torres, while reminding growers to be smart and conservative and analyze any investments accordingly, does advocate they take a close look at adding automation technologies where they fit.

“As we go through this pandemic, it is important for business owners to find technologies that reduce labor needs,” she says. “Automation of activities, tools and technologies that improve the quality of products and services, and new processes that can spread or reduce the need for labor, should be prioritized.”

Caution moving forward

All three green industry economic experts we consulted independently offered growers the same advice: a conservative approach today could actually be more beneficial in the long run, versus a frenzied plan to expand in the immediate short-term.

“Having a conservative approach with the recently experienced liquidity can pay off later on,” Torres says. “And it appears that the best route forward today involves investing in economically feasible technologies that promote automation, and most importantly reaching out to consumers directly through online sales and uncovering new or non-traditional markets.”

She also believes growers should “prioritize cash flow health in the long-term” while trying to diversify their offerings into new or emerging crop markets like indoor strawberry production, or hyper-local vertical produce farming.

Campbell recommends much of the same risk-adverse go-forward plan as Torres, and he is keeping a keen eye on developments with the new administration coming into office.

“There is a lot of research and data out there that shows the economy tends to slow down coming out of an election, and when people are uncertain and don’t know what to expect from a new administration, they save rather than spend,” he says, noting that we don’t know what a Biden administration means for trade tariffs or input prices.

Perhaps the industries’ foremost voice on economic analysis and issues, Hall cautions growers not to get complacent and contented after many had their finest spring sales seasons in decades.

“Make sure you’re lean and make sure you’re efficient in everything you do,” he says.

“If another downturn is coming then I will generally tell people to defer large capital expenditures, defer maintenance expenses as much as they can, forget paying dividends and pay your suppliers within terms, meaning if you have 60 or 90 days to pay off a balance, then go ahead and take it. You do not have to pay everything off within 10 days.

“And making full use of any available lines of credit,” he says. “Is usually a good strategy, especially considering that during the last great depression if growers didn’t use those lines of credit the banks clawed those limits and rates back from them.”

Bottom line

The path ahead for the next few miles seems unclear at the present time. Perhaps there are more good times on the horizon, yet the prospect of more danger could lie just ahead. However you decide to play your hand in 2021, like any seasoned gambler, be sure to do your homework first.