State of the Industry: Margin boost

As the greenhouse industry continues to struggle in its post-recession recovery, a focus on boosting not just sales but profit margins — the percentage of revenue you have left over after subtracting the costs of your sold product — is an important focus for growers. Yet nearly 13 percent of growers don’t know their profit margin, according to the 2012 Greenhouse Management State of the Industry survey.

“You’ve got to measure profit margin. It’s one of the basic indicators of whether you’re successful being in business or not,” says Charlie Hall, Ellison chair in international floriculture for Texas A&M University.

Jan Barendse, owner of River Road Greenhouses in New York, agrees. He invests in an accounting system to track his finances more easily — and things are looking good, with sales and profits increasing by about 15 to 20 percent each year.

“I have really good control of my cost,” Barendse says. “I know exactly where everything goes. … A lot of people that are small don’t do that — they have no idea where they are. I can tell almost by the day, by the week, what my profits and my losses in revenues are, and I find that very valuable. I make decisions based on that.”

His continued growth isn’t typical, with more than 67 percent of growers surveyed reporting flat or decreased profits over the last three years. So what areas do growers need to focus on — and track — to ensure a viable profit margin? Here are some tips.

Know what price to set
In the current post-recession market, reduced prices don’t do much to attract consumers — and those that are buying often maintain a set quantity need regardless of price.

“We call that price inelasticity, meaning the consumer is not responding with purchase increases of the same percentage change as your percentage cut in price,” says Forrest Stegelin, extension agribusiness economist at the University of Georgia.

The rule of thumb, then, is to raise prices to increase the profit margin on the fewer items sold — a rule more than 19 percent of growers are prioritizing as their main area of focus to yield the best possible gains in retaining or improving profit margins, according to the State of the Industry survey. But you need to be able to justify a price increase to consumers.

Fifty percent of surveyed growers say high-quality products set them apart from competitors, while more than 22 percent of surveyed growers focus on providing a differentiated product mix.

You can also capitalize on the “buy local” movement to legitimize price increases.

“People are very cognizant of ‘Where were these plants grown?’ because one, they want to know that these plants are suitable for this particular area — they’re not a plant that should be in a different plant climate zone or plant hardiness zone, and two, that they feel akin to those plants if they came from a so-called local producer,” Stegelin says.

Approach local garden centers and big box stores about putting up a brochure featuring your greenhouse to foster a personal connection with consumers.

There are instances, alternatively, when an elastic market warrants lowering your price to increase your margins. Elastic demand occurs when the price reduction on a product is offset by a resulting increase in sales — common with popular fruits and vegetables.

“If you’ve got a track record, you can be able to observe these things,” Stegelin says.

While what you grow and at what price can be a major factor in boosting profit margin, sometimes, you don’t have a choice. Growing a less-profitable product may be necessary to keep an important contract or customer.

CJ Hayes, owner of Destination Euphoria Greenhouses in New York, which specializes in hydroponic production of micro greens and culinary herbs, goes out of his way to ask restaurant chefs what produce they’re having trouble getting throughout the changing seasons.

“I’m one of the people that will grow what the customer wants, not what I’m comfortable growing,” he says. “Too many growers get stuck in that they’ve done it that way for 10 or 15 years, but things change; the market changes, the customer changes. If you’re not willing to change with it, next thing you know you’re [out of business].”

Know where to cut costs
Many growers are focused on getting variable costs — such as the price of cuttings or pots — as low as possible. Twenty-eight percent of those surveyed by Greenhouse Management reported looking first to reducing packing elements when needing to cut costs, while nearly 23 percent look to cut costs by going with less expensive plant varieties or suppliers.

Matt McElroy, president of Newton Greenhouse in New York, switched from buying a Canadian peat to a local source of raw peat, saving money on freight and packaging. He also has his retail and wholesale customers send back pots so he can recycle them.

“We’re buying probably 20 to 30 percent of what we were buying new when things were better,” he says of the pots.

Stegelin, however, says focusing on cutting variable costs doesn’t yield as much gain as growers think.

“About everybody [in greenhouse management] is paying almost to the fraction of a penny for the same variable costs,” he says. “They’re already buying as cheaply as they can.”

Instead, Stegelin recommends focusing on reducing fixed costs — such as taxes and insurance. While fixed costs don’t come into play when calculating profit margin, they are a ripe area for cost cutting. Consider working with your banker or accountant to re-evaluate your payments.

“They can be looking to see, for instance, if maybe the tax assessor over-assessed what the business value is and they’re charging you property taxes according to their estimate,” Stegelin says. “You need to be willing to go in and ask them to explain how they derived that. I’m not saying you end up arguing your way out of it, but the idea is that you need to at least alert people that it’s of concern to you.”

Hall also directs focus away from variable costs, saying they represent only a small portion of total costs. He recommends that focus be diverted to labor.

“If you really want to make a dent in your costs, you look at how labor is allocated; the efficiency of your labor, and areas in your business that you can cut labor out,” he says.

Consider enlisting the help of a lean flow expert to conduct an analysis, particularly if you’re a larger operation. Of the dozens of greenhouses Hall has seen conduct one, all but one made “monumental increases in efficiency and reduced costs accordingly.”

One of the main ways to do this is to outsource an area you identify yourself as not being very efficient in compared to competitors, such as propagation — which is a significant chunk of your labor costs, with 25 percent being involved in getting product to the bench.

Barendse gets 95 percent of his cutting and seeds from Express Seed Co., which saves him about 20 percent on cutting costs.

“They’re good quality, and if you buy it all from one place, you get pretty good discounts, too,” he says. “A lot of people go wrong there, they buy from 10 different suppliers, and they get three different trucks every day with boxes upside down — there’s tremendous cost in that.”

Eliminate shrink and waste
Shrink — the loss of product between production or delivery to a retailer and the point of sale — is an area many growers don’t consider, much to the detriment of their profit margin. Ten percent of shrink occurs in production, while 19 percent occurs at the retail level — particularly if you’re in a pay-by-scan situation, Hall says.

“That’s incredibly costly, because you’ve already grown the product, you’ve got it to the retail store, and to lose it there … it really hurts,” Hall says. “Sometimes that’s out of your control, but you can hire the right third-party merchandiser if you’re not handling the product at the retail level yourself.”

Overproduction is also prevalent. McElroy has reduced crop sizes to avoid such waste, and to keep labor costs down.

“Hopefully there’s less to throw away at the end of the season and less to take care of,” he says. “Especially after spring, we’re tying to take care of less product through the summer months. That window (to sell) is getting shorter on any crop that’s a time crop for spring or Mother’s Day.”

You can find waste in most aspects of your business. Stegelin recommends forming alliances where able to combat it — such as a transportation co-op with local growers who deliver to the same clients as you, or co-purchasing moveable equipment that can be shared.

“This is a nice arrangement where people can sell off some of their equipment,” Stegelin says. “They can share the ownership.”
 

Jessica Hanna is a Cleveland-based freelance writer.