The strong survive

There are so many factors contributing to the overall health of an industry that it’s shortsighted to focus solely on one specific element. For the green industry, marketplace trends encompass consumer spending and confidence in general, as well as how and where plants are purchased. At present, independent garden centers (IGCs) seem to be holding their own in most markets and even increasing sales for the better stores, if adequate attention to merchandising, customer service and consumer trends is given. However, many firms that are using the “grow it and they will come” approach are struggling, and many IGCs are looking to complement their business with other non-plant lines.

Supply chain trends have a significant influence on the vitality of the industry, and vice versa. We continue to see a number of structural changes occurring in the green industry. The shakeout that started with the Great Recession has slowed, but nonetheless continues at all levels of the supply chain. Several more reputable growers, landscape service providers, and retailers have gone out of business since last year. Not all of this productive capacity has exited the industry, however; consolidation activity through mergers and acquisitions continues to shrink the number of industry participants, but some of the capacity is simply being operated under a different name.

Garden center trends are dependent upon a number of influences, including seasonality, climate, region of the country, competition from mass merchandisers and home centers, and consumer spending in general. The demand in the U.S. for lawn and garden plants and supplies is regional and highly dependent on climate and growing conditions. The good news is that retail sales for building material and garden equipment and supplies dealers, a potential corollary measure of garden supply demand, has increased for five consecutive quarters. Personal consumption expenditures of flowers, seeds and potted plants, a major driver for garden centers, are forecast to grow at an annual compounded rate of 5 percent between now and 2017, according to data published by First Research, a provider of industry intelligence.

Consumer desire to spend time at home and extend living space outdoors should drive sales for outdoor patio products. Demand for decorative outdoor products, such as lighting, pavers and fountains, will achieve double-digit growth each year through 2015, according to the Freedonia Group. As the housing industry rebounds and the economy improves, consumers will unleash pent-up demand for landscaping renovations and updates that may have been put off during the recession.

Landscape service trends appear to be improving; in fact, according to First Research, the output of the U.S. landscaping industry is forecast to grow about 4 to 5 percent in 2015 compared to 2014. The outlook also calls for industry output to increase at a compounded annual rate of 4 percent through 2016, indicating steady growth in the longer term. The value of nonresidential construction spending, a driver for landscaping services demand, has risen this year. In addition, the value of residential construction spending, which impacts demand for landscaping services, has also increased this year – which brings us to another significant driving force: the housing market.
 

The housing influence

Housing is an important source of economic growth. As of the second quarter of 2014, housing’s share of gross domestic product (GDP) was 15.5 percent, with home building and remodeling yielding 3.1 percentage points of that total.

The housing recovery has finally asserted itself in the last couple of years, with nearly every key metric posting measurable improvement from prior years. Sales and prices both rebounded solidly this past year, and new home construction steadily gained momentum over the course of the year. Progress has also been made dealing with the imbalances left over from the housing boom. Conditions should improve further in 2015, as more traditional buyers come back into the market.

A recent surge in new-home sales proves the housing recovery is still on track, though maddeningly erratic, as the dip in sales of existing homes demonstrates. By year-end, the pace of both new- and existing-home sales will accelerate, as will overall housing starts.

Income growth is a key factor that promotes household formation, generating rental and home buying demand. A significant amount of pent-up housing demand exists, but for it to be unlocked, additional gains in wages and other income sources must be realized. Household income typically follows a life-cycle pattern of growing with age, as skills and seniority grow, followed by later declines in earnings as retirement occurs. While in recent years household balance sheets have improved with home price gains, declines in incomes persist despite some recent improvements.

Despite the marked improvement, the housing recovery is likely to remain more of a meandering walk than a jog, reports Kiplinger. Tighter lending standards remain a dampening influence. And while latent demand is high, particularly among 25- to 34-year-olds living with their parents and poised to eventually buy housing, the rate at which they will form new households will continue to be slower than usual, according to Kiplinger.

The consensus among housing pundits is that we will easily cross 1.5 million starts in the next couple of years once the unemployment rate drops significantly among young adults. Many parents would love to see their children leave the nest instead of doubling up in the family home. For the 25-and-under crowd, we should see household formation settle into a trend of 1.5 to 1.6 million new households over the next several years; that will be because young adults will find new jobs and finally leave their parents’ nests, again. All of these housing trends, in addition to the trends discussed earlier, point to a re-invigoration of the green industry marketplace over the next several years.
 

Where do we stand?

The current health of the economy is extremely mixed, with some of the leading indicators continuing to be negative, while some are trending positive. Mixed performance in the economy coupled with extreme weather conditions across much of the country makes for a terribly challenging and uncertain environment. I remain optimistic about the recovery, but then again, I pretty well find the silver lining in most economic storms.

I still have reason to believe that the most successful nursery and greenhouse firms in 2014 will be those that are well-positioned with their customers in the marketplace; not overleveraged; and clearly articulating their value proposition. Conversely, those that aren’t probably won’t be around much longer. We will likely see continued structural changes across the industry supply chain as we morph into the more compact and efficient industry of the next decade. This will not only mean fewer key players in the industry but deeper, more strategic relationships among those left from the transition. The green industry in the next decade will not look the same; not even close.

Yes, the industry will still be around—if it maintains value, relevance and authenticity to end consumers—but the factors that will guarantee success in the future are going to change. Better brand management, more detailed SKU movement and replenishment analysis, greater efficiency in distribution and logistics, closer integration of genetic innovations and supply levels with consumer demand, and the assimilation of innovative marketing technologies (social media and otherwise) are the new key success factors of the future.

Notice that growing a quality plant isn’t listed; that’s because it’s a given. Growers must continue to have quality to even play in the game. Growers that master these key success factors will not only be positioned better for the potential shocks in the economy in the short-run, if they do occur, but they will lay the groundwork for solid performance during any future economic downturns.

Without a doubt, the data above confirm that the downturn in housing has had a profound impact on nursery product sales in recent years. Annual flower growers have had an easier market in which to compete, as households have tended to downsize their plant purchases in an attempt to maximize their purchasing power; for example, smaller but more numerous plants at lower price points.

That being said, annual bedding plant purchases made in 2014 are likely to be slightly above pre-recession levels. The only plant categories that experienced increases in the number of households buying them during this time were edible-related plants. However, given the aforementioned housing market trends, it is likely that nursery products will be facing an increase in demand in the next few years.

Charlie Hall, Ph.D., is professor and holds the Ellison Chair in International Floriculture in the Department of Horticultural Sciences at Texas A&M University, College Station. He can be reached at charliehall@tamu.edu.