Tactical economics: An update

Art: newrossosh | Adobestock

Saying that business has been booming in the green industry for the past year and a half would be an understatement. It’s no secret that the COVID-19 pandemic and subsequent lockdowns led to consumers spending a lot more money on plants in 2020 and 2021 than they had in recent years past. Though many sectors of the economy have struggled, horticulture businesses have done well. We’ve covered this boom in depth here at Greenhouse Management, as well as some of the reasons behind why the green industry has done so well.

And although it sometimes felt like we’d never make it this far, 2022 is indeed on the horizon. So, as 2021 comes to a close and we (hopefully) crawl our way out of this pandemic, now is the time to look ahead to 2022 and figure out what growers can expect for the upcoming year. To do that, we’ll ask the experts.

Where spending is headed

Purdue University’s Dr. Ariana Torres sees a lot of factors that are going to influence consumer spending on plants in 2022. One of the biggest factors is that instead of spending their money on plants, people will likely want to spend their money doing things they haven’t been able to do thanks to the pandemic. For example, after a year and a half of ordering takeout instead of dining in at their favorite restaurants, people will probably be going out to eat much more in 2022. Additionally, people will start traveling and vacationing as more and more places lift restrictions and people feel safer to fly on airplanes again. This return to dining out and traveling will leave people with less money to spend on keeping up with the gardening hobby that they’ve developed over the course of the pandemic.

Torres attributes these shifts in consumer habits to COVID fatigue. After abiding by the rules and foregoing the experiences they love since March 2020, people are tired of being cooped up at home. They want to leave their houses and eat with their friends and travel with their families. However, with the surging number of COVID cases thanks to the infamous Delta variant of COVID-19, it’s hard to say whether the dining and travel restrictions will come back. For now, though, it looks like a lot of people will spend their 2022 doing both.

Of course, that doesn’t mean that consumer spending on plants is going to completely disappear. Though there’s been fear that we are in the midst of a demand bubble bound to burst, University of Georgia’s Dr. Ben Campbell says that such a burst is unlikely, opting to describe his prediction as a “slow leak.” Yes, many people won’t be spending as much money on plants in 2022, but a lot of people still will, especially in the produce sector, and growers won’t see their 2020 and 2021 gains erased overnight. Demand and sales figures will decline in 2022, but it’ll take time, and the decline will likely be gradual. Even better, demand and spending will still be relatively high, as the decline is unlikely to take figures to below pre-pandemic levels from 2019. 2019 figures represent an equilibrium that growers should expect to approach as we enter and go further and further into 2022 and further and further away from the pandemic.

THE RETURN TO DINING OUT AND TRAVELING WILL LEAVE PEOPLE WITH LESS MONEY TO SPEND ON THE GARDENING HOBBY THEY’VE DEVELOPED OVER THE PANDEMIC.

Ignore the outlier

Now, how should growers prepare for that 2022 decline? When forecasting revenues for 2022, our experts encourage growers to treat 2020 and 2021 figures as outliers. After all, with the expected decrease in consumer spending on plants, it would be unreasonable to expect 2022 to be a repeat of 2020 and 2021. Torres and Campbell suggest using 2019 figures when forecasting your revenues.

On a slightly different note, Dr. Charlie Hall of Texas A&M University advises that it’s always best practice to take the average of the last three years for your forecast. Looking at 2019 figures will give growers a good idea of where things are likely to go after consumer plant spending approaches the pre-pandemic equilibrium that our experts are expecting.

According to Hall, the key thing growers should keep in mind when planning for the coming year is not to over produce. He says to take that three-year average and base your inventory levels off that. After all, you don’t want to get to the end of 2022 and realize that you’re holding onto way more inventory than you actually sold because you thought you’d sell everything like you did in 2020.

All three experts anticipate that growers will face increasing production costs in 2022, chiefly driven by increased wages. Like every other business today, growers are facing a labor shortage, and it won’t ease up on its own. To combat this labor shortage, growers will have to offer higher pay to attract workers. Obviously, wage increases can cut into profit margins, so our experts also say that growers will have to raise prices in an effort to offset some of that change.

How to handle pricing

Raising prices has been a hot topic among growers lately, and it’s going to be extremely relevant for 2022. Hall’s advice? Raise prices by 11-13%. Hall anticipates that consumers will be willing to pay those increases, but Campbell warns that you can only increase prices so much and still retain customers, so growers will likely still have to eat some of the added costs of higher labor. That being said, growers still have other options to cut costs, like working to become more efficient, maximizing labor productivity, ensuring they aren’t wasting water, and turning to automation.

Hall also says that businesses have to make sure they retain the skilled and experienced labor that they already have. If businesses can hold onto their current employees, then they’ll save money by not having to recruit, hire and train new employees. One strategy Hall suggests will help in that regard is to provide referral incentives to current employees. If your employee is monetarily rewarded for bringing in a friend to join the business, that employee will stick around and do your recruiting for you so they can get their bonus.

So, while growers should indeed be cautious going into 2022, they should not despair. Though 2022 may force them to take two steps back, they will continue to move forward. But to keep moving forward, Torres says that businesses need to go into 2022 with a plan. They need to get informed and make smart decisions based on solid business plans and economic analysis.

This article is an update to a previously published cover story, "Tactical Economics" from the January 2021 issue. Read the story at https://bit.ly/tactical-economics