American Nurseryman Magazine - Horticulture Magazine and Horticulture Books - What's the Situation? - July, 2013 - FEATURES

American Nurseryman Magazine - Horticulture Magazine and Horticulture Books - July, 2013

FEATURES

What's the Situation?

The leading horticultural economist in the U.S. shares his informed perspective on the state of the green industry-with a special concentration on how the housing market has influenced our progress.
By Charlie Hall

The years leading up to the Great Recession were good ones. The green industry showed signs of strength and stability, much of it fueled by a booming housing market. Overall economic contributions in 2007 were estimated to be $175.26 billion - and growing.

Then came the crash. Nursery and greenhouse growers who experienced remarkable growth in sales and profits for most of the decade prior to the recession now face stagnant demand, with prospective buyers willing to purchase product only if and when it's needed. Maintaining enough liquidity to handle daily operations is a key industry challenge. The decline in industry sales, accompanied by increased expenses to maintain nursery and greenhouse products, have combined to reduce firm-level cash reserves and forced many growers to attempt to source additional credit from lenders or suppliers.

By the numbers - recent green industry performance

The most recent National Nursery Survey, which is conducted every 5 years, gathered annual information for 2008, and represented the fifth such effort by the Green Industry Research Consortium, a multistate research committee made up of horticulturists and agricultural economists from selected land-grant universities. Survey respondents reported total annual farm-gate wholesale plant sales of $4.45 billion in 2008, or an average of $1.73 million per firm, and total employment of 48,833 permanent and temporary jobs. Farm-gate wholesale sales, of course, are valued at the actual prices received by growers for sales of all plant materials sold.

Based on adjusted population of validated active firms (19,803), total U.S. nursery industry farm-gate wholesale sales were estimated at $27.14 billion, and total employment was estimated at 262,941 jobs. The highest sales and employment were in the Pacific and Southeast regions, lead by the states of California and Florida.

The leading plant types were deciduous shade and flowering trees and bedding plants. Native plants represented 13 percent of total sales. Containerized plants accounted for 65 percent of total sales. Overall, 77 percent of sales were through wholesale outlets, including landscape firms, single-location garden centers and rewholesalers.

The latest USDA Floriculture Crops Summary was released in April 2013, and it shows that the 2012 wholesale value of floriculture crops is up 1 percent from the 2011 valuation. The total crop value at wholesale for the 15-state program for all growers with $10,000 or more in sales is estimated at $4.13 billion for 2012, compared with $4.08 billion for 2011. (The 15 states participating in the study include California, Florida, Hawaii, Illinois, Maryland, Michigan, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas and Washington.)

California continues to be the leading state with crops valued at $985 million, down 3 percent from the 2011 value. Florida, the next largest producer, is down 3 percent from the prior year to $812 million in wholesale value. These two states account for 44 percent of the 15-state total value. For 2012, the top five states are California, Florida, Michigan, Texas and North Carolina, which account for $2.72 billion, or 66 percent, of the 15-state total value.

The number of producers with sales of $100,000 or more totaled 2,505 for 2012, down 2 percent from 2,562 in 2011. The wholesale value of all bedding and garden plants - which include herbaceous perennials - at $1.96 billion, is up 3 percent from the previous year. This plant category is the largest contributor to total value of sales and represents 49 percent of the wholesale value of all the reported crops. California, Michigan, Texas, North Carolina and Ohio, the top five states in this category, account for 57 percent of the 15-state total bedding and garden value.

The wholesale value sales for annual bedding and garden plants totaled $1.36 billion in 2012, up 2 percent from 2011. This value represents 70 percent of the total bedding and garden category. The number of growers producing annual bedding and garden plants totaled 1,537, down 2 percent from 2011. The total wholesale value of potted herbaceous perennials totaled $594 million in 2012, up 6 percent from 2011. These crops account for 30 percent of the total bedding and garden category. The number of growers producing herbaceous potted perennial plants totaled 1,241, down 2 percent from 2011.

What's trending?

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) are 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, weather, region, 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, increased 3.7 percent in the first two months of 2013 compared to the same period in 2012. 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 2013 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.

Economic contributions of the industry

For a little perspective, let's take a look at where the industry stood before the nation's economic struggles began.

Prior to the Great Recession, total economic contributions for the U.S. green industry in 2007, including regional economic multiplier effects, were estimated at $175.26 billion in revenue. That's billion with a B.

Employment stood at 1.95 million full-time and part-time jobs; labor earnings reached $53.16 billion. Value added impacts amounted to $107.16 billion. All of this represented 0.76 percent of U.S. gross domestic product (GDP) in 2007. For the Production and Manufacturing sector, including Nursery and Greenhouse Production and Lawn and Garden Equipment Manufacturing sectors, total output impacts were $52.57 billion; employment impacts were 469,000 jobs; earnings impacts were $13.14 billion; and value added impacts were $32.13 billion.

For the Landscape Services and Landscape Architectural Services sectors, total output impacts were $92.83 billion; employment impacts were 1.12 million jobs; earnings impacts were $30.15 billion; and value added impacts were $54.52 billion. For the Wholesale and Retail Trade group, total output impacts were $29.86 billion; employment impacts were 358,000 jobs; earnings impacts were $9.87 billion; and value added impacts were $20.51 billion.

The largest individual industry sectors in terms of employment and value added impacts were Landscaping Services (1,075,343 jobs; $50.28 billion), Nursery and Greenhouse Production (436,462 jobs; $27.14 billion), and Building Materials and Garden Supplies Stores (190,839 jobs; $9.71 billion).

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 5 percent in 2013 compared to 2012. 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, rose 1.3 percent year-to-date in January 2013 compared to the same period in 2012. The value of residential construction spending, which impacts demand for landscaping services, rose 22.2 percent year-to-date in January 2013 compared to the same period in 2012.

Which brings us to a significant driving force: the housing market.

The housing influence

The housing recovery finally asserted itself in 2012, 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 2013, as more traditional buyers come back into the market.

Home sales, housing prices and new home construction all improved considerably during 2012. Sales of new homes rose 19.9 percent to 367,000, while sales of existing homes, condominiums and townhomes rose 9.2 percent to 4.65 million homes. Home prices rebounded forcefully, with the National Association of Realtors median home price rising 6.3 percent on an annual average basis, ending the year with a whopping 10 percent year over year increase, based on a three-month moving average, in December.

New home prices have also improved, with the median price climbing 7.2 percent for the year as a whole. The rise in new home prices combined with a let-up in distressed transactions has bolstered builder confidence and opened the door to new development. Housing starts jumped 28.1 percent this past year, led by a 37.2 percent rise in multi-family starts, mostly apartments, and a 24.4 percent rise in single-family construction.

One of the critical questions about the housing outlook going into mid-2013 is how genuine have the improvements experienced to date been? Some of the stabilization in home prices is undeniably tied to the influx of investors that have come in and purchased homes, many for cash. Many of these purchases have been clustered at the lower end of the market in parts of the country where housing was most overbuilt during the boom years. The recent slide in distressed transactions may also be overstating the improvement in home prices. There has been a noticeable shift away from foreclosures and toward short sales following the National Mortgage Services settlement, which reset the timetable for foreclosures. Short sales tend to be completed with a smaller discount than foreclosures, creating less of drag on prices. Finally, the Federal Reserve is still purchasing $40 billion of mortgage-backed securities each month, which is keeping mortgage rates lower than they would be otherwise.

Housing starts are expected to rise 33 percent to slightly over 1 million units in 2013, the first time that 1 million new homes have been constructed since 2007. The big news is the return of the single-family market, which has been much more constrained than multi-family starts where we saw an influx of investors as renters replaced owners during the last several years.

Home sales are expected to rise 12 percent<0x2028>to a 5.7 million-unit-average pace in 2013. New home sales are expected to outperform existing home sales because inventories are likely to remain more limited in the existing market. Home prices are expected to rise between 6 and 8 percent from December 2012 to December 2013. Price increases are expected to remain the largest where supplies are the tightest, which is in the West.

Despite recent price increases, however, home prices remain low and housing extremely affordable. Long-term interest rates are expected to remain low, particularly for mortgages. The most recent Beige Book survey by the Federal Reserve suggests that lending conditions are easing. Even builders are finding it relatively easy to get financing these days. This is one of the most dramatic shifts in credit markets since<0x2028>the onset of the crisis in 2008. Mortgages and home equity loans are also becoming easier to secure. Ballooning student loan debt, combined with the hurdles that first-time buyers must overcome to qualify, remains the fly in the ointment.

Inventories are tight, especially in the single-family housing market. Household formation is picking up, and still running well above the pace of new construction. Household formation has moved up from about half a million per year during the worst of the crisis and immediate aftermath to more than 1 million a year today.

The consensus among housing pundits is that we will easily cross 1.5 million starts a year 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.

So, 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 2013 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.

Where do the data come from?

Since USDA's Economic Research Service (USDA-ERS) discontinued its data collection regarding nursery crops in 2006, and the latest Nursery Crops Survey conducted by the USDA's National Agricultural Statistics Service (USDA-NASS) was also last conducted in 2006, there is little government-sponsored data published on the nursery side of the industry. There is a Floriculture Crops survey conducted annually by USDA-NASS, but it only reflects data collected from 15 states.

In light of these data limitations, a helpful resource is the National Nursery Industry Survey and the Economic Impact Study conducted by the Green Industry Research Consortium, which is made up of horticulturists and agricultural economists from selected land-grant universities. The information is available online at http://ellisonchair.tamu.edu/, under the marketing and economics emphasis area.

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 will continue to have to have quality to even play in the game. Growers that master these key success factors will not only be postured 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 2012 were flat as compared to 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 housing market trends aforementioned, 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