FloraHolland’s KOMPAS to profitability

Rens Buchwaldt, acting CEO and director operations at FloraHolland.

FloraHolland last month announced that it is streamlining its operations to better align its cost structure with current market conditions and enhance its ability to pursue strategic growth initiatives.

If FloraHolland manages to set up a succesful florist clock in Naaldwijk this will be the only remaining physical clock in the west of the Netherlands.

The KOMPAS restructuring plan includes the consolidation of existing clock units in Bleiswijk into a single florist clock in Naaldwijk and cost reduction actions including the cutback on quality inspectors and an approximate 5% reduction of the company’s workforce.

When fully implemented, the workforce reduction is expected to reduce the company’s annualised expenses by €12 to €15 million. FloraHolland expects to record restructuring costs associated with these actions in the amount of approximately €20 million.

When CEO Timo Huges announced his departure four and a half month ago, Rens Buchwaldt was appointed as acting chief executive officer. In this exclusive one-to-one interview, Buchwaldt emphasises how the new structure is designed to enable company-wide cost cutting and streamlined, increasingly virtual work processes.

FCI: A reorganisation tends to be a sad moment in a company’s history. How deep is your own sadness?

Rens Buchwaldt: “I would say we have found some sort of balance. Given the circumstances,  which you have to accept to a certain degree, we have really done our utmost to do the right things. We will introduce new services, new developments; things that match the interest and requirements of our growers, buyers and other stakeholders. Not all of the consequences, however, are positive. Some of them lead to the unfortunate situation of workforce reduction. This affects loyal, dedicated employees, who do a good job every day. About this I am very sad. On the other hand, we have a very positive proposition to take forward. That, in some way, makes me feel positive. So, there are mixed feelings.”

Over the past few days, you have outlined the details of the reorganisation plans to your personnel. What feedback did they give you?

“The restructuring plan is generally considered ‘comprehensive’ , ‘well-thought out’ and ‘clear’. Most people understand the necessity of change, especially from a cooperative FloraHolland perspective.  At the same time, nearly all of them are asking themselves the same question: what does all this mean to me personally? For quite a few people, we don’t have a clear answer at this stage. Obviously, there is a feeling of nervousness about that, but overall people believe that we are doing the right thing.”

There will be redundancies as part of this restructuring and this causes insecurity among your employees. What’s the time frame for when you’d like the changes to be in  place?

“We would like all the changes to be implemented by the end of next year. The time frame of each individual step may vary, but, for example, the relocation of the auction clocks from Bleiswijk to Naaldwijk is scheduled for November 6^th, 2014: that’s a definitive- end date.”

Is workforce reduction the best answer? It usually marks the beginning of a downward spiral in confidence and enthusiasm that many people never recover from….

“I don’t think it will in this case. Let’s look at the role of FloraHolland as a cooperative. From a grower’s perspective, the use of FloraHolland as selling platform is changing and we are taking steps to adapt to or even go ahead of those changes.  So it’s not only about stopping or changing business activities, but also about new and improved services in a changing market environment. I reckon that this combination will give us momentum going forward. Therefore the debate should not only concentrate on the company becoming smaller.”

Officially, you have been acting CEO for only four and a half months, but you have already set yourself a tough challenge: showing FloraHolland a new road to revival. KOMPAS is the name of FloraHolland’s long term restructuring plan. Normally one would use a compass when completely lost…

“A compass can be of use at any stage, not only when you’re completely lost! A compass gives direction but doesn’t indicate a specific road. We have made a number of very clear choices and picked out a few roads to go forward. In the long run, we’ll obviously need more direction. We opted for the name KOMPAS because a  compass provides direction and it allows you to make small adjustments in course while underway to keep heading in the right direction.”

In terms of business restructuring, before a business model is revamped, an experienced financial advisor is brought in to assess the current situation. How overwhelming  and threatening have FloraHolland’s debt obligations become and how burdensome are its operating costs?

“I wouldn’t use those kind of words. On FloraHolland’s balance sheet almost 50% is risk-bearing financing. The bank financing comes on top of that. The actual solvency level lies somewhere around 23 to 24%. This is actually a very secure position. Meanwhile, for a company of our size we have maintained a somewhat small profit level. We aim to earn around €15 million per year, which allows us to build up equity on a relatively small base. Looking at the operating costs, the current trend basically leads to an annual income reduction of around €5 to €10 million. Over the past three years, we have been able to cut costs and maximise our operating performance, in logistics in particular; to match the decrease, which was not that big at that time. We now need to look at the surrounding organisation to make sure that the size of the organisation fits with its operating activity. Operationally, the KOMPAS reform will bring the financial operating performance at the desired level. I am confident that the combination of reducing costs and investing in new services will really give us a strong base to move forward.”

While reorganising a company you have to make some very difficult decisions. What was the most difficult one?

“To stop the clocks in Bleiswijk and move them to Naaldwijk was the most difficult one. Also because it has a tangible impact on employees. But I believe it is the most positive one, given the market circumstances. In terms of business strategy, the most difficult question is how to address the new market from an organisational perspective. The selling of a grower’s products will become the reference point around which we arrange our setup and services. Our people, knowledge and expertise will be integrated and concentrated in two commercial departments: a commercial products department and a commercial services  department.”

Let’s have a closer look at the details of your reorganisation plan. FloraHolland mentioned that the company will steadily be transformed into a service company.How do you think this worked out so far?

“We have taken quite a few important steps over the past few years in terms of business culture and attitude towards customers. Our Bloei project, for example, focused on service orientated business with higher customer service ratings. However, in terms of developing customised services for the right price and service level, it has been much more challenging. Our aim for the coming years is to develop new services that meet the needs of the market and provide us with income for covering the costs.”

Rens Buchwaldt

In the connected age of internet , in a world where more people are using mobile devices and web-based services, FloraHolland prepares itself to totally disconnect the price setting from the product and logistical processes organised through the auction. The virtual market will be strengthened by a Netherlands-wide approach to auctioning. The Aalsmeer and Naaldwijk clocks will be linked together, while the number of auction rooms will be reduced. How will auction buyers and grower members benefit?

“A Netherlands-wide approach to auctioning is really to match supply and demand in the most complete way. We now have a situation with separate marketplaces for exactly the same products and more or less the same growers and buyers. Many of the large traders buy, and a majority of large growers sell at all three auctions in the central western part of our country. An auction at ‘national level’ will lead to the best possible price for growers, given the market conditions. This is one big benefit. In addition, disconnecting price forming and logistics helps reduce costs in the logistical process. Auctioning is known for being a point in the logistic process that is not easy to manage. By disconnecting clock and price forming one can optimise the logistic process. Ultimately, this is a cost benefit for the entire supply chain.”

The auction clocks in Bleiswijk, which were officially launched by Queen Beatrix on March 5, 1982, will stop ticking. A virtual marketplace requires no more than one building. When will the auction rooms in Eelde, Rijnsburg and Naaldwijk close their doors?

“I wouldn’t call it an ‘auction building’. I prefer talking about places to serve customers. The key thing is that we have customers at different locations, each having their own internal processes. We want to make sure that they are served as efficiently as possible, no matter where the auction clock is located. It could even be a clock located in a cloud computing system as long as our customers receive their products in the most effective way. If you went back a hundred years in time, then it might have made more sense to build one big auction for the entire country and if we were to start from scratch this option could be considered.  But with different marketplaces, different infrastructures that’s impossible. But in the very long run, like 100 years, it is difficult to predict what things will look like.”

No more physical clocks within five years?

”If we manage to set up a successful florist clock in Naaldwijk this will be the only remaining physical clock in the west of the Netherlands. All other auctions clocks will be run in a cloud computing system. But the logistic processes at our different locations will continue to exist.”

FloraHolland is also very busy with job evaluation. Were all 1,500 (!) functions necessary, required and relevant for FloraHolland’s core business? One of the best running gags inside the auction walls was, that every FloraHolland employee had their own CAO* (collective labour agreement)….

“We have a long history of growth and adding activities, at different locations and being separate cooperatives. We have a legacy that basically has added complexity for 30 to 40 years. Now it is time to take this away. Over 1,500 function descriptions in a business that employs about 4,000 people is too much.”

According to the official reorganisation press release FloraHolland will realign the company according to its primary task: the selling of growers’ products.  If you allow me to make a critical remark: today the auction’s only raison d’ être is to offer its grower members a better price than the external, third party marketplace.  

“Our aim is to provide the grower with the best possible price at the lowest cost. In the past, we used to have a clock where a price was set. But growers started developing their own marketing ideas and this has changed the role of FloraHolland too. We aim at doing things that for the collective of growers make sense, subgroups will have to pay for extra services. When third parties in the market offer better prices, we should find ways to either provide the same services or, together with our members explore new marketing tools without hurting the collective value of FloraHolland. The very essence of a cooperative is: you are in it for your own gain, but your own gain can benefit from being part of a collective.”

I would like to rephrase my previous question. How can FloraHolland generate the best price for its grower members?

“I think by providing the steps as written down in KOMPAS. We should strive to achieve a national clock system with exceptional buying power, to help growers understand the market and develop their own marketing strategies, to point them toward changes or opportunities. Gone are the days when auctioning only meant bringing your flowers and plants in front of the clock.”

You have €8 million at your disposal to drive sales and increase market shares. Aren’t those €8 million, which are now being used for consumer promotion, too ridiculous for words? It is an inadequate budget that only just covers the basic marketing costs, but lacks the recurrent funding for substantial consumer promotion. Why not spend these €8 million on B2B promotion?

“Our annual general meeting voted for 0.2% of the revenue to be devoted to consumer  promotion. You’re right; there is an on-going discussion between marketing experts and auction members about whether €8 million can really make a difference. Meanwhile, there are many product groups that put together money to carry out product promotion activities focused on one single crop. But you’re right, one could argue that €8 million is not very much and we should find ways to discuss this further.”

The number of management jobs will be cut by 25%. How many management jobs were there?

“Anywhere between a few hundred to maybe even 500 managers, depending on the definition of what a manager is. This 25% reduction should reflect a mind-set. We want to organise ourselves more simply. There is also another reason. As a service company, you increasingly need your resources, your energy outside the business to maximise the daily interaction with your customers. It doesn’t help if there are too many managers standing in the way of a process that really makes the difference.”

I foresee a problem with these exiting managers, as a carefully considered reorganisation usually includes bringing in qualified leadership….

“As you probably know FloraHolland  has just appointed a new CEO, Mr Lucas Vos. Be assured that he will bring with him the needed leadership.”

How satisfied are you with the quality of leadership in FloraHolland?

“If you look at it in terms of professional skills, auctioning , logistics and marketing knowledge, we are quite good. In terms of a service business, we are not that good. In certain places we need some new influx of leadership or specific knowledge, the newly apppointed CEO is part of that.”

Another key element of the reorganisation plan is to cut back the number of quality inspectors at the auction. The first thought that came into my mind was “The Russians will surely appreciate this bold decision making….”

“Well, we didn’t consider the Russians as a specific target group. All joking aside, the market, growers and buyers, tell us that 50% of the trade is direct and not inspected, the remaining 50% of clock sales are only randomly checked. So eliminating this service is definitely the right way to go. If customers do want quality checks we provide them but they will have to be paid for.”

That doesn’t sound very service oriented to me…

“It is. Is it more service oriented to provide a service that people basically don’t want, but have to pay for?”

How can individual growers be made responsible for their quality control? “Fundamentally, they are already today. A grower is obliged to provide the details needed regarding product quality whether it concerns direct trade or clock sales. We check on a random and unannounced basis to find out if this is really the case. I am convinced that the market will dictate that the growers will act according to auction specifications.”

Will the quality of FloraHolland products be negatively affected by the decrease in inspections?

“That is one concern. We will stop gradually by assessing each product group first to see whether the specifications are enforceable in a free market. The specifications will continue to apply. Some of them are outdated and subject to different interpretations. We would like to make them as clear as possible. We will also carefully monitor quality during the first months to see what’s going on whether there is an increase in complaints. We believe that over a period of 12 months this system of auto quality checks can be in place.”

With KOMPAS underway, what will the company look like in five years?

“When you think of KOMPAS in terms of its three-year time frame, it will lead to a company where direct trade flows will be bigger than auctioning trading. Given the current market trends, this will already be the case next year. FloraHolland will also be a much more service- orientated company, with income generated by services that people can freely choose; a company with an increased focus on market demands. What do people want and how can we act upon it quickly?  Eventually we will also be a smaller company as each year we need to move with the clock volumes. Our natural attrition is 50 to 150 people per year and that will continue over the next few years.”

• CAO stands for collectieve arbeidsovereenkomst (collective labour agreement). CAOs are a fundamental element of Dutch industrial relations and cover pay, working hours, conditions, bonuses, perks, training etc. The agreements are traditionally negotiated in the autumn by unions and employers. In theory at least, they are binding to the whole sector. They are particularly disliked by foreign companies who say they are too rigid and make it hard to fire people.