High risks and low-profit margins (1)

In this two-episode column from FloraCulture International magazine, industry veteran Jaap Kras questions if vertical integration will reshape our industry and what this means for the future role of wholesale. He also discusses the superpower of supermarket flowers next to the knowledgeable and passionate retail florist who makes flowers its business and is interested in selling the best quality and most beautiful flowers.

“Allow me to make some preliminary remarks before going into the specific topic of supermarket flowers. Ideally, producers produce according to consumers’ needs in highly developed societies.

History shows how new technology brings many new products to consumers’ attention. In the past 200 years, steam power, railroads, telegraphs, telephones, cars, radio, television, fridges, air conditioning, mobiles, iPads, home computers, and more.

After a new product is launched, multiple new companies emerge to produce the novelty product or service. As soon as Karl Benz designed and built the world’s first practical automobile, every interested entrepreneur began to copy and develop a rival car brand.

What follows is a shakeout. Horizontal integration occurs with businesses achieving growth by purchasing related companies. On the other hand, vertical integration – backwards or forwards – happens when a business takes control of one or several stages of production.

Both strategies result in a handful of large companies selling their products or services worldwide and doing everything themselves: R&D, production, distribution and retailing.

Wholesale companies ask themselves if information technology, warehousing and the modernised transportation industry will herald the end of wholesale. Critics say that accessible communication between production and retail makes wholesale unnecessary. And indeed, those wholesalers who do not add value will lose their function to warehouse-transportation companies.

I have spent a long career in ornamental horticulture, in which hundreds of thousands or more relatively small family businesses form this sector’s backbone. Is our industry different, and can we escape from these ‘economic, commercial laws’? Will we remain a fragmented industry with many independent farmers, wholesalers and retailers?

Do the key characteristics of our industry – soil and weather dependency, perishable products, and substantial logistical demands – force us to continue to produce on relatively small enterprises which sell the products upon harvesting. Are we forced for good to store, cool, water and transport our products and follow a strategy modelling on short-term sales?

In arable cropping and dairy, the answer is clear. After thousands of years, with generation after generation doing more or less the same, the introduction of the tractor revolutionised agriculture. Later, more mechanisation and new breeding and selection techniques led to other revolutions.

Worldwide there is a massive shakeout and concentration in production: fewer but larger farms and higher production. In processing, the same thing happens, fewer dairy factories and the creation of multinationals. The faster the economy grows, the fewer farmers and people are working in agriculture companies.

Today, in the Netherlands, less than two per cent of the professional population is active in agriculture (including horticulture). In the 1950s, this was over 50 per cent.

During this time, we saw the arrival of the first large-scale supermarkets, heralding the end for many groceries, butchers and bakers. Apart from some specialist shops, which succeed in differentiating themselves in the marketplace, there is no escape from the supermarket competition.”

Read more about the superpower of supermarket flowers in High risks and low-profit margins (2).

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