Art Parkerson is the owner and CEO of Lancaster Farms, a wholesale container nursery in Suffolk, Virginia, right down the street from one of the largest naval bases in the world.
“I think the term ‘spending money like a drunk sailor’ might have been coined in our hometown,” he says. “Having too much money all at once makes you very stupid. Even if you are not stupid, sudden infusions of cash make you stupid.”
The nursery industry has a clear and a long history of “boom or bust.” Parkerson and others in the industry are keen to avoid the mistakes that led nursery owners in previous generations to overproduce and be left holding tons of expensive-to-produce crops years later once the demand has dried up.
This is a topic that has been on Parkerson’s mind lately. In July, he and Jake Pierson led a Nursery Swap Shop session at Cultivate. Pierson is co-owner of Pierson Nurseries and leads the Nursery Community Connector Group, a grower-centric focus group that is part of AmericanHort. The two men asked the question to the growers in the room: You just had two of the best years ever. You may be profitable for the first time ever. How are you spending that cash? Are you buying more land, doing those capital improvements you've been meaning to do, taking care of your employees? The answer depends on a multitude of factors and isn’t as straightforward as it might seem.
How did we get here? There are a few reasons the last two years have been so good. The COVID shutdown added to the already-strong demand and great sales followed.
So top line growth has been great. But costs are rising everywhere. Supply for raw materials is difficult to manage. And once you’ve sourced it, it’s tough to keep a steady supply.
As Dr. Charlie Hall discussed the current state of the horticulture industry at Cultivate’21, he said that we’ve moved from the Great Recession to the Great Shutdown to the Great Conundrum.
“We’re in a period of probable growth but we’re constrained,” Hall said, “but that’s not necessarily a bad thing.”
The increased business that headed to horticulture during the COVID shutdown has resulted in a high level of working capital.
“I have never seen working capital as high as it was going into 2021,” Hall said.
But Hall cautions against aggressive spending. Whenever consumers are forced to remain at home, whether it’s due to economic reasons or public health issues, the horticulture industry gets a “shot in the arm,” he said.
“But in every single case bar none (since 1949), when people make the switch to buying durable goods like cars and refrigerators, they pull back on buying lawn and garden products,” he said.
And in the past, the industry hasn’t been able to maintain the public’s interest. On top of that, there has been a huge disruption in the supply chain. Not only are there not enough truckers to move product, Amazon and other delivery services are stressing the system even more. The plant shortages of 2020 and 2021 are challenging the industry as well.
Mark Sellew, owner of Prides Corner Farms in Lebanon, Connecticut, still can’t believe how good the last two years have been, with growth of more than 25% each year. However, he agrees with Dr. Hall’s points and says growers should be cautious moving forward. The stay-at-home gardening binge was nice while it lasted but nurseries shouldn’t count on a repeat performance.
“The ‘COVID bump’ is definitely over now,” he says. “All the increases in sales this year will be in March, April and May.”
Next year still looks promising, Sellew says. Plant material is still tight and supply issues are limiting expansion.
Pierson says he expects next year to be a bit slower than 2021, but not by much.
“Northern New England is in the middle of a huge housing/construction boom, and it doesn't look to be stopping anytime soon,” he says. “The slowdown will come from lack of supply of all things, not a lack of demand.”
The supply issues might be a blessing in disguise. Those “constraints” Hall mentioned may help stop nurseries from overextending themselves. Parkerson says there are several factors keeping nursery growers from repeating past mistakes this time around. The first big factor is labor.
“We could expand, but can we find the people to make it work? We're having a hard enough time finding people to simply do what we did last year,” he says.
The next factor is liner availability. It’s hard to find good liners now, especially in trees. Growers have to plan far ahead, because many suppliers are already sold out for next year.
The third factor is another that Hall addressed – transportation.“It's getting harder and harder to roll our stock down the road,” Parkerson says.
And finally, what may be the biggest throttle – the supply of containers. Parkerson says his container supplier has capped how much Lancaster Farms could order for next year. So even if they wanted to increase production by 20% to try to meet the demand, they couldn’t.
Prices and profitability
So what can you do to turn a profit if you can’t increase production much and your input costs are climbing? You can start by raising your prices.
“We’ve raised prices, and will keep raising prices,” Parkerson says.
Due to the pent-up demand, the market is bearing all price increases. Unit-wise, Lancaster Farms is still well below its peak years of 2005-2007. However, Parkerson says profitability is the best it’s been since he joined the business in 1998. This is due to three main reasons. No. 1: When you sell out, you make money. He says the biggest lesson from 2020 is how much easier it is to run a nursery and how much more money he makes when all of the plants leave on time.
The increased business that headed to horticulture during the COVID shutdown has resulted in a high level of working capital.
“Looking back a decade or more, I shake my head because clearly ‘unsold plants’ (or maybe I should say ‘slow-sold’ plants) is the biggest profit drain my company had,” Parkerson says. “One of my father's favorite sayings is ‘You don't make a dime until you've sold number twelve of a dozen.’ So, I've known this intellectually since I was a child. But to see it, feel it, experience it. I sure don't want to go back to coddling stragglers and remainders...spacing, pruning, moving, standing up every time the wind blows, watering, fertilizing, spraying, pruning some more...”
The second reason profitability has been so high is the Paycheck Protection Program loans. And the third is that some price increases are slower than others to catch up. For instance, some products were purchased at 2019 prices and sold at 2020 prices. This is where nurseries should be cautious.
“Of those three reasons, no. 2 and no. 3 will not come back, and we have no control over them,” Parkerson says. “All we can hope to control is no. 1: sell what we grow. This leads me to think production planning is super important right now. It always is, but it just seems to be more critical than ever.”
The key to surviving the last recession was inventory management. The nurseries that learned how to do it well are still around. Sellew hopes the industry has learned those lessons well.
“I believe there is less delusional exuberance in building plant inventories with the hope to sell it,” Sellew says. “That strategy bankrupted a lot of nurseries and the ones still standing are very good at managing their inventories.”
Some of this management is dependent upon nursery size, market and other factors. Pierson felt the two-year boost in Maine, where his nursery is located. He says the last two years were two of the highest sales years in his company's history. Last year was their largest ever and 2021 looks like it will be even bigger.
Located in Southern Maine and witnessing the push of people moving northeast from Massachusetts, the nursery is well-positioned for growth. Pierson Nurseries sells to landscape contractors, who have stayed busy in the Northeast for a long time. There have been downturns, but they’ve come back strong after each setback. Pierson’s product can’t be outsourced; it’s heavy, in-demand material that is not readily available just anywhere. The region’s public is demanding more and more. And it’s capital-intensive to set up shop, which means it’s less likely that a large competitor will move in.
Indeed, it’s been a record-breaking two years in the nursery industry, but since the recession, Willoway Nurseries in Avon, Ohio, has learned to take a conservative approach.
“Our vision and strategic plan focused on what mattered most to us, which is to pay down debt, manage expenses and invest in capital improvements,” says Matt Steinkopf, head grower at Willoway. “We continue to look for ways to improve processes and reduce expenses. We are constantly evaluating our Lean flow functions, labor management and capital needs.”
Knowing that the good times may not last, Willoway wants to be ready for whatever comes next. As a result, the nursery has been concentrating on its “internal battle of scrap.”
“We have spent many hours thinking of the best capital improvements that would result in the fastest ROI to help,” Steinkopf says. “This includes revamping sections with changing the grades to eliminate standing water, adding heaters, helping our water quality with self-cleaning filters, adding copper and an ECA [electrochemically activated water] system. All of this has helped reduce our scrap numbers.”
Planning is critical at Willoway, and they follow the mantra of expect the unexpected.
“Not every year is going to be a lucrative as the last. We find that it is important to always stay on task and follow the plan,” Steinkopf says. “In years where the profit is higher, we are able to pay down more debt and invest more into capital improvements.”
How are these growers spending that pandemic windfall? Sellew says Prides Corner Farms is using its cash to invest in the business. The biggest project to be tackled is a new propagation facility with glass and state-of-the-art technology.
Pierson Nurseries is spending its pandemic windfall on nursery expansion. Jake Pierson is planning more container and field production, as well as a new office.
“We are looking to the future to stay ahead of demand and become a destination company for employees,” he says. “The opportunities that Maine holds for us with more construction and more people moving from the cities to live here are incredible and we want to be well-positioned to capture them.”
Pierson is not worried about overextending his company. At least not yet. Business in New England is booming, and Pierson Nurseries has room to grow.
“Frankly, we very rarely don't do some sort of expansion every year,” he says.
It may not always be a large expansion. For instance, last year the Maine wholesale grower rebuilt its garage space to make the maintenance division more comfortable and efficient. This year they are expanding their production space.
“Staying stagnant is not in our vocabulary,” Pierson says.
Some of Willoway’s recent capital improvements include streamlining the potting system and replacing outdated equipment. The nursery also invested in new IT equipment to help its employees be more efficient in their abilities to record and share data.
“The last thing we did for our facilities was look into our risk management and found weak points that we needed to correct. We found that our back-up pumps were a problem, so we added more back-up pumps for maintaining optimal plant growth,” Steinkopf says. “Generators were added or upgraded to handle the facilities during power outages. The other part of our risk management was the inventory. We want to be able to handle and supply all our customers’ needs. Balancing this thought with optimizing square footage usage has been a real challenge, but that is where the site improvements have taken a real turn to help us.”
Besides all the site improvements, Willoway continues to focus on its employees.
“We have changed policies to make the work-life balance more accommodating, and there has been a big focus on simplifying job duties and cross-training to help when people are out sick, Steinkopf says. “We took part in having different companies coming in to help improve the morale and cohesiveness of the people within Willoway.”
Whether times are good or bad, Willoway is and always will be a forward-thinking company that is always prepared for the hurdles and triumphs ahead.
Parkerson has been cautious at Lancaster Farms, due to the origin of the cash infusion.
“It is a windfall, precisely because we won't be able to repeat the PPP money-drop or the delayed cost-hit,” he says. “A windfall lets us take a longer-term ROI than what we might think wise.”
When he considers how to invest money in his business, the question he asks repeatedly is, "What can we do today that will save us money for 20 years or more?" He doesn’t believe the windfall is enough to build “the nursery of the future.” So he hasn’t pulled the trigger on anything really significant. A few metal barns to protect equipment and materials from sun and rain – the type of upgrade that doesn’t make any money but saves a little bit over a long time without requiring additional fixed costs.
There are obvious steps to take for growers who have had capital improvements simmering on the back burner for years. Fix the roof, install new energy-efficient windows in the office, update your delivery fleet or buy a few tractors.
The problem with that plan is that the time to start those capital improvements was 12 months ago before everyone else had the same idea. Now, good luck finding a contractor to complete your project in a reasonable timeline for a reasonable price, assuming they can even get the materials to start the job.
Another question to ask is how much of the windfall should go to your employees? Parkerson says that since these two years are really the only good ones his company has had since the Great Recession, most of the cash needs to be reinvested in the business. He’s not handing out big raises. About 20% of the windfall has gone to employees, and that’s been via bonuses and profit-sharing (retirement) contributions instead of making changes to base pay.
A lot of their pandemic cash ended up in the bank, and although it feels like it's losing value every day, Parkerson says that’s preferable to making a huge move that could have balance-sheet repercussions for decades.
“If you buy new automation or create new positions or expand your production, you'll be paying to keep all of that running forever,” he says. “You have to KNOW it's worth it.”
Editor's note: Watch for part two of this story in the September issue.