Volume 17, Issue 2
2023 Outlook for the Green Industry
Written by Dr. Charlie Hall, Texas A&M University
Going into 2022, the green industry was filled with a great deal of optimism after the stellar performance it had experienced in 2021. The perfect storm of positives allowed the industry to experience its best year ever in terms of top-line sales and bottom-line net profit. The demand during the COVID-19 pandemic left a shortage of certain types and species of plants, resulting in growers scrambling to build inventory. A challenge exacerbated by supply chain disruptions that had increased lead times for ordering major inputs which slowed the build-up in inventory.
However, Mother Nature had a different scenario in mind for 2022. Extreme weather conditions ranging from rain to drought and extreme heat to cooler-than-normal temperatures disrupted the spring and fall planting seasons considerably. Because growers (and downstream retailers and landscapers) had been able to raise prices in 2020-2021, top-line sales in spring 2022 were actually 1.5% higher YOY, but bottom-line net profit was down about 40% YOY. Retail sales were down to flat and customer counts in much of the country were down. With the price increases, however, average retail tickets were up YOY. Even box stores experienced positive, but slower sales and earnings before interest, taxes, depreciation and amortization (EBITDA) growth than they had witnessed during the pandemic.
While EOY benchmarking is still underway at the time of this writing, it is safe to say that sales and profit in the northeast and the rest of the country was mixed in 2022. Some growers were up by double digits while other growers were down YOY by the same amount. However, while the comparison to 2021 was not favorable, a survey I conducted mid-year showed that all of the growers that responded were up in terms of sales and profits compared to 2019 (pre-pandemic).
The weather-related headwinds in 2022 were exacerbated by the continuing labor shortages that hampered the ability of green industry companies to capitalize on the surge in lawn and garden spending. It is becoming increasingly clear that labor markets will not return to pre-pandemic levels. The retirement of baby boomers, lingering challenges associated with the pandemic for women in the workforce and career revaluation among many younger workers are driving a structural shift in the labor market that is affecting all sectors of the economy, including the green industry.
Nonetheless, overall consumer spending for durable and non-durable goods has remained elevated and this has exacerbated inflationary pressures. The surge in goods spending, which has helped lift the economy out of the depths of the pandemic recession, continues to retreat and give way to a faster pace of spending on services. That noted, the up-shift in services spending will likely not be enough to keep overall consumer spending growing at levels experienced during the pandemic, as household savings from government stimulus continues to dwindle.
Another bright spot is that the pervasive supply chain wrinkles that have been hampering many parts of the economy continued to be ironed out over the course of 2022 and the costs associated with supply chain logistics will likely continue to recede to pre-pandemic levels. However, de-risking of the supply chain continues with re-shoring and more intensive strategic partnering relationships being forged. Accordingly, green industry supply chains are improving and should be functioning closer to normal by late 2023.
In last year’s Index of Prices Paid by Growers, I validated that grower input costs increased 10.1% in 2021 and my forecast for another 8% increase in 2022 appears to be accurate. While rising input costs won’t likely subside until late 2023 (another 3.6% is expected in 2023), there has been less price sensitivity throughout the retail and landscape portion of the supply chain and growers across the industry have been able to raise prices. Thus, working capital has not been as constrained as in the past. With the additional cash flow, firms have either paid down debt, invested in CAPEX, or increased inventory (if they could source the inputs). This build-up in inventory will inevitably lead to future surpluses of certain plant materials, however this bull-whip effect will not likely occur until after the 2023 season (or beyond for longer-term crops like trees). In the interim, firms should focus on the elements of their value proposition to continue to justify their higher prices throughout the supply chain.
There is one question that I still cannot answer, however, and that is whether or not consumers will continue to spend on lawn and garden products and services at the same elevated rate as they have during the pandemic. Historically, their “consumption” has retreated back to trend levels as the industry has not been successful in retaining many of the new consumers that engaged in gardening and landscaping when they stayed at home more during periods of downturns (or now pandemics). While there has been greater emphasis on the health and well-being benefits of plants, the jury is still out as to whether we have moved the needle in getting them to view the industry as “essential” and something they need in their lives daily.
Lastly, as I indicated last year, the next two years will likely bring more merger and acquisition activity since venture capital firms are starting to show interest in the industry again. More B2B vertical coordination tools will be used with more standing orders, increased lead times, greater use of webshops and online platforms, and more virtual sales contacts/demos. Strengthening vendor and customer relationships will be even more critical. Innovation will lead to alternatives to plastics and a more sustainable mindset throughout the supply chain (e.g., less weight, less waste, lower carbon footprint). E-commerce applications will expand (albeit at a slower rate than what occurred during the pandemic), and the use of technology will continue to disrupt the status quo (e.g., artificial intelligence applications, order management, personalization, warehouse automation, and big data analytics). It’s a very interesting time to be in the green industry and interesting shifts are on the horizon.
Editor: Chris Laughton
Contributors: Dr. Charlie Hall and Chris Laughton
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