*[This article was originally published by Knowledge@Wharton on January 3, 2012].
Analysis on the floriculture industry and the countries that are predominant in global flower supply.
Most Americans purchase roses only once or twice a year. But do they ever think about where these roses come from? Do they ever consider what it takes to get them to their local market just in time for their purchase?
The flower industry is dominated by only a few major countries: 83% of the world's cut flowers come from Holland (40% of production value), Colombia, Ecuador and Kenya; and 73% of the cut-flower production is imported by Germany, the UK, the US, Holland and France.
Chances are that the roses purchased for Valentine's Day or Mother's Day came from Colombia. According to Asocolflores, the Colombian Association of Flower Exporters, three out of every four flowers sold in the US are grown in Colombia, making it the number one exporter of flowers to the US. Flowers are also Colombia's second leading agriculture export, distributed to 89 countries, making the country the number two exporter worldwide. Together, the industry accounts for the second-leading agriculture export in Colombia. Similar to the coffee industry, Colombian flower producers are part of growers associations. Currently, the firms are split between two organizations. Asocolflores represents the large exporters, while Fedeflores represents the medium- to small-sized Colombian-owned farms.
Colombian flower farms have leveraged the country's natural climate, favorable economic conditions (including exchange-rate advantages) and proximity to the US to develop the American consumer market into its largest importer. What is not well-known, however, is that this relationship between Colombia and the US in the production and sale of flowers began more than 40 years ago. It has facilitated both the growth of the Colombian flower industry and the broader development of the Colombian economy. Have the Colombian flower farms outgrown their exclusive and dependent relationship with the US consumer market or does the industry still have room to grow and expand the flower demands there?
An Interdependent Relationship
Since the flower industry's inception, Colombia and the US have had a robust and almost symbiotic bond. David Cheever, an American university student, wrote an academic research paper that identified the key local characteristics necessary for industry development: ideal climate and land, low-cost labor, suitable transportation and proximity to the US market. His analysis sparked the initiation of the Colombian floriculture industry. In 1969, he and three others put his ideas into practice by launching Colombia's first multinational flower company, Floramerica. Other entrepreneurs followed their lead and entered the new market, investing significant amounts of money into the capital-intensive industry.
Many years later, in the early 1990s, the Colombian flower industry became a primary focus in the trade negotiations between the US and Colombia. The ATPA (Andean Trade Preference Act), first passed in 1991, used economic and trade incentives as a key tool to help four Andean countries (Bolivia, Ecuador, Peru and Colombia) combat drug production within their borders. To encourage exports and increase production, the pact eliminated tariff duties on key products, including cut flowers. In 2002, the trade agreement, now called ATPDEA (Andean Trade Promotion and Drug Eradication Act), was renewed and expanded further so that, today, cut flowers are Colombia's second-largest category of US imports under the act.
The US has also given direct aid to Colombia, leveraging the flower industry to promote and distribute social aid. In the past, Colombia has received funding from sources such as the US Agency for International Development (USAID). As a result, today this sector is responsible for an estimated 172,000 jobs, of which 92,000 are associated directly with floriculture. This sector is also the largest employer of women in rural areas, with women comprising 65%. The "corporate responsibility" the industry has been able to implement includes childcare centers, subsidized meals and continuing education. According to Mónica Morena, an operations manager at C.I. Flores Ipanema Ltda., outside of Bogota, all the employees are provided with a daily breakfast of agua de panela (sugar water) and bread, a subsidized lunch of 4,000 pesos (~US$2.20), and free transportation to and from the farm. For an additional cost, they also have access to child care and continuing education (elementary and secondary).
The US-Colombia relationship within the flower industry is not one-sided, however. Both countries have benefited economically through this arrangement. For example, about 150 flower importer-distributor companies alone have been founded within the US, mostly in and around the Miami area. Cut flowers have also become Miami International Airport's most important cargo item, while Bogota's international airport handles 200,000 tons of flower-related air freight annually. Freight costs paid to US- and Colombian-based airlines represent approximately US$200 million per year. From the US-based importers to the brokers, truckers, wholesalers and floral retailers, the industry is the source of US$7 billion of added value for the US
Current Challenges for the Industry
The flower industry faces several challenges within the sector. First is an oversupply of flowers with an unmatched sales demand. In recent years, flower production has expanded as a result of the increase in the amount of lands being cultivated and the more advanced technologies used in the different types of production. These factors allow for growth in production efficiency, which, consequently, increases the supply. However, flower demand does not follow this same trend. The industry is highly dependent on the US consumer market, which receives 80% of Colombia's flower exports. This high level of sales exclusivity and key characteristics of the US market itself contribute to the issues related to excess supply. The US has a relatively low per capita annual consumption of flowers (US$29).
In addition, the seasonality of sales within the US presents challenges in supplying for the two peak days of the year: Mother's Day and Valentine's Day. As Morena notes, "In order to meet Mother's Day and Valentine's Day demand levels, we have to significantly increase flower production, time the cultivation of the roses perfectly and bring on about 1,000 additional seasonal employees." In Colombia, flowers may be produced year-round, making the supply constant. However, the demand for flowers in the US is extremely seasonal. This creates an awkward mismatch between the traditional microeconomic factors.
Another market factor that affects Colombia's flower business is the distribution channel. More than 50% of the flower market in the US, for example, is concentrated in supermarkets. This figure has been increasing year after year, forcing producers to conform to supermarket standards and pricing. As a result of preferences for high-quality flowers at lower prices, producer margins have been reduced. Adding additional pressure, the value of the Colombian peso has risen against the US dollar, reducing profit margins even further. With an economic recession, decreased margins and an appreciation of the peso, does it still make sense for Colombia to concentrate almost entirely on one market?
Given these concerns, the floriculture industry in Colombia must consider several alternatives in order to maintain and ideally increase its global market share. One option is to grow US sales through a focus on expanding demand -- in other words, "expanding the pie." This strategy would utilize a marketing campaign promoting flower purchases throughout the year rather than only for specific holidays. The campaign would strive to increase Americans' per capita consumption to a level similar to that of Europeans. Asocolflores has already identified this option as a key strategic objective for its group. This approach, however, still leaves Colombia susceptible to the risks of single-market dependency and exchange-rate fluctuations.
A second alternative for Colombian businesses to explore would be expansion outside the US With its growing middle class and obvious proximity, the broader Latin American market could provide additional consumers to absorb the excess supply. Currently, Colombian producers export US$2.9 million to Mercosur (Argentina, Brazil, Uruguay and Paraguay) and another US$2.9 million to Central America and the Caribbean. However, countries such as Mexico and Brazil produce enough flowers to meet their own domestic demands, and Ecuador itself is a global exporter of flowers and in direct competition with Colombia. It is, thus, unclear whether this market could, indeed, provide sufficient growth potential.
Farther away, Europe presents another potential market in which to expand since, currently, only 3% of flowers purchased there have Colombian origins. In addition, Europeans' per capita consumption of flowers is much higher than that of Americans -- on average, the Swiss spend €77 (US$112) on cut flowers per year (versus the €20 (US$29 spent by Americans). Colombian producers have two primary options when entering the European market. They can ship the flowers directly from Colombia, or consider the multinational route and establish a production presence in Kenya. The former would help alleviate excess supply issues but add additional challenges related to distance and the perishability of the cut flowers. The latter would improve the physical proximity but present new challenges related to cultural differences, political instability and language barriers. Neither option addresses the challenge of distribution channels moving from primarily florist-based sales to supermarket-based sales. The bottom line is that, with Holland already dominating the European market with 67% of the market share, it is uncertain whether Colombia would be able to become a dominant player there.
In addition to expanding consumer demand, Colombian flower producers also have the potential option of reducing production costs and increasing process automation in order to improve profit margins with or without an increase in revenue. The floriculture industry, regardless of the production country, is highly dependent on manual labor. Automation and technological advances would obviously reduce expenses. In addition, improving transportation infrastructure and production technology would provide producers with increased control over their supply production and delivery and help to improve efficiency within each of these processes.
Reducing costs through automation, however, opens producers up to new issues related primarily to the risk of operational losses. As explained by one of the trolistas (the men who transport the flowers between the greenhouse and postharvest operations) at the Colombian rose farm, C.I. Flores Ipanema Ltda., "the moment a rose touches the ground, it is no longer suitable for sale, destroying the entire value of that flower." Unlike an automated trolley, which Ipanema did try to implement at one time, a human being has the ability to not only control the flow of transported flowers, but also use additional care and judgment to ensure that the flowers arrive safely at their predefined destinations. Thus, given the fragile nature of their product, flower producers must find a delicate balance between automation and manual labor so that both operational expenses and operational losses are minimized.
As the global floriculture industry becomes more and more competitive, Colombia's producers must find ways to adapt. Relying on an intimate knowledge of the industry, high-quality flower production and future technological advances to help them navigate through the current challenges that threaten their survival are just some of the tools to be engaged. Each firm will have to explore its strengths, weaknesses and specific cultures to determine which path forward provides the most growth potential. All the possible alternatives present clear advantages and disadvantages. The only option currently not on the table for the Colombian floriculture industry is to simply stand still.
This article was written by Alicia Figueroa, Adriana Lima and Elizabeth McCracken, members of the Lauder Class of 2013.
*[This article was originally published by Knowledge@Wharton on January 3, 2012].
The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.