What Lenders Should Know With Demand For Horticulture/Nursery products on the Rise
On this podcast we cover recent developments in the wholesale horticulture/nursery industry, he unique challenges that the “living and growing” nature of the inventory presents to those up and down the supply chain, and the structuring of distinct selling period advancement rates and other important considerations for lenders with portfolio exposure to the industry.
Steve Katz 0:10
Hi, everybody, and thanks for taking time out of your busy schedule to listen into our Hilco global smarter perspective podcasts. Most return listeners know by now I’m your host, Steve Katz. But if this is your first time on the podcast with us, well, then welcome. We’re glad that you could join in. Today, we’re going to be talking to Gary Dressler, who’s a returning guest, and he’s senior valuation director at Hilco valuation services. And he’s going to be talking about what’s been going on in the wholesale horticulture and nursery industry. A lot of people might not think about the fact that Hilco plays in that area. But it is a very large market. And in particular, today gear is going to be talking about larger growers. He’s going to walk us through a variety of other considerations for abs to consider as they move ahead with existing and future borrowers in the space. So Gary, welcome to the podcast.
Gary Dressler 1:01
Thanks, Steve. Great to be here.
Steve Katz 1:04
Big business, nurseries and horticulture, so we’re glad to have you on. And you know, being from the Midwest, this is usually around the time that I actually stopped thinking about my yard and garden, all the plants that I probably killed over the course of the summer. But you know, the horticulture and nursery industry is, as I said, big business, lots of lending behind it. And I’m sure the p&l never sleeps. So let’s just jump right into it. I’m guessing the the wholesale nursery business, like so many others is closely tied to the housing market. In addition, of course, to the overall financial health of the country. And there’s quite a bit going on right now in both of those areas. So what can you share about those relationships? And what’s been learned over the years that can help these businesses right now?
Gary Dressler 1:52
Yes, Steve. I mean, that’s absolutely, uh, right. I mean, the wholesale nursery industry, very impacted by the construction levels. And, as everyone knows, more recently been slowing down with higher interest rates, you know, slashed mortgage rates. But, you know, frankly, we’ve seen numerous peaks and valleys like this over the years. And, you know, certainly we’re not at anywhere close to the issues like during the great recession with the housing crash, which that kind of peaked in 2008 2009. At that time, you’re prior to that demand was strong. And so the, the wholesale nursery industry had built up a lot of inventory. Know, when the housing crashing occurred, there was a lot of inventory, low demand. And frankly, consumers at the time, got very accustomed to seeing discounted pricing. And the industry, the wholesale industry now basically had to move the product being a live product, and there was a lot of discounting. And when that discounting happens, something like that it takes a while to break that cycle. And you know, basically, if I’m a consumer and I bought a plant, a prior year, it was at this level, discount the level, you’re not going to be too quick to thought tangle a lot more, and that slowly improve your margins improved for the wholesale, wholesale nursery industry. Everything from there was less inventory. And also this constantly, this industry constantly coming out with new plant types, and slowly pricing, more or less normalized.
Steve Katz 3:47
Yeah, I mean, it does make a lot of sense. And I think we and other podcasts, we’ve talked about the fact that there’s a lot to be learned from these trends that we see over time in certain types of cycles, like recession, and so forth. But when you talk when you’re talking about trends, the pandemic obviously is a totally different animal. So I’m curious, how did that period impact the industry?
Gary Dressler 4:11
It was almost like the opposite. You know, the, the pandemic it was, like you mentioned totally a different animal. It was you had after the initial impact from the pandemic and this lockdowns, very strong home sales, and there was a huge demand for gardening products. And that really contributed to a very strong, robust industry of growth. I’m gonna throw out a few statistics. By some estimates, the pandemic created over 18 million new consumer gardeners. And what I found fascinating was a lot we’re in the millennial age range, and you know, working from home, so you have more time at home without the commute disposal income was strong, and just daily access to outdoor space. In at the same time with the pandemic, there was a strong construction level increase. And no, there was probably in some stats, you know, from 2020 to 2021. The younger customer demographics, US and Canadian God has sent has actually experienced like a 65% increase in millennial customer demographics. And for Gen Z customers a 44% increase. So it was very strong. According to the National Gardening Association, in 2021 42% of the respondents increased the gardening activities due to the pandemic. And yeah, most people have said, at that time, I am sure going back to work, it’s killed off some from the from those heights, but he’s still has been very strong. And I would say this is after prior issues, like I mentioned about the Great Recession grow is did not over ROI expand their playing things too much. So even with some weakening, you know, construction has slowed down more recently, less disposable income with recessionary environment. Industry is really a lot better prepared than it had been to say back back in that 2008 2009. And other times when we’ve had ups and downs cycles.
Steve Katz 6:40
Yeah, well, um, you know, former Fool me once, shame on me fool me twice. Shame on you know, it’s the other way around actually filming. Shame on you fool me twice. Shame on me. But yeah, I think it’s, you know, sort of holding back and restraint. I think we’ve, again, we’ve seen in any number of industries, in terms of inventory levels, Holding, holding those and making sure that you don’t have this sort of irrational level of exuberance over what could be because it does seem to come to an end as it did here. So as you know, I speak with a lot of specialists across a number of industries. And there are some pretty consistent themes these days, including consolidation and the shift to e commerce. What’s going on in the in the industry related to those?
Gary Dressler 7:27
Yes, sure. The retail distribution channel. So this is, you know, there has been some consolidation and this hasn’t been like just over overnight really has been over the last 20 plus years, there was a shift of some of the business that was done by local independent nurseries, to these large home centers, you know, mass, birches names, everyone has heard of Home Depot, Lowe’s, Walmart, Costco, target as such. And so with a relatively low price of most live, you know, plants that you would see it at the retail stores, it encourages impulse buying from consumers. So they’re at the stores, whether, you know, buying the plants when they’re buying something else, and I would say with these large retailers, is they have that much more power. And they’re that much more demanding of the large wholesale industry that are supplying them. And so it’s critical to have had very strong demanding delivery schedules, you had to be able to fulfill large volume requirements. Oftentimes as value added services, everything from helping the retailers on their ordering time to order, it may be even as far as having some paying for the wholesale was paying for some quality control and maintaining of the plants at locations. But I would say even with that consolidation, the there are still so many it’s really still a highly fragmented industry and is still a very large number of local independent nurseries. In regards you mentioned about e commerce, the industry was you know, not a early adopter of ordering online. But there has been some increase in that avenue. So a end user can go online, place a order for a plant to from a large grower and pick it up at a local independent retailer. And the advantage of the independent retailer in that case is tip While you’ve gone to visit one of their stores, and you picking up a plate that you order online, is frequently that you can be buying something else from the from that retailer. But I should point out is still a very small percentage of sales are being conducted through E commerce online is growing, but it’s still very, very small. There’s a few other trends I can point out. One is, there’s been a significant increase in live tree plant, no flowers being imported to the US from overseas in the last decade in 2011, those values, the inventory value was approximately 1.8 billion in 2011. And it’s now over 3.5 billion. So that’s cutting into some US growers business. And the other thing that I have seen visiting a number of nurseries is just with a high increase in labor costs. And the continued need to improve quality of the of the plants and consistency of how the plants look, which is very important to Oh, retail is is has been a increasing automation at the actual nurseries. So a plants of a small size of say in a one gallon pot will be transferred to a two gallon pot, that process which was very labor intensive, has become a lot more automated is also out in the field, or the made equipment that now can better space, the plants from each other. Also automation of the pruning of the plants, again, for consistency, consistency, or reasons. So while there’s a cap a cost for all this equipment, the savings is in labor, and again, plant quality, it does get improved.
Steve Katz 12:08
Yeah, very interesting. You know, you kind of touched on it briefly earlier, and I want to go back to it because I thought it was interesting, you know, the the very nature of the business selling a living and growing products must create some unique challenges that other industries don’t face. I mean, even with perishable foods, which are really tricky. Obviously, you don’t have that continuing growth consideration. So what what kind of burden does that place on operators in the industry and how challenging is that for them?
Gary Dressler 12:43
Yeah, I mean, it really is and no, it really makes this a unique inventory for collateral purposes for your for a lender. As you said these are living and growing products and health of the plants, trees, shrubs, Cetera is subject to weather conditions. One you have issues you know, potential issues with past potential potential disease and the requirements of continuing proper maintenance and watering of the plants. So you know, the handling of perishable products often requires nurseries to So customers are right now, basis, plants already mature, and they have to be shipped out quickly. So the constant maintenance is so critical. The other thing is is just the nature of the industry is forecasting is so important. Know the growers. They use their internal forecasts but also on forecasts from key customers. If the sales are overly aggressive. The grower can run the risk of carrying these unsold mature crops into next year. And that’s obviously not possible for certain plant types. Or no unfortunately, crops would have to be scrapped if not sold, but then is a forecasting for growers. The forecasting is so critical. And growers use both key customer forecasts as well as internal estimations. If the sales forecasts are overly aggressive, the grower runs the risk that they’re going to be carrying unsold mature crops and some you know some plants you can’t carry over until the following year. But you know, the crops would have in some crops would have to be scrapped. If they’re not sold and cannot be carried over into the following year. You know, poor weather conditions could also delay the start of a selling season. So all these things can impact the grower a forecasting planting levels to coincide with the sales expectations is so critical to every grower or the other? No, that’s a little different in the industry compared to a lot of other industries is, it’s a highly seasonal business a varies by region. And sales fluctuate by growing season and demand in different areas of the of the country.
Steve Katz 15:20
So, so much to think about in terms of what you’re talking about. And it’s it really is complex. I mean, it’s, you know, the more I think about it, the more I realize how highly specialized this business is, and how unlike almost anything else from an industry and inventory perspective, it is, which makes it I would think, doubly important for lenders to really stay in the know, if you will, about what’s going on with borrowers in their portfolio. So what thoughts can you share with acid based lenders who have exposure to the industry, what they you know, things that they should be looking at focused on conversations they should be having right now?
Gary Dressler 15:58
Sure, every industry has its complexities and horticulture nursery is certainly no exception at all, is it’s a lot of lenses to stay on top of everything. But you know, we suggest you know, right now, key company financial data, these are very similar to many other industries, whether it’s, you know, sales, levels, gross bhajans, inventory levels, turnover, but no key, some key things for the lender are in this industry. Some large wholesalers use different costing methodologies, some use standard costs, which might be more similar to other industries. This industry also used many wholesalers use a port cost method, I won’t go into the details of that, but critical no matter what method of costing is used, it is an industry that the lender has to stay on top of with proper company reporting. So you don’t get to the end of the year find out that there were large scrap levels, that a sales did not materialize as well and as a lot of carryover, things of that nature. And a lender has to be comfortable with a with the company continuous program of monitoring the quality and health of its plants. Obviously, as we discussed, you know, being a live product, and things such as adverse weather conditions, pest control, things of that nature, scrap nature of the industry, but scrap occurs. So scrap should be monitored levels of it, and provided to the lender on a regular basis. But I would say, again, key for all industries, but this one as well product margin has to be monitored is if a product is has to be discounted significantly, which a lot of times occurs later in the busy selling season has to be reviewed. Additionally, input costs of labor materials fuel have increased in recent years, well documented, and companies have had to pay higher wages and various geographies. There’s a lot of nuances in the industry, some eligible inventory, that cup that lenders are advancing on for some wholesalers, it’s eligible for inventory, even when shipped and inventories at retailers. Again, that’s not for all loans. But on some that is the case and the monitoring of shrink rates at retail is is would be a critical in that situation. And obviously there’s all your regulations as far as EPA and other water agencies, disposal of waste and things of that nature has to be taken into consideration. We also recommend separate advanced rates, one in conjunction with a low selling period, and one with a high selling period. Now typically the highest selling period would have the higher recoveries, there’s a high percentage of mature crops at that time. So that’s a another thing is the issue with the low selling period is it really can be a back low to sales strategy. You’ll have a lot of expenses costs for maintaining the plants. And it’s not until the higher selling season where it’ll flip back and make it more profitable. So there’s numerous considerations associated with these.
Steve Katz 20:06
Yeah, yeah. Listen, you know, it’s exactly what I thought it just, there’s, it’s such a complex business and you said it, you know, every industry has its nuances, and lenders need to stay on top of it. But there’s just a lot going on here. So, you know, I really appreciate you taking the time. Unfortunately, we we’re out of time now. But I think you’ve given listeners a lot to think about, and a lot of great information. And it’s clear that you and the team can bring a lot of value to the relationships that they hold with their borrowers across horticulture and nursery so if they have any questions, want to learn more, maybe have something happening with one of those businesses that they just want to bounce off you what’s the best way to get in touch with you?
Gary Dressler 20:49
Sure. It’s been my pleasure. Enjoy speaking with anyone who has any questions on the topic lender or borrower. My phone number, cell phone number is 401-225-5901. My email is G Dressler. So that’s g d r E, S S L E R. At Hilco global H I L. Co. G L. OB al.com.
Steve Katz 21:23
Great. All right. Thanks again, Gary. Really appreciate it. And listeners. As always, we hope that the smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And one last thing please remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts like Gary at Hilco global.com forward slash smarter dash perspectives. So until next time for Hilco global I’m Steve Katz.