Friday, August 29, 2008

Solving the cost-price squeeze

According to Table 10 in today's BEA report, real disposable personal income increased in July by 1.2% compared to July last year, following a 3.4% annual increase in June and 6.3% increase in May. Both growth rates (May and June) were above the 2.6% average growth in real disposable income since 2001, following 7 months (October 2007 to April 2008) of below-average growth.

Although real disposable income growth showed weakness in the last quarter of 2007 (0.6%) and the first quarter of 2008 (-0.7%), the above-average, year-to-year growth rates of 6.3% (May) and 3.4% (June) contributed to an 11.4% increase in real disposable income during the second quarter 2008 (see Table 6), one of the biggest quarterly increases in history, largely due to the Economic Stimulus Act of 2008.

Couple this increase in real disposable income with the core inflation rate holding relatively steady (see 8/15/08 post) and this means that [a sizable portion of] our end consumer in the green industry has the means with which to purchase our products and services, but do they have the desire -- particularly at the prices we must charge in order to cover our current cost-price squeeze?

My friend, Lloyd Traven of Peace Tree Farm, just reiterated to me of how tough it is for growers right now given the "20% increases in pots, film, chemicals, and 30+% for fertilizers, soil, etc---and don't forget to add energy, labor, etc. BTW, medical just went up again, and let's not forget tuition." The recent news of Hines Nursery's bankruptcy (and the rumors of others pending) also reminds us that no one is immune from the effects of this cost-price squeeze.

But the key question is what to do about it? Logic would tell us there are only two options -- either (1) employ the supply side strategy of continuing to shave costs out of the value chain internally or (2) opt for the demand side strategy of increasing price. Anyone who has been reading Making Cents for a while will readily know that I have been pushing for growers to embrace both strategies, but particularly option #2 (click on the differentiation tab on the right hand side of the page to view relevant posts).

On the flip side, however, never underestimate the value of a regimen of lean flow analyses on your value chain activities. Several growers at the Seeley Conference related some impressive cost savings testimonials to the rest of the group. You might want to give Gary Hudson a call if you're interested in finding out more about lean flow. Also check out recent issues of Greenhouse Grower and GMPro for lean-related articles.

Stay tuned on more on the cost-price squeeze topic later...

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