Interview With Dr. Charlie Hall
Plants Without Borders is fighting inflation by making global supply chains accessible to all. I recently had the opportunity to interview Dr. Charlie Hall, Chief Economist of AmericanHort.
Topic: How can green industry businesses invest in their supply chains and use data to fight inflation and prevent shortages?
Mark: How did you get your start in horticultural economics?
Dr. Charlie Hall: I was going to go out in the industry and make my millions in the nursery business after my master’s degree. And my major professor said, “Charlie, man, you need to go on for a PhD. You’ve got the gift of BS.” So, I kid you not, that’s exactly what he said. So, I went on for a PhD in economics. So, I had to…horticulture and the economics together. And that’s how I got off into doing research and outreach in the horticultural economics area. So, I’ve always talked about how do you make money doing this?
Mark Javier: I think a lot of small business owners and even large businesses sometimes struggle to take in new data to inform decision-making. Have you noticed this at all? If so, what have the major roadblocks been?
Dr. Charlie Hall: Yeah, I’ve noticed quite a bit of it. But there’s this whole phenomena right now in the business world called “big data”, and analyzing big data and using machine learning and artificial intelligence, and so forth.
And really analyzing market research data and consumption data, and so forth. In our industry, we have some data, but it’s always historical data. There is not really a lot of predictive data in terms of how many plants our consumers going to buy this spring? For example, we’ve seen in 2020 and 2021, people buying a lot of plants, but we don’t know whether or not they’re going to continue doing that at the same level.
That’s the one question I really can’t answer to folks, when they ask me, if historical precedents holds true, then consumption of plants will go back to trend. But maybe we’re on a new trend. I don’t know that yet until we get more data.
So those are the data that we typically don’t have. And so, as a business in today’s environment, it is critical to analyze those data and to make the best possible managerial decisions that you can, because there’s too many wrinkles that can occur to reduce your profit margin. One mistake and you can reduce all your profit for the year. So, there’s some degree of pressure to analyze both internal data and analyze external data. And since we don’t have a lot of external data, it behooves us to take a look at our historical trends in terms of sales cost of goods, what our overheads trending and make sure that we have all those financial indicators, all those ducks in a row so that we don’t get over extended in economic downturns.
And many of the folks that have gone out during the Great Recession, or any other economic downturn—they didn’t go out of business because they didn’t grow quality plants. They went out of business because they ran out of working capital. And so working capital management is one of the trifectas, I call it. You’ve still got shrink, that you’ve got to deal with minimizing shrink, and of course, managing working capitals, another piece of that. And of course, not getting over leveraged is another key point, because you just can’t afford when the bank has more skin in the game than you do. There’s going to be some problems.
Mark Javier: One thing that I’ve noticed is that the most common strategy for increasing output is by investing in capital equipment and expansion. And I’m wondering if there’s another way to increase output, increase yield, and that would be bringing in fully-grown plants, in addition to liners and plugs. That way, you could maybe just finish them off in a couple of months, versus six. What are your thoughts on that, given your background in international floriculture?
Dr. Charlie Hall: Well, sure, let me talk big picture and then I’ll drill down to that. There are three main buckets that you can put all this cash into that we’ve been earning the last couple of years, right? You can pay down long term debt or pay out dividends, you can invest in Capex in order to increase efficiencies and increase turns and so forth. And then the third bucket is you can invest in tradable assets, you can buy more plugs and cuttings and you can ramp up and build inventory.
Now, what you’re talking about is another way to generate additional production and therefore, additional sales. It turned quicker, right? Instead of starting with the tissue culture or starting with a little rooted cuttings or callous cutting, unrooted cutting and can develop the rules and then go through the whole propagation stage and then growth phase is you’re basically buying in pre-finished product and finishing it off and turning t, then I call it. That’s one of the things as they turn to marching and a lot of people insist on growing their own plants, even if they’re commodities in the marketplace.
And when I asked growers why not just buy that and turn to marching, they say, “Well, nobody can grow the same quality that I do.” I’ve never heard a grower say, “My quality sucks.” Everybody has the best quality. Of course, we know that’s not true, that there’s a whole continuum of quality in the industry. So, one of the key things then, is that particularly, if it’s product that is slow-growing and take a long time to propagate and takes a lot of time in the greenhouse to grow. You can reduce overhead costs dramatically by increasing the turns, increasing the rates at which you’re turning inventory into greenhouse. So buying in pre-finished product is one way to do that.
Mark Javier: What advice would you give to a grower thinking about bringing in pre-finished product for the first time?
Dr. Charlie Hall: Well, there is a continuum, again, in terms of the propagation expertise that you find within different nurseries and greenhouses. And some are very adept at propagation, and some find it difficult. And so when you consider the percent germination or the percent take on rooted cuttings. If you’re getting down in the lower percentages, it’s costing you a lot. And so that, again, that’s one of the ways in which you can reduce cost is to…It may cost you more on the front end to get the pre-finished product, but you can turn a lot faster, and generate cash.
So, it’s one of those things that I say, particularly for new growers coming into the business that are still trying to learn the tricks of the trade and so forth, while your inventory is growing in size, that’s one way you can generate some cash, is the buy in pre-finished material and turn it very quickly. You take trees, for example, obviously you put a liner or a whip in the field and either in a can or in the soil. It’s going to take you 3, 4, 5, 6 years to reach that tree’s suitable size and that’s a lot of cash flow during that time period. So, you can generate more cash in the immediate short term, by buying in a smaller product, turning it, and turning it faster.
Mark Javier: What if a grower went to their clients and said, “What plants do you want in three months? I can source the material for you, and then let you know when it's ready. So instead of them growing first and selling later, they’re going to the customer first, asking what they’re looking for, and then providing that service.
Dr. Charlie Hall: I’m not sure, you know, a lot of folks will do that. Let me think about how I want to phrase this because I don’t want to lead people astray. So, there’s an opportunity, I think, for folks to honestly, contract grow. But in the sense, it is contract growing for specifically what the customer wants, rather than the “Built it and they will come” approach, where we just grow everything. And then we have this huge inventory.
And in fact, that’s another good way for particularly new folks that are wanting to break into the industry, I would recommend that they contract grow for somebody if they can, develop that relationship with somebody and maybe even start with just a few species of plants, contract grow and then get their feet wet and get into the industry and then you can start from there. So, it reduces that risk somewhat, to do that.
Mark Javier: Other commodities like corn have futures markets to reduce risk for producers and buyers. Do you think we’ll ever see a similar futures market for horticulture?
Dr. Charlie Hall: No, no, that’s a quick answer, and I got it. I don’t stand by that one. Because the thing is that generally, when you see some sort of futures market, where you have some sort of farm program, it’s with a homogenous product, right? Milk is milk, and it’s sold at 100 weight. And you’ve got beef is beef. Beef is sold by the pound, and so forth, where you can measure by how many carcasses there are, but there’s a uniform measure. And we have anything but that.
In fact, the same question has been asked to me in a little different way of, why don’t we do a generic promotion for the industry and talk about how great we are. But the big hurdle is, how do we fund it? Because there’s not a homogenous product. There are containers, there’s field-grown product, there’s pot and pot, there are all kinds of sizes, and then you’ve got greenhouse versus nursery. So you don’t really have the uniformity that it takes, either to develop a generic advertising program, or to build a futures market, because you need to have homogenous product, and we have anything but. We’ve got everything that everybody could possibly need.
Mark Javier: Some business owners report that their customers are now searching for very specific varieties, and that they aren’t just buying anything green anymore. Today someone reached out and told me, “These high-end varieties, they’re either really expensive or hard to find now.” It looks like the price of these items are too high for businesses, but consumers continue to demand them. Have you noticed this as well? If so, what do you think some of the solutions are?
Dr. Charlie Hall: Well, we’ve seen some for businesses, inflationary pressure over the last few years and of course, over the last two years, we’ve seen prices within the industry increase substantially. And the question then becomes, have we reached the point where we found inelasticity in demand, and that we’ve risen the price. The price is rising so much that whenever the price rises, people typically buy fewer units.
But in the last two years, everybody was interested in buying so it didn’t matter what the price was at. People were very price inelastic. They’re probably about 15 to 20% of the market. It’s almost price conscious that they’ve been less price conscious over the last two years. And so we’ve seen that inflationary pressure increasing prices. You know, the cost of inputs, the growers have had to raise prices to cover those increased costs of inputs and roughly about 8% this year and/or last year, and then another 5% projected in terms of increased costs of inputs for this year.
So growers have to raise prices in order to stay even, or their profit margins going to be cut in two. And then when that happens, those costs, those prices are passed on through the supply chain to the retailer, who gets it, and then they have to raise prices. And there are folks that are really questioning, are we raising prices too much? And are people going to start resisting that price increase?
Well, so far, they haven’t. So we’ll see if we’ve done a good job, if we’ve promoted the health and well-being benefits well enough, if we’ve promoted the ecosystem services benefits provided we’re moving the needle by plants well enough, then maybe in terms of the inelasticity of demand, and if so we can continue raising price. And if we sell for your units, total revenue for the firm goes up in that situation. So, really inelasticity of demand is pretty critical. And again, it comes down to the data and the lackada data as to whether or not we’ve moved the needle in that regard.
Mark Javier: When you say people haven’t really pushed back on the price increases, is this growers selling to retailers or retailers selling to the end consumer? Now, the reason that I asked is that some of the retailers that I speak with are saying, essentially, we’re seeing asset inflation in terms of plants, where, hey, the Monstera that sold one week, like a year ago, it is now taking three months to sell. And they’re seeing the price of their procurement, not really matching up with what consumers are expecting.
Dr. Charlie Hall: Right.
Mark Javier: And I think that could be a challenge, especially because inflation is not decreasing by any games. And at some point, it has to just match up, I think.
Dr. Charlie Hall: Yeah.
Mark Javier: There could be a risk there.
Dr. Charlie Hall: I hear you, and as the inflation pressure continue, then disposable income dollars that the consumer has access to purchase plants, of course, dwindles. But still, it goes back to the inelastic demand. Have we created this mindset in the consumer’s mind that plants are a necessity in their lives versus a mere luxury? And again, I can’t tell you yet. I’ve been talking about this for three and a half decades.
Now, I bought the need to increase that mindset on the part of the end consumer, that plants are necessity, that we need them, they enhance not only our beauty of our external and internal environments, but they provide all these ecosystem services and they provide these health and wellbeing benefits, particularly reduction of stress and reducing cortisol levels in the body.
And I’ve talked about that in many other programs. And on my website, I have a whole Benefits of Plants section that talks about these physiological and psychological benefits associated with plants. And if we can convince the consumer that the plants offered these things, then maybe even when during economic downturn, they’ll choose to buy those things, because they’ll view them as necessities. It’s almost like I’ve got to buy medicine, I’ve got to buy my stress medicine in the form of chlorophyll.
Mark Javier: Definitely makes sense. And I think for the speak generation, that’s something that they’re discovering of their own.
Dr. Charlie Hall: Yeah, I see it’s in the students. I teach at Texas A&M, that they respond when I talk about economic benefits. ‘That’s nice, Dr. Hall.’ When I talk about even environmental benefits to some extent, “Okay, that’s nice.” But when I start talking about the health and well-being benefits, these new Gen Z students, man, they become alive. You know, I can see that I’ve hit a defining moment there in the educational process, and it’s a learning moment for them, and they’re latching on to that.
So, I’m pretty positive about the future, if we emphasize these kinds of benefits, that they’ll respond when they get to the age where they have some disposable income in order to buy some chlorophyll.
Mark Javier: Yeah, that’s interesting. How you mentioned the divide in generations, I think that the Genesis is definitely a different breed good reason. I think then discovering the kinds of plants benefits early and understanding that psychological level reference just kind of rare and exclusive level. And it’s really…
Dr. Charlie Hall: Yeah, yeah.
Mark Javier: …Important.
Dr. Charlie Hall: And there’s some extent the Millennials have as well. And the oldest Millennials now are 41 and 42 years of age. And so they’re in their home buying years, and they’re just entering that sweet spot in terms of gardening and landscaping years, between 45 and 55 is the sweet spot. But we know that they continue from 45, 55, 65, and then when they get in their 70s, their DIY consumption goes down.
But they start hiring more services for it to be done for them. Because the most of the baby boomers who are 70 and above right now, they know the benefits, and they value plants, because they’ve been buying them for 40 years, so they’re already part of our core customer. And so now we’re seeing that transition into Millennials and of course, Millennials becoming into their main income earning years, so they’re going to have some money to spend on plants. So, I’m encouraged about that, too.
Mark Javier: 2022 is definitely going to be an exciting year. Thank you for taking the time to meet me. I follow a lot of your talks and your publications, they’re always on point.
Dr. Charlie Hall: Well, I appreciate that. Yeah. But it’s one of the things that I’ve learned through the years that there are certain things that people must focus on and they would be successful. And if they could incorporate that with their passion for plants, it’s a win- win.
Mark Javier: Definitely, definitely.
Dr. Charlie Hall: Yeah.
Mark Javier: Last question— I did notice that you got that Vice Chancellor’s Award in Excellence for student counseling relations at the Texas A&M. I was interested in how that came about and if it has any relations to the physiological benefits of plants.
Dr. Charlie Hall: Well, at the time, that particular award I received for the students interactions that I have, and in mentoring students, both in formal settings like the Horticultural Club, or whether its being coach of the National Agricultural Marketing Association team. And so there’s a lot of things that you can do in order to teach students what the real world is like.
And so it was that mentoring that I was doing and the interface there. And at one point, I was a director of our Masters of Agribusiness program. It’s like an MBA in agriculture.
Mark Javier: Wow.
Dr. Charlie Hall: And I was directing about 45 students through that master’s program at that time. So, as it was a lot of mentoring, and a lot of students’ hands-on interaction, which keeps faculty, you know, keeps us young.
Mark Javier: Yeah.
Dr. Charlie Hall: Yes, some folks, they don’t like students all that much, which I find highly ironic, but myself, I like it. I’ve got some big classes because I have 336 students every semester. While there are 336 seats in the classroom, I can’t fit anyone in there. It’s like standing room only. So, it’s one of those things where students…I close out on my emails with a little caption from the quote from Robert Cavitt and he said, “People don’t care how much you know. Do they know how much you care?”
And so I tried to let the students know that I care what their future is like. And at the same time, there’s another phase that is, you know, people may not remember what you did. And they may not remember all of what you said, but they’ll always remember how you made them feel. And so I try to relate that to my students and my mentoring those students. And I take that very seriously, all the way from undergraduates and also graduate students. And I’ve had some magnificent graduate students who are now faculties at different countries, at different universities around the country. And so that’s part of my legacy. There is the training and the effort that I’ve put into mentoring, both mentoring undergrad and graduate students.
Mark Javier: Well, that’s certainly inspirational, and I hope that I’ve made you feel welcome on our show today. We’re up to the 30 minutes mark there. Any last words you’d like to say before we end the show?
Dr. Charlie Hall: Well, there’s always last words. The key thing is you are trying to reinforce the value proposition continuously in 2022, reinforce the value proposition? What is it about your business? What is it about your plant portfolio? What is it about your service levels? What is it? What’s the why? What is that? What is it that you do? Why is it that you do this? How are you different than every other person that’s offering plans in the marketplace?
And then from there, be very focused on how you manage shrink and working capital in leveraging the future, and you should be very successful.
Mark Javier: It’s basically focusing on what you’re good at and not spreading yourself too thin...
Dr. Charlie Hall: Yeah, yeah, what you’re good at. And what’s the best way to do that? Yeah, where the process and systems to do that.
Mark Javier: All right, well, I appreciate it Dr. Hall, definitely.
Dr. Charlie Hall: Sure thing. I enjoyed the conversation.
Mark Javier: I enjoyed speaking with you.
Dr. Charlie Hall: Thanks for inviting me today.