Reading assignment: Chapters 6
Case
Ecuador: a Rosy export Future?
Rose is a rose is a rose is a rose —Gertrude Stein, “Sacred Emily” from Geography and Play (1922)
Stein intended her line to illustrate what a word can invoke. Given the many uses of “rose” throughout the ages, the word brings a nearly unique image and emotion to each of us.63 It has been a name for daughters, an adornment for a garden or vase, a representation of a deceased versus living mother on Mother’s Day, a mark of love on Valentine’s Day, an ingredient for perfume and medicine, confetti of strewn petals, and even the symbol of opposing armies during England’s War of the Roses.
Some Global Changes
Although growers have sold roses for centuries, their perishability (they should usually be sold within three to five days of being cut) prevented extensive export before there was timely, dependable, and economical air service. Today, roses compose about half the $14 billion cut-flower export industry. Developing countries, many without significant domestic cut-flower markets, have accounted for the most recent export growth. The world’s largest exporter is Colombia, with Ecuador and Kenya running neck and neck for the second and third positions. Given that consumers purchase roses as discretion rather than as necessities, most exports are to high-income countries. Given the need to reach markets quickly and inexpensively, most exports are regional—Kenya sends most of its flowers to Europe, Taiwan to Japan, Colombia, and Ecuador to the United States. However, chilling technology may soon allow cut flowers to be sent in containers on ships. In addition to feasible air service, other logistical improvements have speeded the connection between growers and consumers. Take, for example, flower imports into the United States. About 85 percent of the annual market enters by air through Miami, which has more than 50 wholesalers and importers. These flowers, mainly from Latin America, are packaged where they are cut and air-freighted the same day. The packaging often includes address labels and tracking information so as to avoid the costly and time-consuming process of re-packaging for transshipment. On arrival in Miami, the roses are placed at once in refrigerated warehouses, where U.S. government customs and agriculture inspectors clear shipments by spot-checking packages to ascertain their invoice accuracy and absence of insects. Of course, long before the growth in export markets, many countries produced flowers for nearby sale, and some are still domestically focused. China and India have larger land areas under flower cultivation than any other country, but their quality is insufficient to compete much internationally. Japan, the world’s second-largest cut-flower market has purchasing power, but it fills most demand with domestic production. However, in many other countries, imports have largely displaced domestic output. For instance, the United States now imports more than twice the value of its domestic flower production.
Ecuadoran Advantages
Developing countries have a labor cost advantage in the rose market because production is very labor-intensive at almost every stage—planting, fertilizing, fumigating, pruning, removing thorns, assembling by size and rose variety, and packaging. Although Ecuador has this overall advantage, it has a labor cost disadvantage with Colombia, its main competition, because its monthly minimum wage is almost $100 more. Further, its transport cost for roses to the United States averages 20–30 percent more than Colombia’s. However, Ecuador has almost unique advantages in rose cultivation. Because the equator runs through the country, the sun is
almost directly overhead throughout the year, which speeds growth and allows for year-round temperature consistency. It grows roses at high altitudes (averaging about 2000 meters, or 6561 feet) that provide the very cool nights that are ideal. Seventy percent are grown north of the capital of Quito, and 30 percent to the south. These areas obtain water from the mineral-rich melting snow of the Andes. The result is that Ecuadoran roses have very large buds, stems up to a meter in length, vivid colors, and extended vase life. The growers sell them at about a one-third price premium above Colombian exported roses. In addition, because Ec-uadoran growing areas have less rainfall variation than those in Colombia, they enjoy a lower climatic risk. Nevertheless, damage from weather conditions, particularly wind and rain, is uncertain for growers everywhere. In addition, the growing area south of Quito, because of its higher altitude, can produce more premium roses (bigger buds and longer stems), but it is subject to a greater risk of frost than the area to the north.
Market Structure
Ecuador’s cut-flower exports, of which 73 percent are roses, have become very important to its economy, employing over 100,000 people directly and many more in supporting industries. Its rose farms are typically owned by individual families, who engage in a mixture of cooperation and competition. They cooperate through a producers’ association, Expoflores, to negotiate better airline carriage rates and find means to improve production methods; they compete vigorously with each other for customers abroad, and it is common for them to sell below cost if they are short of cash and have excess supplies that might otherwise perish. For Ecuador’s largest market, the United States, growers sell to both importers and wholesalers. The importers sell to large customers, such as wholesalers, mass-market retailers (including grocery chains), and hotels. Wholesalers, in turn, sell to mass-market retailers or florists, who then sell to final consumers. The farms have been trying to sell more directly to wholesalers in order to capture some of the margin in sales between importers and wholesalers; however, too much effort to do so could jeopardize their existing sales to the importers on whom they depend. Given final distribution fragmentation, it is impractical for farmers to sell directly to retailers abroad. Sales to importers and wholesalers are generally highly
personalized, handled via verbal agreement rather than a written contract, and dependent on trust. In most instances, there is a buyers’ market for cut flowers, so exporters seek to develop confidence and trust among buyers to help secure repeat sales. For instance, if a farm cannot supply what it has promised, perhaps due to adverse weather conditions, it will typically try to buy supplies from other producers in order to fulfill its commitment and build buyer confidence. Negotiations take place largely via e-mail, but exporters make occasional visits to importers and wholesalers to help cement personal relationships. Contacts, both in person and via e-mail, also help the growers plan the quantity of future production by date and rose variety. Growers generally extend credit to the importers and wholesalers; however, if importers do not pay as agreed, then exporters require payment by letter of credit in future sales. Sales are f.o.b. Quito, which means that growers keep title only until the roses are loaded on the aircraft; thus, they do not have legal responsibility if the roses arrive damaged or no longer fresh. (They are responsible for damage caused by disease and for sending a different variety of rose than was ordered.) However, the personal relationship in transactions means that importers, wholesalers, and growers work out the responsibility in such circumstances. Although wholesalers and importers try to maintain high quality on roses sold to final consumers, there is an underground market for older and damaged roses that is difficult to control.
Fluctuations in Demand
Planning rose production is difficult because of demand changes during business cycles, during periods of the year, and by a variety of rose. This planning is further complicated by unforeseen supply situations. The demand for roses, especially the high-end market for Ecuador’s large, long-stemmed varieties, has been particularly sensitive to income changes in importing countries. For instance, a global economic recession caused the value of Ecuador’s cut-rose exports to fall 42 percent between 2007 and 2009, but export sales recovered nearly to the 2007 level by 2012. With the 2014 fall in oil prices, Ecuador’s exports to oil-dependent Russia (Ecuador’s second-largest market) fell 30 percent in value. The decreases occurred as consumers bought fewer flowers of any kind, replaced some rose purchases by buying less expensive flowers, and switched in part to fewer premium roses. The demand change was most noticeable through florists’ sales, which depend more on the most expensive roses; mass-market sales of mixed flower bouquets held up fairly well.
Demand during the calendar year changes substantially in both volume and rose type. The biggest spike in sales by far is for red roses on Valentine’s Day. Accounting for 25 to 30 percent of Ecuadoran rose exports, they are primarily office gifts and must usually be presented on February 14. (When Valentine’s Day falls on the weekend rather than on a weekday, sales drop substantially.) Since the growth period for a rose stem is between 90 and 100 days, the farms must keep clipping stems so that they start growing and then mature on the right date for shipment. However, this 10-day margin between 90 and 100 days is due to uncontrollable weather conditions. With more sunlight, the roses mature faster; with colder weather, they mature slower. Farms can warm growing areas artificially (at a cost). Slowing down maturity when temperatures rise is even more costly inasmuch as agronomists must paint rose encasements with mud or cover entire greenhouses with black fabric. The second-biggest spike is for Mother’s Day, but the demand is spread among different colors of roses. During the whole month of June, demand increases again because it is a big month for weddings and the demand is primarily for cream-colored roses. During the rest of the year, the export demand is fairly steady in both volume and color of rose, and growers try to get standing orders to assure steady sales. However, growers must make decisions on how much effort to put into production for the high-demand periods versus the remainder of the year. Further, they must make these decisions without knowing what other growers are doing, which could mean over-or under-supply at any given time. Roses vary by such characteristics as color, fragrance, size, stem length, and the way they open. In fact, there are about 6,500 varieties of roses, and a farm cannot grow them all. The variety per farm depends largely on the farm’s size. Hoja Verde, one of the largest Ecuadoran producers, grows over 400 rose varieties, whereas a more typical Ecuadoran rose farm, such as Grupo Vegaflor, grows about 60. Regardless of farm size, its managers must estimate what the market will demand in order to choose which varieties to grow, how much area to allocate to each, and when to bring different quantities to maturity. Of course, growers depend largely on a few fairly standard but distinct roses for which there is demand throughout the year and in ongoing years. Despite its dependence on standard roses from year to year, the industry also depends on innovation. Growers are pressured, like producers in the fashion industry, to sell new varieties each year. Rose breeders, almost all in developed countries, such as Rosen Tantau in Germany and E. G. Hills in the United States, develop new rose varieties that they promote to distributors. Rose growers must then predict the success of new varieties in order to choose which to grow. In turn, growers pay a fixed licensing fee to the breeders for the rights to grow the new varieties and use their names. Another factor affecting the rose market is the emergence of demand for fair-trade products, including cut flowers, from developing countries. For instance, TransFair, a not-for-profit organization, certifies whether flowers are grown by using techniques promoting the environment and providing sufficient benefits to workers and communities. Once certified, the flowers sell for about a 10 percent premium, which is used for the workers and community. While reliable figures are unavailable on the size of this market, some estimates put it as high as 10 percent of the rose ex-port market. As of 2011, less than 10 percent of Ecuadoran rose farms had been certified.
Present and Future Market
Our discussion implies that Ecuadoran rose growers could benefit by having consumers treat flowers as a less expend-able purchase, choose roses over other flowers, develop a preference for Ecuadoran roses, increase rose buying during nonpeak periods, and better align their rose partiality with the varieties that growers have chosen to produce. However, the growers presently have little influence on final consumers and must therefore depend on distributors to promote those final sales. In fact, many florists advertise through various media, and a quick perusal of the Internet indicates that some specifically promote Ecuadoran roses. Thus, for growers to increase exports they must convince importers and wholesalers to promote final demand, such as through retailers, for the differentiated Ecuadoran premium-priced roses. This is difficult because the number of players (grow-ers, importers, wholesalers, and retailers) is so large and fragmented that no single player at any point in the distribution chain has much influence on final consumers. Many Ecuadoran growers are putting more emphasis on some countries than on others. Although Ecuador exports roses to more than 90 countries, its sales are highly concentrated in the United States and Russia, which account for a bit over 60 percent of its export market. These two countries are also the largest final consumer markets for imported cut roses. Ecuador and Colombia dominate the rose export sales to these countries. Colombian roses dominate the U.S. import market, and Ecuadoran roses dominate the Russian import market. Observers believe this discrepancy in market share between the two leading markets is due to Russian consumers’ preference for long-stemmed roses, whereas the U.S. mass-market preference is for shorter and less expensive roses sold in supermarkets. Ecuador and Colombia together dominate the export sale of cut roses to some other markets as well, such as Canada and Spain, but these markets are small compared to the United States and Russia. Thus, there is a question of the existence of some fairly untapped markets. Some Ecuadoran growers are considering the Middle East as a possibility for sales expansion because new air service links Ecuador with Iran via Venezuela. Other growers believe that most future growth must come from traditional export locations, either through increasing total rose sales in those locations or by picking up market share from Colombian and other countries’ producers. At any rate, whether Ecuador’s future cut-rose export sales will be rosy or not seems to have nothing to do with its production ability. Rather, it will depend partly on foreign demand (i.e., the penchant of consumers in other countries for buying its roses). It will depend also on foreign competition (i.e., East African countries, such as Kenya, Zimbabwe, and Uganda are presently in the process of increasing their output).
Questions
6-5. There are a number of ways Ecuadoran growers might increase demand for their cut roses. Among these are (a) to try to get more consumers to move up-market by buying premium roses, (b) to promote more rose demand for a different special day (e.g., roses account for a small percentage of U.S. flower sales for Christmas/Hanukkah, Thanksgiving, and Easter/Passover), and (c) to promote sales in relatively untapped markets, such as the Middle East. Compare these and any other alternatives you can think of.
6-6. Some countries have found success by promoting the nationality of their products, such as the Juan Valdez campaign for Colombian coffee. Discuss the viability of a national campaign to promote Ecuadoran roses abroad.
