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SAP 2.64/WP.120
The Dutch flower sector:
Structure, trends and employmentPaul Elshof
Food World Research and Consultancy
Strategies for the flower sector in the Netherlands have to take account of the current comparative advantage of the country. A special study done by a team of researchers of the Rabobank in 1992 on the occasion of the Floriade ("A view of international competitiveness in the floristry industry" (Rabobank, June 1992)) sheds some light on this (table 12).
Table 12. Strengths and weaknesses of Dutch flower-growing
| Strengths | Weaknesses | |
|---|---|---|
| Geography | -- favourable situation with respect to Europe
-- low transport costs |
|
| Climate | -- mild and steady climate | -- cultivation in heated greenhouses essential |
| Raw materials | -- cheap gas | -- strong dependence on non-renewable energy sources
-- expensive land -- scarce irrigation water; requirements for this are rising because of substrate cultivation -- fertilizer and pesticide emissions to the soil, air and water |
| Labour | -- stable labour costs
-- high productivity |
-- high labour costs (Dfl.32/hour)
-- workers scarce -- labour management not professional |
| Capital | -- cheap capital (9.8 per cent interest) in principle in unlimited supply through banks which know the business
-- low inflation (3 per cent) |
|
| Infrastructure | -- well-developed roadway network and air travel
-- auctions developing teleprocessing networks permitting fast communication |
-- hold-ups at auctions not located on the motorway |
| Knowledge infrastructure | -- extensive courses and study club network
-- open knowledge structure; sector has money for knowledge; information spreads rapidly -- much research, from fundamental to practice-oriented -- good quality training courses at various levels |
-- little marketing knowledge;
-- information from market slow to penetrate to producers; -- shortage of trained personnel |
Of course the main comparative advantage of the Dutch flower industry is that "it has always been there". This means the benefits that derive from past investments in knowledge and physical infrastructure. Of these the former are probably the most important.
At the moment students from age 12 onwards can choose their own mix of practical and theoretical training. Education is compulsory from 4 to 16. At the end of primary school -- age 11 or 12 -- most students enrol in secondary school, while others start with VBO (preparing occupational training) to take them to age 16. Those specializing in agriculture are called VBO Groen (Green). After this follows MBO (Medium Occupational Training), a three-year course in an Agrarische Opleidings Centrum (Agrarian Training Centre), of which there are 21. During this phase a choice is available between full-time or part-time training, within the latter three days being spent as a trainee in a company and two at school. Nearly all 21 AOCs offer plant cultivation as one subject in which students may specialize while the five or six AOCs located in the flower-growing regions offer more elaborate choices, the Florens College at Aalsmeer even going so far as to offer growers and traders/exporters the possibility to organize their own specialized courses. Beyond the three-year MBO come the Higher Agrarian schools. Again there is a choice between full-time training for three years, or part-time, mostly evening, courses spread over four years, with a day-time job in the flower sector. At the apex is the Agrarian University which emphasizes scientific training. Like the Higher Agrarian schools, the University offers specialized courses in horticulture, glass horticulture, and floristry. The educational infrastructure extends to adult growers. Trade magazines inform growers of the latest developments and techniques, but equally important is the system of study clubs. These clubs facilitate the exchange of information through visits to farms and firms that experiment with new techniques of plant propagation, etc. The study clubs are credited with the high level of sophistication of the Dutch flower industry.
Formidable as these advantages are, the Netherlands cannot afford to be complacent because cheaper communication costs will undercut the advantages that arise from a trained labour force.
The consumption of cut flowers and pot plants is confined presently to richer countries, mainly in North America, Japan, and Western Europe. The pattern of consumption differs, partly because per capita consumption is quite different, which in turn depends on prices. Most of the consumption, about 75 per cent, is based on local production. Of the 25 per cent trade volume that is exported, Europe's share has been growing, presently reaching around 75 per cent. With the spread of economic growth to Asia and Latin America in the last few decades levels of income are rising fast and conditions exist for unprecedented growth in flower consumption. The President of the VBN, the Association of Dutch flower auctions, estimates that in 2015 total consumption might be at a level two to three times higher than the current Dfl.80 billion in 1997. The growth will come mostly from the Third World countries since the more developed markets are already saturated.
The question arises: Who will gain the best positions in the emerging markets? Can growers and traders who depend mostly on sales in the established markets adapt to the new market realities and maintain their dominant positions or do they have a natural disadvantage against Third World producers? First of all, although the Dutch flower industry has a worldwide fame, only 14 per cent of cut flowers and 7 per cent of pot plants are exported outside Europe. The European market is still vital for Dutch flower exports (table 13).
The increased German demand in 1992 and 1993 was the result of the demand arising from the ex-DDR. Sales returned to more normal levels after this. Germany's relative share will decline as more of the former Soviet bloc countries enter the market. Exports are already rising rapidly to the Russian Federation, Poland, Slovakia, Hungary, Ireland and Norway.
Table 13. Total Dutch export of cut flowers and their destinations in percentage of total exports
| Destination (%) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Total (Dfl. million) | BRD | France | UK | Italy | US | Japan | ||
| 1991 | 3 951 | 48.1 | 13.6 | 10.8 | 4.7 | 2.9 | 1.9 | |
| 1992 | 3 923 | 50.4 | 12.5 | 10.4 | 4.5 | 2.6 | 1.4 | |
| 1993 | 4 159 | 50.6 | 12.2 | 8.8 | 4.5 | 2.6 | 2.1 | |
| 1994 | 4 378 | 49.0 | 12.0 | 8.9 | 3.7 | 2.7 | 2.2 | |
| 1995 | 4 468 | 46.9 | 13.4 | 8.3 | 3.0 | 2.6 | 2.2 | |
Total volume at the Dutch auctions in 1994 was 10 billion cut flowers and 900 million pot plants. Fourteen per cent of cut flowers and 3 per cent of pot plants came from foreign suppliers. The most important exporting countries in 1994 were (in `000 tons): Israel, 27,888; Kenya, 24,011; Colombia, 19,665; Zimbabwe, 6,861; Turkey, 3,656; Thailand, 3,459; Ecuador, 2,735; Morocco, 2,109. The most important types of flowers within the import volumes of 1994 were: spray carnations, 17 per cent; roses (small), 16 per cent; standard carnations, 8 per cent; gypsophila, 4 per cent; roses (large), 11 per cent; waxflowers, 4 per cent.
Between 1990 and 1995 imports into Europe increased by 66 per cent. Factors most in favour of foreign growers were good climate conditions for outdoor growing and low labour costs. The initial reaction of Dutch growers -- to ban sales through the auctions -- was counter-productive since it simply resulted in flowers being traded directly to retail chains in Europe.
The overall picture for the near future can be characterized as follows:
-- growing consumption in Europe due to: increasing numbers of households; trend towards more leisure and home decoration; and strong growth in Eastern European countries;
-- much faster growth in other regions of the world due to rising incomes. The Netherlands has a consumption of 150 stalks per capita, German 80, the United Kingdom 50, the United States 30, and China 0.3.
The most important constraints are: constant threat of trade barriers; high VAT levels that prevent consumption growth; the fragmentation of the price forming process by direct sales from growers to retailers. A consequence will be lower prices and lower quality. The bottom line in all future changes will be that the industry will continue to shift from being production-driven to market-driven. More and more it will be unwise for Dutch growers to concentrate just on higher production; such a volume-based strategy would be vulnerable as growers in countries with cheap reserves of land and labour increase their sophistication in cultivating flowers. "More of the same" will not do.
The advantage for growing low-priced mass-produced flowers has shifted away from the Netherlands. What is needed are more innovative and higher added value products. This strategy is feasible for most growers, but not all. These may have to concentrate on the production of uniform high-quality and year-round flowers at competitive prices. Economies of scale are a precondition, raising pressure on the concentration of land (and better glasshouses) in fewer hands. Estimates already exist that within a decade one-third of growers will sell their firms to others.
Some growers are segmenting the growing cycle, starting in recent years with the internationalization of production. Tissue culture and first propagation might be done in one country, the first phase of growing in good climate conditions in another, and the last phase in the Netherlands. This trend will continue: it is the search for the use of optimal conditions during the different stages of growth and keeping control at one point -- near the place where most market information comes together. The trend involves shifting labour-intensive parts of a production process to low-wage countries and knowledge-intensive parts and managerial control to stay at the core. The trend is well known in all industries now as multinationals organize their production on a global scale and control an increasing proportion of world trade. It is the expression of companies using comparative advantage at local levels to keep the cost of the total to a minimum. The emergence of a new generation of managers with new skills and readiness to implement change will speed up the process.
The auction boards are aware that they have to rethink their position and role and they are doing so in several ways. In 1996 the auctions put in place their marketing re-engineering and internationalization project (MAREIN) for the years 1996 to 2000.
The auction at Aalsmeer expects to handle 33 per cent more volume in this period. It is investing in extra premises for this. But the auctions have already started to segment their clients. Those with substantial sales will get preferential service prices while those with minimal or irregular activities will have to pay fees. The auction would prefer to deal with 300-400 traders, not the present 1,500. This targeted policy of the auctions will hasten the process of concentration.
The auction clock will no longer be the only price-forming medium. Up until now 95 per cent of all flowers pass the clock, with 5 per cent being sold by mediation of a specialist team directly to large customers. The auction staff is preparing complementary systems. On one side will be the clock as the best instrument for suppliers and buyers on a free market. At the other extreme will be a structure where large retail chains develop a closed system with contract growers. Based upon cost calculation and agreed quality and production specifications, large volumes could be produced and pass hands without the interference of the auction clock. The auctions would like to play a role as mediator and supplier of the knowledge to verify qualities and specifications. Another option that will be more important in the future is auctioning by electronics and eventually video. The use of new technologies creates the possibility to form prices without the need for flowers always to pass the clock physically. That opens the possibility for products, say from Kenya, to be sold at Aalsmeer but go directly to Paris.
Another way of preventing the concentration of imports of flowers at one point and then distributing them to the major consumer markets would be to spread the auction system over the most important markets. It might be the auctions themselves in combination with distribution centres or first the distribution centres only: the principle is that trade and price information is untied from the physical flow of the products sold. One advantage would be a gain of 1-2 days in flowers reaching the customers.
Most probably the Dutch sector will try to create better conditions to maintain its leadership in the market. Economies of scale is one means to reach those conditions. Within five years many growers and smaller traders will no longer be actively involved in the sector. Increasing emphasis on quality and specialities to overcome the high cost levels will be the second line of attack. This policy will also be necessary to create a positive marketing argument out of what has been seen in the beginning as just an extra cost factor: rising environmental demands. In 2000 the use of agrochemicals will have to be reduced to half the 1991 level so growers will have to develop biological ways to treat pests and diseases. This element can be used as an extra quality asset of Dutch flowers.
A feasibility study was recently completed into the possibility of building an underground transport system from Aalsmeer to Schiphol airport, with a rail terminal nearby. The plan was for a closed system, meant only for the underground transport of flowers over the required distance of 25 kilometres. The construction costs would be about Dfl.1 billion. The study was requested jointly by airport authorities, NS Cargo (public rail company), the auction, and the Ministry of Transport and Infrastructure. The rationale for a dedicated transport system for flowers is evident -- it would: hasten the transport of perishable products; shift part of this transport from road to rail; reduce the level of CO2 emissions from trucks; stimulate the discussion on greater use of rail transport for flower dispatching.
The study was optimistic about the feasibility of the project. The decision-making process was to have started in mid-1997 but the growers have still to give their consent because, in the end, they, through the auctions, will be the ultimate funders of the project. Scepticism remains, particularly in view of the basic assumptions of the project -- that consumption of flowers in the world market will double or triple within the next 15-20 years and that the bulk of the world supply will pass through the Netherlands. Clearly in most regions of the world most of the higher consumption will be supplied from local sources: just as the Netherlands supplies Europe, so might Malaysia and Thailand supply Japan, and Colombia and Ecuador the Americas. But the basic assumption remains that not all consumption will be covered by local or regional supplies. Part of the extra volumes will be delivered through the Dutch auctions and eventually also by Dutch growers. This latter part will mostly be of higher quality, innovative and complex ranges. At the same time, mass-produced, low-priced flowers will reach the European market in even bigger quantities, putting enormous pressure on the transport system. The proposed tunnel project is one way to manage this extra flow and prevent congestion.
Two future impacts of the above trends can be predicted: (i) fewer jobs at some stages, and (ii) more skilled jobs at all stages. Jobs are bound to be lost in some stages of production. Many older farmers and their families will go out of production. Firms still involved in the production of low-priced flowers will face difficult times and job losses will follow. At the other end of the market, farms will get bigger with the acquisition of land from smaller farmers. They may resort to higher levels of automation, with some implied job loss, compensated partially by an increase in the number of skilled jobs to control the automated processes.
The move to better quality flowers will require investment in the education of workers. This applies to growers, auctions, traders and all parts in the logistics chain. Until now, qualification has been a real word only for the limited number of permanent employees in the growing stage. This will change. Trade unions have already started discussions with employers on these items and the auctions and traders started training courses in 1996 for their employees.
The Dutch flower industry is undergoing vast changes as a result of globalization of the world markets. Its once unassailable position as the distributor of flowers throughout Europe -- and even the world -- is being eroded as transportation costs decline and communication becomes easier amongst peripheral countries. The Netherlands' advantage arose from a well-developed physical and educational infrastructure. These two could still keep the country's flower industry on a competitive footing but only if both are continually augmented. The volume of flowers entering the Dutch auctions will rise significantly into the next century so that investment in physical infrastructure is imperative to keep a perishable product moving. At the same time the skill levels of all workers in the flower industry -- from farms to auctions -- must be raised to cope with the competition arising from labour-abundant countries. A constant upgrading of the local flower-growing sector is called for to move to more specialized and skill-intensive products. Such an upgrading will mean further concentration of land in fewer hands with implications for income distribution as well as employment. Low-level skill jobs are bound to decline and it is not at all likely that they may be compensated by an increase in high-skill jobs. The net job loss will have to be countervailed by job creation elsewhere in the economy. Skill augmentation is also required in the auction subsector to maintain the country's pre-eminent position in the world flower industry.