A recession is looming later this year with a housing market correction on the horizon. But with several years of stellar sales under its belt, the industry is positioned to weather the economic storm with the right preparation and retail maneuvers.
Dr. Charlie Hall, professor and Ellison Chair at Texas A&M University, predicts a 90% chance of a recession in 2023, but doesn’t expect it to hit until the second half of the year. So there’s still time to prepare for the upcoming recession economy, which economists predict will be much milder than the U.S.’s last recession in 2008. “I don’t think it’s going to be very deep,” he says.
Looking at fundamental indicators like GDP and unemployment rates, Hall says we’re not in a recession yet, but there are definite signs that one is on the way. For example, the four-week moving average was 227,250 for the week ending Dec. 10, down 3,000 from the previous week’s revised average. “Once that number goes above about 400,000 for the week, in terms of that four-week moving average, that’s a pretty good indicator we’re in recession,” Hall says.
The Chicago Fed National Activity Index is also outside of the recession range, Hall says. It turned negative in October, but as of print time in late December, it was not in the range economists believe indicate the beginning of a recession, according to Hall.
Another key indicator is the yield curve between 10-year treasury notes and the federal funds rates or treasury bills with shorter maturity dates. “Certainly there’s some inversion there and that’s a telling of recession coming down the path,” Hall says. “There are some other indicators that are still not in the recession rage. So while it may, in some respects, feel like a recession, it’s not.”
We spoke with Hall about his economic predictions for 2023, what they mean for the garden retail industry and how garden centers can prepare for a recession.
Garden Center magazine: What is the cause of the impending recession and how severe will it be?
Charlie Hall: This will be a correction that’s probably promulgated from the housing market correction more than anything else. Although as the Fed starts raising rates, not only do mortgage rates go up, but business start pulling back in terms of investment. They don’t hire as many people and consumers start pulling back. They save a little more because it makes sense from a financial standpoint for them to do so.
That’s why I don’t necessarily foresee a deep recession. Because the corrections, the fundamentals, the employment within the economy right now, are fairly sound. The job market is still relatively strong. The Fed has got to kill off several million more jobs. That’s not their intention — they’re trying to combat inflationary pressures. But that’s just the effect of higher interest rates. Companies don’t invest as much in equipment and people.
By calculating the index of prices growers pay for necessities like media, containers, plant protection products, fertilizers, propagated materials, labor and other inputs growers use to grow flowers, shrubs and trees, Hall is able to identify trends in spending.
In 2021, growers’ input costs increased 10.1% over 2020, and he estimates there was an 8% increase in 2022 over 2021. This year, he’s projecting another 3.6% increase year over year. As growers’ input costs rise, they’ll be increasing prices to cover them which, in turn, means garden centers are going to need to increase prices to consumers to maintain margins.
GC: With inflation leaving consumers with less disposable income, are you expecting gardeners and plant-lovers to slow their spending on lawn and garden items? What does this mean for the overall health of the industry?
CH: Inflation is still relatively high. We’ve been seeing some improvement on inflation, but it has not come down as quickly as most people would like. But you’ve got to remember that it takes about six to nine months for any monetary policy that’s implemented to really take effect.
As we all know, the pandemic gave the industry a shot in the arm as consumers spent more time than ever at home. While that was good news for garden centers in the short term, it may slow purchasing in 2023, as homeowners have already improved their landscapes and gardens. On the other hand, economic downturns generally lead to higher sales for garden centers as consumers find ways to have fun at home instead of traveling.
GC: What factors are you considering when it comes to lawn and garden spending in 2023?
Charlie Hall: “We’ve got to lead with why they should buy from us and why they should buy in the first place. You’ve got to start with the why.”
CH: During the pandemic, folks were staying at home and looking out the window saying, ‘Geez, my landscape sucks. I’ve got to do something,’ because they were spending more time at home and looking at those landscapes so much more.
So did they pull their purchases forward in time and now they say, ‘You know what? I’m good. I don’t need as much lawn and garden activity this year because I’ve done so much in the last couple of years.’
I don’t know whether that’s the case or not, but that’s the question that comes to my mind.
But the counter to that is: Are they going to be spending more on lawn and garden products and services because it is going to be kind of a downturn? We know that historically, any downturn has been a shot in the arm for us because people are staying at home instead of traveling to Disney and so forth.
So the question is: Will the effect of consumers spending more time at home during a recession outweigh the effect of ‘forward in time’ purchases over the past two years?
With less money for discretionary spending during times of inflation and recession, consumers may be more judicious with their spending in 2023. And as input costs rise, garden centers will need to increase their prices to consumers this year to maintain profitability. So will customers be willing to pay those higher prices?
It all comes down to price elasticity, Hall says. If demand is inelastic, suppliers can raise prices, sell fewer units and maintain margins. That’s exactly what happened in 2022, when retailers saw decreased customer counts, but higher average tickets.
So while the forecast may look somewhat difficult, it’s key for IGCs to rely on their retail skills.
GC: How can garden centers prove their worth and stay competitive in 2023?
CH: Generally, service ranks very high in the mix in terms of [customers’ considerations]. There’s a service and value trade-off that people make. They expect quality, although there are some shoppers that go to certain venues because they get greater value and they’re willing to sacrifice some quality. So the garden center has got to understand its role within its trade area.
Secondly, they’ve got to exercise some cost resilience. They’ve got to be mindful of their cost of goods. While they may not be able to do as much on the cost of goods side, they can certainly manage their SG&A (selling, general and administrative expenses) side. So they’ve got to make sure that doesn’t get out of whack.
Lastly, they’ve got to lead with the value proposition. They’ve got to convince folks of why we’re so important in their lives. Coming out of the pandemic, the mental health issues we’ve seen arise from people not socializing and all the constraints and the pressures that the pandemic put on people, particularly women.
Mental health is a big topic across the country so we’ve got to lead with the value proposition that not only are plants, flowers, shrubs and trees aesthetically pleasing, but they have economic value and they have environmental value. They have considerable health and wellbeing value to our lives.
So we’ve got to lead with that. We’ve got to lead with why they should buy from us and why they should buy in the first place. You’ve got to start with the why.
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