Market Trends: Feb. 2000

CLEVELAND – Knowing where the potential customers are located is certainly valuable information, but savvy contractors should also consider where the competition is located.

According to federal business registrations and the SIC code for lawn and garden services, the Philadelphia area comes out as somewhat of a surprise as having the most competition. Roughly 2.2 percent of the nation’s lawn care companies are located in this part of the country, while six out of the top 10 overall markets for lawn care service can be found in the Sun Belt.

CHARLOTTE, N.C. – A company can have the most sound operating practices in the industry, but it may never realize its true potential if the local market doesn’t provide sufficient opportunities for business.

Of course, there aren’t too many markets that don’t provide more than ample work for lawn and landscape contractors these days, but data gathered by Husqvarna Forest & Garden illustrates the areas most likely to provide the most opportunity in a population density map. According to its data, the largest number of single family homes reside along the East Coast, in the Midwest and in major cities along the West Coast.

INDUSTRY NEWS
AgrEvo/R-P Complete Merger

MONTVALE, N.J. – The new year brought about a new giant in the pesticide industry with the completion of AgrEvo’s merger with Rhone-Poulenc, which created Aventis, the largest global basic manufacturer of turf and ornamental control products.

The company’s combined product lines for the lawn care, turf and ornamental, and golf markets, which include DeltaGard insecticides, Banol, ProStar and Chipco fungicides, Acclaim Extra, Finale and Ronstar herbicides, will be managed under the Chipco Professional Products group.

Josh Weeks, vice president of the new division, said the costs of inventing new chemistries are placing increased pressure on pesticide manufacturers. He forecasted Aventis’ corporate research and development budget at $3 billion annually, and said the R&D dollars allocated to the environmental services part of the organization are expected to be key benefits to the merger.

"Our costs to invent, test and register new protection products are growing at a pace faster than inflation, and one way to gain some synergies, some focus and more dollars is by merging," Weeks explained. "Also, the regulatory side of the business presents ever-increasing criteria and testing to generate new registrations and maintain the registrations we already have, and the market simply isn’t growing fast enough to counterbalance these costs."

Weeks believes contractors will benefit from these mergers in the long run.

"Customers of these products should feel good that companies are restructuring themselves," he pointed out. "Comparing how far the chemistries have come since a lot of them were invented 20 years ago, there are new families of products with lower use rates that are less injurious to the environment. And there are always opportunities to invent families of compounds that raise the bar further."

WASHINGTON, D.C. – Some leading construction industry experts are forecasting slow downs that could have an impact on the landscape industry. These reports were released when the CMD Group hosted its North American Construction Forecast at which construction industry experts analyze the trends shaping the construction industry. Because new construction projects are often followed by new landscaping projects, these construction trends provide an outlook for the landscape industry as well.

Hugh Kelly, chief economist of Landauer Associates, predicted retail and industrial real estate to dip slightly at the beginning of 2000 and then continue to grow throughout the year.

According to Kelly, investment into real estate only amounted to $4 billion in the first quarter of 1999 but then bounced back to set a record of $7.5 billion in the second quarter. "The strongest region in the second quarter was along the Pacific, especially California," said Kelly. "The area has led the nation in retail and industrial building development for the last two years."

Kelly said that Seattle, Los Angeles, northern New Jersey and Denver will be hotspots for industrial construction, while Phoenix, Washington, D.C., Orlando and Tampa would have low industrial construction in 2000. On the retail side, he sees Philadelphia, New York, Boston and Chicago as large development locations for new construction.

According to Raymond Torto, principal and managing director of Torto Wheaton Research, the current demand for office space should remain strong for at least the next two years. "However," he said, "we saw more space being delivered into the marketplace in 1999, and we are beginning to see vacancy rates rise."

Rising vacancy rates are mostly due to the influx of new office construction flooding the market. Office construction was up 11.3 percent in 1999 and continues to rise, according to Bill Toal, chief economist for the Portland Cement Association. Toal also said that office construction will maintain its current levels, if not increase, in the years ahead.

During the third quarter of 1999, office vacancies rose drastically from 1 percent to 9.8 percent. High office vacancy rates can negatively affect landscape contractors because of a lack of funds for property upkeep. However, new building construction results in increased properties to develop. Only time will tell whether diminished landscaping work will result from reduced occupancy and funds or if increased landscaping work will result from the new office construction.

The amount of new construction in Atlanta and Dallas has been dubbed "overbuilding" by CMD Group due to the increases in vacancy rates. Atlanta has seen an increase from 10 percent to 12 percent and Dallas has seen an increase from 13 percent to 18 percent by the end of 1999. The vacancy rate is expected to increase in Dallas for the next two years as 8 million square feet of new construction is scheduled for 2000 and 7 million square feet is scheduled for 2001.

Conversely, vacancy rates in Washington, D.C., Virginia and Maryland are at approximately 5 percent. The decreased supply of office space is driving rent higher, which may increase landscaping funds. However, Torto expects increases in new construction to meet the demand for office space, causing vacancy rates to rise to 12 percent.

For contractors relying on residential construction, Robert Barr, a senior economist with Fannie Mae, predicts a slow year in housing activity, following record levels in home sales and mortgage market activity in 1999.

Barr credited the stock market for consumer spending in 1999 and also for the slowdown predicted in 2000. According to Barr, "A lot of consumer spending has been fueled, at least in part, by the wealth-effect of the stock market." He said that a soft stock market can quash consumer confidence, causing decreased home purchases.

"Household growth remains very strong, rising faster than the population growth," said Barr. However, he noted that refinancing rates – including long-term interest rates and 30-year fixed rate mortgages – have been high, leading to predictions that residential construction will dip in 2000. Barr believes that as the economy slows down, the interest rates will drop. That drop is then expected to fuel increased home construction in 2001.

Barr said 2000 should see an 8 to 10 percent drop in new home sales, followed by a slight recovery in 2001. "Even with that drop-off, 2000 would still be the third best year ever after 1998 and 1999," he said.

CLEVELAND – According to some commercial mower manufacturers, an overproduction in mowers is flooding distributorships nationwide. If the excess equipment doesn’t sell this winter, manufacturers could be lowering mower prices come springtime as a means of moving shipment more quickly.

"If there is too much product, the market will soften up and pricing will fall," recognized Bob Walker, president, Walker Mfg., Ft. Collins, Colo.

Shipments of commercial riding units increased by 35 percent in 1999, according to the Outdoor Power Equipment Institute, Alexandria, Va. Few industry observers believe the industry as a whole actually grew this much, however.

While some contractors might be inspired by this news to hold out for a better price, Walker warned against it.

"When prices come down, service usually disappears along as well," he explained. "A mower is not a commodity. It is a durable, serviceable piece of equipment. Buying a mower without a service backup is not wise.

"Some contractors may wait until spring to see if they can get a better deal," Walker continued. "But most contractors will want some kind of service to go along with it."

Reasons for this apparent overproduction vary. Walker believes the reason can be attributed to the rapid growth in the landscape industry and the expectation that this growth will continue at the same rate.

"Some manufacturers work on the theory that says if they have the capacity to produce, then they should," Walker remarked. "Other manufacturers don’t want to build unless someone on the other end is ready to buy, thereby balancing production with what can be sold so as not to run out of cash by prematurely producing."

Rick Cuddihe, senior vice president, Great Dane Power Equipment, Elm Grove, Wis., points to last year’s East Coast drought as the reason for mower overproduction.

"This drought resulted in lower sales in a mower-heavy area," Cuddihe explained. "We’re in a weather-related industry and when this happens you hear about overproduction or overestimation of demand."

Regardless of the cause, Walker said the situation should naturally work itself out.

"The market will hold up well," he said. "The only concern here is that manufacturers seem to be collectively producing too much product. These things happen and tend to -correct themselves if given enough time."

GAITHERSBURG, Md. – The patent infringement litigation between Wright Mfg. and Great Dane Power Equipment, Elm Grove, Wis., recently came to a close, resulting in a ruling by the judge and a separate future agreement between the two parties.

According to Bill Wright, president, Wright Mfg., Gaithersburg, Md., the court found that all versions of Great Dane’s and Huncilman’s Surfer stand-on mower available to the public on or before July 30, 1999 infringe each of the Wright’s ‘944 and ‘347 patents, but not the ‘138 patent. This ruling prevents Great Dane from further producing and distributing Surfer mowers as they existed before July 30, 1999.

In an agreement separate from the ruling, Wright said he granted Great Dane a limited, non-exclusive field license under its patents for the purpose of making and selling a new stand-on mower called the Super Surfer. However, according to Rick Cuddihe, vice president, Great Dane Power Equipment, there is still some debate over what the ‘confidential’ agreement between the two companies actually entails.

"This was a mutual, private agreement between two companies," explained Cuddihe. "The lawsuit was scheduled for a February court date and after we introduced the Super Surfer as a new, improved stand-on mower with a floating deck to replace the Surfer, Wright came to us wanting to settle.

"The only thing we (Wright Mfg. and Great Dane) can agree on," Cuddihe concluded, "is that the litigation between us is over."