summary-date February 2017
By The Numbers
- Zelenka Farms, one of the nation’s largest wholesale growers and distributors, filed for bankruptcy protection in June 2016
- Increasingly, large retailers are cutting out wholesalers and sourcing directly from growers, diminishing wholesalers’ bargaining power as retailers are able to set strict supply contract terms with wholesalers. This trend has prevented industry participants from fully passing on rising costs to buyers, forcing wholesalers to look elsewhere to protect profit margins
Notable Bankruptcy Shined Light on Trademark Questions: Zelenka Farms, one of the nation’s largest wholesale growers and distributors of container grown shrubs, trees, perennials, roses, and groundcovers, filed for Chapter 11 bankruptcy protection in June 2016 citing an unusually wet spring that left it without enough money to pay down part of a loan before a key deadline. LM Farms, LLC (an affiliate of Gardens Alive!) purchased substantially all of the assets but not without trouble. During the proceedings, the $15 million sale was put on hold so that the judge could consider in more detail arguments from Conrad-Pyle Co. and Spring Meadow Bursery Inc., which claimed Zelenka didn’t have the power to sell off trademarked plants grown with their patented DNA, raising an important concern for secured lenders. Discuss with your appraiser any issues that may arise with reselling trademarked products.
Perishability an important value consideration: The industry’s performance is impacted by certain uncontrollable variables, including weather patterns, horticultural diseases, and pest infestations. Many finished goods, fresh cut flowers in particular, are perishable and must be transported under refrigeration. This also limits transportation across long distances, which quickly becomes cost-ineffective as well as increases inventory loss due to perishability. Recovery values could thus be materially impacted by these factors.
Seasonality analysis is critical: Commercial operations are very seasonal and revolve around the growing cycle. The prime commercial selling season in North America extends from February to May, though this varies by company and inventory mix. When engaging an appraisal, lenders should strongly consider a seasonality analysis to get a more comprehensive view of the inventory at various stages of the sales cycle. High-low analyses provide average values during high and low selling season months, whereas larger nurseries may require monthly recovery analyses. In most cases, recovery values are maximized when inventory holding costs continue to be absorbed until the peak season for a particular inventory is reached. Thus, liquidation and holding costs tend to be higher with this type of liquidation strategy. However, this is mitigated by the need for significantly less discounting when selling in the peak versus non-peak season. It bears mention that a nursery may have counter-cyclical inventory, such as annuals and Christmas trees, whose peak selling seasons are opposite.
Complex supply chain means typical terms of sale don’t work: Most major customers, such as national garden center chains, big box home improvement stores, and mass merchandisers, would be unwilling to purchase under the normal “as is, where is” cash and carry Net Orderly Liquidation Value terms. Sell-through and values would be maximized by continuing to incur the costs to package and transport the inventory to customers. Thus, lenders should consider their willingness to: hold the inventory for up to six to 12 months as opposed to three; continue to offer limited credit terms to major customers; continue to package, ship, and potentially merchandise inventory in store; or continue to operate the business until the peak selling season, then continue to package and distribute to customers as normal. Without the willingness to do so, the values will be extremely low.
Maturation period and inventory mix are risks: Nurseries purchase seeds and plugs, typically grown in large, controlled-environment facilities for four to 10 weeks before being transplanted and allowed to grow until they reach their finished state, from suppliers. Most annuals take from eight weeks to one year to grow to a point where they are salable. Perennials, generally consisting of shade and ornamental plants and trees, take three to five years (trees not taken out of the ground at five years may become too large for proper extraction), and most Christmas trees five to seven years. As a result, lenders will only be able to sell a portion of the inventory to the intended customer base at any given point in time. Anything not mature enough to go to customers would have to go to local competitors or be abandoned/lost. If this is a major nursery, the amount that local competitors could absorb may be limited. A potential lender must carefully monitor the proportion of propagation to finished goods at all times as most propagation will not be ready to sell to the existing customer base within six to nine months and, if sold as propagation to competitors, will have a significantly lower value than salable plants.