Pay by scan has become the most talked-about and off-the-record subject in the United States bedding plant market. While certainly capable of generating an avalanche of opinions, attempting to discuss the details inevitably meets with a roadblock (at least one retailer who switched to pay by scan this spring required a signed confidentiality agreement from each of its growers). But after the first season of pay by scan, how is it working? Below is a report on what we have managed to determine so far for 2005.
First, what is it?
Pay by scan is a system implemented this year by American big box retailers Kmart and the Home Depot that redefines the landscape of selling plants: Growers are paid only when a consumer buys a product (generally bedding plants, but sometimes perennials) and it is scanned at the cash register. It is not consignment, which some growers might use with certain customers to move excess product. And it is not a guaranteed sale, where the grower takes back any product that does not sell. Both of these systems come with an unwritten understanding that the retailer has ownership of that product while it is in their possession; if the plants die from lack of water, or are stolen or damaged, the store pays. Under pay by scan, however, the store does not pay for a plant unless a consumer buys it. This puts 100% of the risk on the grower—basically turning every Home Depot and Kmart grower into a retail grower, whether or not they realize it.
Anxieties and realities
Back when pay by scan was a possibility instead of a reality, growers were afraid that if stores did not have some ownership in the product, employees and management alike would pretty much ignore it. Much to the surprise of growers involved in the program, the opposite has actually happened. Store employees and management, aware that the growers are now depending upon every plant selling, have shown a higher level of cooperation than in the past—or, at the very least, they have not shown any less cooperation. The rate of success with this, we think, depends heavily on a grower’s ability to build relationships. If a grower had problems before pay by scan, they will have problems no matter what.
Another concern before pay by scan “went live” so to speak, were the associated costs—merchandising, shrink, returns and so on. Would stores pay for those increased costs? A group of anonymous growers gave mixed responses. Some said they were happy with the price increase they managed to negotiate, while other growers admitted that they do not know if they are getting paid enough because they are still not sure what the true costs of pay by scan will be. This is a two-part issue: First, it is crucial that growers are able to calculate the cost of doing business. And second, they must be in a position to negotiate the best possible price—chain stores do not treat all vendors equally. Those who deliver the best plants and best service get the best prices. Again, relationships are key.
Theft was another gray area: Would stores turn a blind eye to customer or employee theft? Would whole carts of product mysteriously disappear? Growers say theft is an issue and always has been. Store loss-control departments are pretty ruthless with their security systems, but they are also pretty lenient when it comes to busting suspects because of the fear of lawsuits. Better to let somebody walk off with a flat of pansies than risk negative headlines. Growers have to pay for this, so they have to know the average loss per year to build that cost into their pricing.
Both retailers guarantee their plants—in the case of Home Depot, all plants are guaranteed for one year, even annuals. But this generous policy can easily be abused: we heard that one Home Depot consumer returned several hundred pots of groundcover—pots that had been refilled with dirt and stuck with cuttings from the original plants. Such obvious exploitation of this lenient return policy worries many growers: Let Home Depot have its policy for competitive reasons, they say, but do not ask us to pay for it.
Can Home Depot’s and Kmart’s computer systems accurately track scans so that growers are paid fairly? We are sure the stores would answer yes. Growers, however, say it is too early to tell, and that they have to trust their customer—all they have to go on is what they think sold versus what the store says sold.
With growers shouldering all the risk, some of us on the outside wondered if they would get conservative, reducing inventories and eliminating hard-to-maintain crops in order to minimize shrink. This had not happened, with many growers saying they planned exactly as they did before pay by scan. Or they speculated more heavily, or added new SKUs. Our store visits confirmed these actions: We noted a wider selection of products at our nearest store (which, admittedly, is being served by a different grower this year than last). A cashier told us that customers had commented favorably on the quality of the plants, too—the highest praise of all. (more…)