by Choo, David K., featured in Hawaii Business.
More than three years ago, Russell Watanabe had to consider those three options for his family business. It wasn't the first time the chief executive officer of Watanabe Floral Inc. had to ask himself those hard questions. In 1995, with South American flower suppliers blooming and the Internet starting to take root, Watanabe decided that his company, which had primarily been a flower grower and wholesaler, needed a bigger retailing presence, opening four locations throughout Oahu.
However, in 2002, Watanabe Floral's challenge was how to deal with big-box retailers, which were entering the Islands' flower market in a big, big way. Consumers were responding, having no problem buying lei and cut flowers at the same place they purchased their flat-screen televisions and 50-roll packs of toilet paper.
Watanabe's choices were difficult: Competing head-on with the bargain behemoths and their razor-thin margins could mean retailing suicide. On the other hand, entering the mass market and supplying these giants with product would involve far more work for far less profit than dealing with traditional wholesalers. However, ignoring this new, growing retail choice would probably be the biggest mistake of all.
So Watanabe, reading the retailing handwriting on the wall, bit the bullet and after nearly nine months of negotiating, worked out an agreement with Costco to sell lei at their locations in 2003. WalMart and Foodland followed in 2004.
"We saw a great demand for flowers, and we had to figure out a way to get them in consumers' hands," says Watanabe. "We try to think of the bigger picture, so we don't look at other flower people as competitors per se. Instead, we focus in on how we can get people to spend their discretionary income on our flowers."
Over the past three years, Watanabe Floral has gotten pretty efficient at doing just that. Sales have blossomed from $6 million in 2003 to $8 million in 2004. In 2005, gross annual sales are expected to reach $10 million. Much, if not all, of this growth is attributed to Watanabe's performance in the mass market, which now accounts for 20 percent to 25 percent of the company's total sales. According to Monty Pereira, sales and marketing manager for Watanabe Floral, even though profit margins are as much as 50 percent less than what the company makes selling directly, the mass market offers the company its best opportunity to expand its reach, with minimal investment.
"We don't have any infrastructure costs. We just supply the labor and the product," says Pereira. "But the mass market has its challenges. At Costco, for instance, we have to provide leis at three price points: $7.99, $14.59 and $18.69. At those prices, there are leis that we don't make a dime on. There are others that are actually cheaper than what we offer in our own store. But that's where the customers are, so that's where we have to be."
A Rose Business Is Not a Rose Business Is Not a Rose Business
With 133 employees, four retail locations and a 17-acre farm on the Big island, Watanabe Floral Inc. is the Islands' largest floral business by far, controlling more than 50 percent of the Islands' locally purchased floral resources. The company supplies more than 400 wholesale accounts statewide, providing many of them with cut flowers from field to storefront in 24 hours.
However, dominating the Island's flower world means very little in the wider blossom universe, where Central and South American factory farms marry critical mass with cheap labor and high-tech fulfillment. Slowly and then all at once, the vertically integrated Watanabe Floral has had to evolve and adapt, doing everything for everyone--growing processing, importing, wholesaling and retailing. The company, as nearly as diverse as the more than two dozen different varieties of roses it grows, operates more like a nimble Internet startup--changing business plans regularly--rather than an old-school, 60-year-old flower merchant.
"If you compare the company today to what it was five years ago, it would be almost unrecognizable," says Pereira. "Our building's different, our personnel's different, and, more importantly, the markets that we are in are vastly different than before. We've had to make considerable adjustments to keep up with the game."
"Conventional business wisdom says that you pick out a niche and fill it. But conventions haven't applied to the flower business in a long time, and especially in the last several years," adds Watanabe. "We've become everything to everyone, which is not something you want to do in most businesses, but it's worked for us."
Blooming Business
Russell Watanabe's father, Ernest Watanabe, first got the idea to grow flowers for a living as he gazed out the window of his Army barracks in 1945. Watanabe, who was a translator and interpreter with the Military Intelligence Service, had been stationed in Brisbane, Australia. The war was winding down and soon people would be returning home to restart their lives and rekindle romances. (His own wedding, which had been scheduled for June 1942, was interrupted by the war.) Watanabe reasoned that simple luxuries such as flowers would be in huge demand in postwar Hawaii.
Upon his return to the Islands, Watanabe, who had a master's degree in chemistry from the University of Hawaii, briefly worked for the Hawaii Sugar Planters' Association before leasing a 3-acre plot in Kahala, where he planted roses he had imported from Texas. Within several years, he outgrew his pocket-size Kahala farm on the appropriately named Farmers Road and moved operations to Koko Head and a patchwork of plots in the area where Hawaii Kai's Kaiser High School stands today.
Watanabe would grow roses there for the next 20 years, with the help of his six children, who did everything from plowing to picking to delivering. It was a seven-day-a-week job, with the flowers being stored and processed at the family's Young Street home before they were delivered to florists throughout the Islands. Four of the six Watanabe children still work ill the business.
"My father would knock on the door around 5:30 a.m. If" we didn't get up he'd start yelling, then blast "Beethoven's Fifth' very loudly on the stereo," says Leland Watanabe, today the company's purchasing manager. "I used to like Saturdays, because we'd get off early, to play sports. At the time, I thought every kid had to work before games. When I found out that most off my teammates spent their mornings watching cartoons, I realized life wasn't fair."
Until 1974, Ernest Watanabe Roses, as the company was then known, was primarily a commercial rose grower. But in the summer of 1972 a trip to the Mainland changed all that. Ernest and Russell, who was a sophomore at the UH Manoa studying business administration, visited the Mount Eden Floral Co. in Hayward, Calif. The business, run by the Japanese-American Shibata family, was one of the largest rose growers in California, but, more importantly, a full-line floral wholesaler. To father and son, the soup-to-nuts operation seemed like the logical progression for Ernest Watanabe Roses. Mount Eden would become the template for their growing company.
Two years later, shortly after Russell's graduation from college, father and son each invested $500, shook hands and started Watanabe Floral Inc. Ernest handled the wholesaling side of the business, while Russell managed nursery operations, which in 1978 grew to two properties, one in Mililani and the other in Waimea on the Big Island.
"We brought in our first shipment of carnations from Mount Eden and much to our surprise, it sold out in two days," says Russell. "Then we brought in more carnations and some chrysanthemums and those sold out in two days. We knew we were on to something."
The business grew quickly. In 1976, the Watanabes tore down the family home to make room for a larger facility, which was supposed to serve as the base of operations for the next 15 years. They outgrew it in five. In 1987, Watanabe Floral moved into a 25,000-square-thor Nimitz Highway location, which provided the business with plenty of room to grow. But changes in the market both locally and globally were threatening to slow down growth considerably.
The War of the Roses
By 1987, the emergence of a local rose-growing competitor on the Big Island and pressure from South American growers, who were flooding the Mainland with cheap products, led to a glut of the flowers on the local market. Faced with a growing (and dying) surplus of roses, the Watanabes decided that they had to start selling their excess flowers directly to the public from their Nimitz Highway headquarters. Quantities were small at first, sometimes as little as five dozen to as much as 100 dozen roses. The decision was unpopular with the company's wholesalers and eventually touched off a boycott.
"Roses grown in Colombia and Ecuador started showing up on the market nearly 20 years ago and really came on strong shortly thereafter," says Ed Mersino, county extension agent with the University of Hawaii's College of Tropical Agriculture and Human Resources. "With cheap labor and perfect rose-growing conditions (high altitude areas along the Equator), these countries completely dominated the rose-growing business globally. Within five or 10 years, there were only pockets of rose growers on the Mainland. It became very, very difficult to survive in the business its just a grower, If you wanted to survive, you had to get into retail like Watanabe."
Watanabe Floral had no sooner weathered that storm before it was hit by retailing and wholesaling's next big wave, the Internet. The advent of online connectivity and state-of-the-art fulfillment brought these affordable South and Central American flowers to the doorsteps of Hawaii wholesalers and retail customers.
In 1993, with prospects in the wholesale market unclear, Watanabe committed to selling its full Fine of flowers (not just surplus) to the public, opening locations at Daiei Kaheka in Honolulu, Tropicana Square in Waipahu and Times Supermarket in Niu Valley. In addition, it continued to sell flowers at its flagship Nimitz Highway store as well as its farms in Mililani and Waimea. Today, retail accounts for approximately 50 percent of the company's gross revenues.
Entering retail on a larger scale was a tightrope walk of sorts for Watanabe. The company needed to penetrate the market deeply, but not too deeply. It wits, after all, going into competition with its wholesale customers and in a round about way, itself: So Watanabe officials picked their locations carefully, making sure that it wouldn't encroach on its wholesalers' turf.
"We avoided areas that would put us head to head with our wholesalers, areas like the Windward Side, for instance," says Pereira. "Sometimes you're making decisions that don't benefit you immediately, but are good for the long run. For our overall business, we depend on our wholesalers succeeding."
Watanabe further refined its retailing strategy' in 2002, with the aforementioned move into the mass market. Watanabe lei and flowers can be found in all of Costeo's, WalMart's and Sam's Club's Oahu locations, as well as in eight of Foodland's 29 outlets. In the next several years, Pereira hopes to have a wider presence throughout the local supermarket's chain of stores.
Today, Watanabe continues its balancing act of cultivating its fragile network of wholesalers and meeting the needs of its retail customers, while growing its own flowers For both. On the rose front, the company has met the South American challenge by cultivating varieties that have smaller blossoms but very strong fragrances. These aromatic roses are a niche item for the floral company. Since they are more delicate and have a shelf life of about a week (half of the South American-grown varieties), they can't be shipped long distances. In other words, no cheap foreign competitors.
At the end of last year, Watanabe closed its Mililani farm and has invested several hundreds of thousands of dollars into upgrading its Waimea facility and its dozens of varieties of roses and other flowers. In addition, earlier this year, Watanabe introduced Speaking Roses, long-stemmed roses with messages and images custom printed on their petals. Pereira believes that the flowers, processed at its Nimitz Highway location using a top-secret and patented technology, will be the floral industry's biggest item since the Mylar balloon. The roses should give Watanabe's wholesale customers a needed boost.
Watanabe Floral's balancing act seems to be working fine, for now. While the immediate future looks bright, there are some worrisome signs over the horizon. Africa has become an increasingly larger player in the rose-growing business. Even worse, the 800-pound, economic gorilla, China, has recently started to grow roses on a large scale.
However, Russell Watanabe remains undaunted and prepared.
"We've got a very complicated business plan with a lot of complicated challenges. But I'm optimistic," says Watanabe. "No matter what happens in the global market, at the end of the day, Hawaii is still surrounded by a 2,500-mile-wide moat and we are still a kamaaina company, which knows the culture and buying habits of its customers."
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