Management column: Get more efficient and keep investing
December 19, 2023
In this series of columns, we give the floor to directors and managers of Royal FloraHolland. This time our CFO, David van Mechelen discusses our financial housekeeping, because besides keeping our income and expenses in balance, it is also important to keep investing in the future.
Becoming more efficient while investing
In my role as CFO, one of the most important questions is how we as Royal FloraHolland keep our household books in order. That is, staying within the financial frameworks we have set for ourselves. This is not just a matter of ensuring that income and expenditure remain in balance. At least as important is considering how much we should and can invest in our future, and how we finance those investments. Investment is a given: standing still is going backwards. The key questions here are: how much do we invest? What do we invest in? And: do the investments pay off? For me, it goes without saying that we handle our members' capital very carefully. As a cooperative, we are in the special position that our members are also our shareholders and our customers.
We cover the association's costs from membership fees. That arithmetic can be done and substantiated. We also have to deal with the costs and revenues of our services for growers and buyers. These costs determine the rates we charge for them. For investments, we have the option of borrowing temporarily from the bank or financing them directly from the cash flows (resources) we generate ourselves. In the end, we have to earn the money ourselves, because loans have to be repaid, of course. In recent years, we have been able to pay for all financing from our own resources and have therefore not used the financing space at banks. Royal FloraHolland has a healthy balance sheet; we can take a hit when things get tough. That is an important starting position.
Strong cost awareness
This all looks very logical on paper. Practice, however, is a lot more stubborn. We set tariffs and membership fees for a year, but some of our costs are less predictable. The cost of energy is a good example. Everyone can talk about that from their own experience. Labour costs have also risen, the extent of which became clear only after the collective labour agreement was concluded. And to maintain our logistics performance, we made extra efforts to bring in enough employees in a highly competitive labour market. This was necessary, because if there is a shortage of employees, we might disappoint customers. This is a balancing act, because the reverse also applies: if we are too big in our pocket, if we have too many employees for the work at hand, we incur unnecessary costs. We want to avoid both situations, but finding just the right balance is a real challenge. This is a reality we have to deal with. Despite strong cost awareness, the loss over 2023 will unfortunately be significant. For next year, we are targeting at least a break-even result.
In that context, there are many positive things to report. We are already achieving lower energy consumption thanks to investments in energy saving; for instance, energy purchasing has decreased by 16% in recent years, partly due to solar panels and investments in sustainable LED lighting. Gas purchases have decreased by 12%, partly due to geothermal energy and other investments in sustainability such as "smart" docks. In terms of in-house staff and external hiring, we are realising a more favourable mix. We already have much lower consultancy costs than before. For 2024, we are tightening that even further. In addition, we are working with focus and attention on lower absenteeism. We also manage to negotiate better conditions with our suppliers, with a greater focus on risk mitigation.
One of our big financial puzzles: lots of real estate, and lots of necessary maintenance
Royal FloraHolland has a very sizeable real estate portfolio. The core building in Aalsmeer was completed in 1972 and has been expanded and adapted many times since. The same applies to our locations in Naaldwijk and Rijnsburg. Our buildings are mostly not energy-efficient and no longer meet today's requirements in many aspects. Within the company, there have long been discussions about issues such as central auctioning, aft-auctioning and other ways of distribution. All discussions with consequences for the use and deployment of our property. In the meantime, logistics processes changed and buyers' demand for space also increased. It was often unclear for a long time how and when we intended to use our real estate differently. This uncertainty had a paralysing effect on the management and maintenance of part of our portfolio. We now know much more precisely what we want and which uncertainties can have an impact on our plans. We now sometimes consciously opt for new construction, because it is cheaper to maintain and manage than renovating old buildings. And sometimes we decide for refurbishment or necessary maintenance because we cannot do without those spaces in our daily processes, or because maintenance and renovation is simply the best affordable option in some situations.
Value creation is doing the right things right
What I see is that when we talk about value creation within Royal FloraHolland, we all quickly tend to think of new services and propositions for the customer. There is nothing wrong with that, because new is exciting and challenging. But we are not sufficiently aware of the opportunities on the cost side. Creating value is both: developing and offering services that are relevant to customers, but at an affordable rate that also covers our costs. Good services that are too expensive have no right to exist. I find that thinking along these two axes is not yet fully balanced in all corners of our business. We work in a sector that is largely logistics; margins are thin. That is peculiar to logistics sectors. So actively thinking every day about how things can be done smarter and more efficiently is part of our DNA. The good news is, I do see this happening more and more. Many colleagues are constantly looking for possible savings. In doing so, I see more and more creativity in solutions. For instance, how we can now store a larger part of our logistics resources outside with limited investments. That saves a lot of valuable indoor space. Also very important: working on efficiency in the chain, not only within Royal FloraHolland itself. Time supply is a great example of this. It ensures that our logistics process is spread out over a longer period of time, allowing us to make better use of our employees and real estate. And the same applies on the buyers' side, they get their products delivered at the time that suits them best. So it cuts both ways: lower costs and better service. And also very important: doing things we do, develop and launch, right the first time. First Time Right, very important. Delivering quality saves a lot of costs. All these smart savings, but also the correct pricing of the value we deliver as Royal FloraHolland, give more and more colleagues visible energy and satisfaction. And the same goes for myself. Doing the right things is one thing, but doing the right things well is top sport and pure value creation!
Many good examples and many opportunities
Cost savings can be achieved in many ways. In logistics, for example. Reducing order picking errors results in substantial savings for the Search & Correction team. They spend less time tracking down flowers that have been picked incorrectly. Reducing errors also creates savings for the buyer who does not have to wait for the lost product. One savings in the chain not yet mentioned is Floriday. Floriday potentially creates big efficiency gains for both grower and buyer. Think, for example, of an application like Direct Bidding. The efficiency gains from using Floriday are far from being recognised as the result of our investment programme. And in the future we will be able to organise transport, both supply and delivery, i.e. 'end-to-end', much more efficiently when we have rolled out central auctioning 100%. Floriway but also other transport companies can play an important role in this.
In the coming period, under the heading 'Fit for Future', we will investigate which organisation is appropriate for our platform strategy and how it can also be more efficient and decisive, with a clearer division of roles and responsibilities.
With all these changes, we can also phase out so-called IT legacy systems. Outdated technology often makes them less reliable and more costly to maintain and manage. Right now, we are in an expensive phase: we are building the 'new world', while still having to keep the old systems up and running. We need to get through that as soon as possible. Phasing out old systems and simplifying our IT application landscape, that too is value creation.
And last but not least, we are focusing on international growth. Growth is not just something commercial, it also affects our costs. Because: with growth, we achieve scale and therefore lower costs per unit. Very important, especially for a company like Royal FloraHolland, which is capital-intensive and where many costs are 'fixed'. Think of our buildings, installations, logistics and IT. Scale is therefore also a crucial element in cost efficiency.
Influence of interest and depreciation
Another issue we face is rising interest rates. This has a direct effect and manifests itself in higher financing costs. Not only interest we pay on Certificates B of our members, but also on our bank financing. So this also works through when we make investments at higher interest rates now. Both depreciation charges and interest expenses then go up. We therefore look critically at our investments and make investments that pay for themselves, preferably in the short term. Sometimes that is not possible and we simply have to make investments to remain compliant: to remain in compliance with laws and regulations, for instance in the field of safety, sustainability, privacy, cybersecurity and working conditions.
When I look back and forward, I see that we are doing things ever smarter, better thought-out and better substantiated. And that we are working together better within Royal FloraHolland. We are becoming increasingly professional in our operations and decision-making, we understand complex issues better and better, we approach matters more and more integrally and then come up with integrated solutions for them. And we have more and more grip thanks to smart use of data. We are increasingly able to measure whether we are doing well in all kinds of areas, certainly not only in the financial domain. We can be proud of that and we will continue. A little better every day. And every day we show together that we can do it. That makes me look to the future with confidence.
Becoming more efficient while investing
In my role as CFO, one of the most important questions is how we as Royal FloraHolland keep our household books in order. That is, staying within the financial frameworks we have set for ourselves. This is not just a matter of ensuring that income and expenditure remain in balance. At least as important is considering how much we should and can invest in our future, and how we finance those investments. Investment is a given: standing still is going backwards. The key questions here are: how much do we invest? What do we invest in? And: do the investments pay off? For me, it goes without saying that we handle our members' capital very carefully. As a cooperative, we are in the special position that our members are also our shareholders and our customers.
We cover the association's costs from membership fees. That arithmetic can be done and substantiated. We also have to deal with the costs and revenues of our services for growers and buyers. These costs determine the rates we charge for them. For investments, we have the option of borrowing temporarily from the bank or financing them directly from the cash flows (resources) we generate ourselves. In the end, we have to earn the money ourselves, because loans have to be repaid, of course. In recent years, we have been able to pay for all financing from our own resources and have therefore not used the financing space at banks. Royal FloraHolland has a healthy balance sheet; we can take a hit when things get tough. That is an important starting position.
Strong cost awareness
This all looks very logical on paper. Practice, however, is a lot more stubborn. We set tariffs and membership fees for a year, but some of our costs are less predictable. The cost of energy is a good example. Everyone can talk about that from their own experience. Labour costs have also risen, the extent of which became clear only after the collective labour agreement was concluded. And to maintain our logistics performance, we made extra efforts to bring in enough employees in a highly competitive labour market. This was necessary, because if there is a shortage of employees, we might disappoint customers. This is a balancing act, because the reverse also applies: if we are too big in our pocket, if we have too many employees for the work at hand, we incur unnecessary costs. We want to avoid both situations, but finding just the right balance is a real challenge. This is a reality we have to deal with. Despite strong cost awareness, the loss over 2023 will unfortunately be significant. For next year, we are targeting at least a break-even result.
In that context, there are many positive things to report. We are already achieving lower energy consumption thanks to investments in energy saving; for instance, energy purchasing has decreased by 16% in recent years, partly due to solar panels and investments in sustainable LED lighting. Gas purchases have decreased by 12%, partly due to geothermal energy and other investments in sustainability such as "smart" docks. In terms of in-house staff and external hiring, we are realising a more favourable mix. We already have much lower consultancy costs than before. For 2024, we are tightening that even further. In addition, we are working with focus and attention on lower absenteeism. We also manage to negotiate better conditions with our suppliers, with a greater focus on risk mitigation.
One of our big financial puzzles: lots of real estate, and lots of necessary maintenance
Royal FloraHolland has a very sizeable real estate portfolio. The core building in Aalsmeer was completed in 1972 and has been expanded and adapted many times since. The same applies to our locations in Naaldwijk and Rijnsburg. Our buildings are mostly not energy-efficient and no longer meet today's requirements in many aspects. Within the company, there have long been discussions about issues such as central auctioning, aft-auctioning and other ways of distribution. All discussions with consequences for the use and deployment of our property. In the meantime, logistics processes changed and buyers' demand for space also increased. It was often unclear for a long time how and when we intended to use our real estate differently. This uncertainty had a paralysing effect on the management and maintenance of part of our portfolio. We now know much more precisely what we want and which uncertainties can have an impact on our plans. We now sometimes consciously opt for new construction, because it is cheaper to maintain and manage than renovating old buildings. And sometimes we decide for refurbishment or necessary maintenance because we cannot do without those spaces in our daily processes, or because maintenance and renovation is simply the best affordable option in some situations.
Value creation is doing the right things right
What I see is that when we talk about value creation within Royal FloraHolland, we all quickly tend to think of new services and propositions for the customer. There is nothing wrong with that, because new is exciting and challenging. But we are not sufficiently aware of the opportunities on the cost side. Creating value is both: developing and offering services that are relevant to customers, but at an affordable rate that also covers our costs. Good services that are too expensive have no right to exist. I find that thinking along these two axes is not yet fully balanced in all corners of our business. We work in a sector that is largely logistics; margins are thin. That is peculiar to logistics sectors. So actively thinking every day about how things can be done smarter and more efficiently is part of our DNA. The good news is, I do see this happening more and more. Many colleagues are constantly looking for possible savings. In doing so, I see more and more creativity in solutions. For instance, how we can now store a larger part of our logistics resources outside with limited investments. That saves a lot of valuable indoor space. Also very important: working on efficiency in the chain, not only within Royal FloraHolland itself. Time supply is a great example of this. It ensures that our logistics process is spread out over a longer period of time, allowing us to make better use of our employees and real estate. And the same applies on the buyers' side, they get their products delivered at the time that suits them best. So it cuts both ways: lower costs and better service. And also very important: doing things we do, develop and launch, right the first time. First Time Right, very important. Delivering quality saves a lot of costs. All these smart savings, but also the correct pricing of the value we deliver as Royal FloraHolland, give more and more colleagues visible energy and satisfaction. And the same goes for myself. Doing the right things is one thing, but doing the right things well is top sport and pure value creation!
Many good examples and many opportunities
Cost savings can be achieved in many ways. In logistics, for example. Reducing order picking errors results in substantial savings for the Search & Correction team. They spend less time tracking down flowers that have been picked incorrectly. Reducing errors also creates savings for the buyer who does not have to wait for the lost product. One savings in the chain not yet mentioned is Floriday. Floriday potentially creates big efficiency gains for both grower and buyer. Think, for example, of an application like Direct Bidding. The efficiency gains from using Floriday are far from being recognised as the result of our investment programme. And in the future we will be able to organise transport, both supply and delivery, i.e. 'end-to-end', much more efficiently when we have rolled out central auctioning 100%. Floriway but also other transport companies can play an important role in this.
In the coming period, under the heading 'Fit for Future', we will investigate which organisation is appropriate for our platform strategy and how it can also be more efficient and decisive, with a clearer division of roles and responsibilities.
With all these changes, we can also phase out so-called IT legacy systems. Outdated technology often makes them less reliable and more costly to maintain and manage. Right now, we are in an expensive phase: we are building the 'new world', while still having to keep the old systems up and running. We need to get through that as soon as possible. Phasing out old systems and simplifying our IT application landscape, that too is value creation.
And last but not least, we are focusing on international growth. Growth is not just something commercial, it also affects our costs. Because: with growth, we achieve scale and therefore lower costs per unit. Very important, especially for a company like Royal FloraHolland, which is capital-intensive and where many costs are 'fixed'. Think of our buildings, installations, logistics and IT. Scale is therefore also a crucial element in cost efficiency.
Influence of interest and depreciation
Another issue we face is rising interest rates. This has a direct effect and manifests itself in higher financing costs. Not only interest we pay on Certificates B of our members, but also on our bank financing. So this also works through when we make investments at higher interest rates now. Both depreciation charges and interest expenses then go up. We therefore look critically at our investments and make investments that pay for themselves, preferably in the short term. Sometimes that is not possible and we simply have to make investments to remain compliant: to remain in compliance with laws and regulations, for instance in the field of safety, sustainability, privacy, cybersecurity and working conditions.
When I look back and forward, I see that we are doing things ever smarter, better thought-out and better substantiated. And that we are working together better within Royal FloraHolland. We are becoming increasingly professional in our operations and decision-making, we understand complex issues better and better, we approach matters more and more integrally and then come up with integrated solutions for them. And we have more and more grip thanks to smart use of data. We are increasingly able to measure whether we are doing well in all kinds of areas, certainly not only in the financial domain. We can be proud of that and we will continue. A little better every day. And every day we show together that we can do it. That makes me look to the future with confidence.
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