IntroductionThe following report is based upon the information provided by the stake holders of cut flower industry on a three day field visit to Nuwaeliya and Kandy areas between 1st June 2012 to 3rd June 2012. Objective of the three day field visit was to enable the participants to Enhance the knowledge of industry analysis, apply relevant tools and models in this regards and develop their own integrated model or approach

Enhance the knowledge of postgraduate students on prevailing trends in Floriculture industry in Sri Lanka and to learn possibilities to develop this industry.

Review the outstanding issues and shortcomings in the Industry and Marketing Practices in Sri Lankan business organizations with a view to applying the Value Chain as a frame of reference in advancing management practices or in analyzing core challenges in strategic management practices.

Suggest strategic approaches and make policy recommendations to promote the Floriculture Industry in Sri Lanka.Floriculture industry in Sri Lanka..Main categories included in the floriculture sector are1. Cut Flowers2. Cut foliage3. Cut decorative leaves 4. Potted Plants5. Bedded plants6. SeedsSri Lankan floriculture industry has three types of growers and producers1. Large scale growers for export and local market2. Medium scale growers for local market3. Small scale growers for local marketPresent Situation of Cut Flower Production in Sri LankaWestern, North Western and Central Provinces in Sri Lanka are the major areas where cut flowers are grown commercially. Cut flowers grown in the country can be divided into two main categories based on their temperature requirements i.e. Temperate Cut Flowers and Tropical Cut Flowers. Temperate Cut Flowers: Temperate cut flowers include carnation, rose, statice, gypsophyla, alstroemeria, chrysanthemum, lilies and irises. Among them, carnations and roses are grown in the highlands of the Central Province of Sri Lanka. Carnations are produced entirely from imported planting materials and are graded according to internationally accepted specifications for export and local market. The other species are commercially grown mainly for the local American and Mediterranean carnation cultivars are quite famous in the world market. Pink, white, red, yellow and salmon colours are much popular. Novelties such as striped and frosted types are also becoming increasingly popular. American cultivars grown are silvery pink, karina, barbara, red barron, elsy, royalette, bagatalle, bianca and adelfie. Mediterranean cultivars grown are nora barlo, shainah, lena, castellaro, scania, tanga, roma, pallas and charmeur. Carnations are grown in poly tunnels, covering more than 10 hectares, under fully protected environments. Roses are second to carnations and production is limited to about 40,000 blossoms per annum. This is mainly due to the highly expert conditions required for cultivation and production. Approximately 2-3 hectares of area have so far been used for cultivation of roses. Roses for the export market are grown under controlled environments in poly tunnels. Popular colours are highly variable. They are generally required in a mix and an acceptable mix would consist of red-50%, Pink-30%, yellow-10% and others 10%. Roses are quite popular in the local market also. Most of them are supplied by small scale growers. Tropical Cut Flowers: Anthuriums and Orchids are the most popular tropical cut flowers which are being grown commercially for exports as well as for the local market. Anthuriums can be grown at elevations up to 1500 metres above sea level, with texture and the flossiness remarkably enhanced with increase in elevation. Annual production of anthuriums is around 3 million flowers, the majority of which are sold at the local market. The exports of Anthuriums at present are not very significant. A land area of approximately 10 hectares is under Anthurium cultivation at present and the industry is expanding steadily at village level. Almost all plantations are either under poly tunnels or structures with shade netting. However, locally available materials are also used under certain conditions to provide required shade levels. The standard trade types in the world market are the "Avo" lines i.e. Avo Nette, Avo Ingrid, Avo Anneke. The improved standard types e.g. Germa, Cuba, Fuego, Favoriet etc. are also popular. The Royal Botanic Gardens, Peradeniya, being the pioneer institution for the development of cut flower industry in Sri Lanka has produced a few promising Anthurium varieties with export potential. Some of these varieties are being closely studied and mass propagation has just been started. A few of the slected varieties are: RBG - Green Tip, RBG - Soft Sheen, RBG - kandy queen, RBG - Gardens Pride, RBG - Royal Flag, RBG - Lak Isuru, RBG - Wild Beauty, RBG - Krishnas Red. Tropical Orchids can be grown under warm humid conditions up to 500 metres above sea level. Climatic conditions in the Western Province are quite favourable for cultivation of Dendrobiums, Vandas and Phalaenopsis types which are quite popular in the local and foreign markets. Approximately 3-4 hectares of land are under Orchid cultivation at present and the industry is gradually developing to cater to export markets. Almost all cultivations are under shade netting and the majority of growers have developed mist irrigation techniques. Madam Pompadour (Pink and White), and Rena Vapahoo (Pink and White) hybrids are some of the popular hybrid Dendrobiums in the market. Hybrids of Arachnis, Oncidiums, Phalaenopsis and Dendrobiums are being exported in smaller quantities and the income earned is not very significant. Gerberas are becoming popular among growers due to the availability of a wide range of long lasting cultivars produced by many modern breeding methods and tissue culture. These cultivars can be broadly categorised into three classes, namely Singles (such as Fleur and Apple Blossom), Doubles (such as Marleen and Hildegard), and Black Centres (such as Fabio and Rosseta). Pink, salmon, orange, red and yellow are the popular colours in the market. Trials have already been started under controlled environments by private entrepreneurs to grow gerberas for the export market. About 2 hectares of land is so far being used for gerberas. During our visit we mainly focused our study on temperate cut flowers ..... Strategic Groups in the industry1. Users of advance technology like pre cooling, freezer trucks for transport etc. with high initial capital investment targeting export market as well as local market

2. Green house growers with drip irrigation systems medium scale investment targeting local market ( these type of growers in Nuwaraeliya area have formed a society called Reflect flora with the assistance of Small Enterprise Development Division (SEDD))

3. Domestic growers

PESTEL Analysis1. Political2. Economical3. Social4. Technological5. Environmental6. Legal

4.3. Value Chain AnalysisValue Chain for Cut Flower IndustryValue chain for cut flower industry could be broadly identified as follows.Government support in terms of tax exceptions, Legal framework, loan facilities, building foreign networks, branding etc.

Training of Human resource related to cut flower industry, technical advices from SIDB

Cut flower R & D support

Inbound logistics

1. Procurement of lands and building of sheds.2. Supply of mother cut foliage. 3. Supply of pesticide and fertilizer.4. Farm tool suppliers.5. Building green houses

Operations

1. Site selection2. Production system3. Soil preparation4. Field planting5. Irrigation6. Weed Control7. Insect and pest control8. Control of other infectious diseases9. Control of nutritional and physiological problems.Outbound logistics

1. Harvesting2. Grading3. Bunching4. Sleeving5. Packing6. Pre cooling7. TransportationSales and Marketing

1. Advertizing and promotion2. CRM3. Managing marketing channels4. Marketing research5. Use of internet in marketing6. Auctions

During our field visit following value chain actors were identified as major role players in the value delivery process of cut flower industry. 1. Input suppliers2. Growers3. Transporters ( Local and International )4. Supporting organizationsa. Department of Agriculture b. Department of National Botanical Gardens c. Department of Forest d. Department of Wild Life Conservation e. Department of Commerce f. Sri Lanka Customs g. Export development boardh. Ministry of Economic developmenti. Public and Private banks5. Exporters, Buyers, and CollectorsThere were no established local input suppliers for floriculture industry in Nuwaraeliya area and Small Enterprise Development Division (SEDD) is the input supplier for small scale growers and medium scale growers especially in supplying planting materials for these two groups. However large scale growers import these inputs directly from abroad. We visited two large scale growers Macksons Ltd. at Thalawakele and Hayleys plant nursery at Boralanda. These growers use advance technology in their production process and most of the value adding activities identified in the cut flower value chain above are applied by these firms. Because of this they have the quality and quantity advantage over small and medium scale growers when it comes to the exporting of cut flowers. Some of the value adding activities like pre cooling, transportation through freezer trucks, and advance irrigation systems like drip irrigation systems which are adopted by large scale growers are not used by other two types growers. Temperate cut flower industry is heavily dependent on cool chain activities as these varieties are sensitive to the temperature very much. This is creating a big gap in quality of products and hence the products of small and medium scale growers are low in quality. According to the growers cost of land and high cost of initial investment for construction of green houses and other works has become an entry barrier as well as expansion barrier for existing small scale growers. It was revealed during the interviews with the growers that even though large scale growers have quality and quantity advantage in the international cut flower market they are lacking the price advantage and opportunity in the local market is higher than international market in some seasons of the year and hence small and medium growers are facing a heavy competition. SEDD has played a pivotal role in establishing temperate cut flower grower association in Nuwaeliya district aiming to give financial and technical assistance for small and medium scale growers. This association currently with seventy one members take the advantage of joint purchasing of planting material and other related materials but they have not adopted a joint marketing campaign to gain the advantage. The other major barrier is the international legal restrictions on propagation of some varieties of planting materials.Value added productsIt was revealed during the discussion with the growers that only one grower is suppling plant parts and dried flowers for fibre tech Ltd which is producing dried flower related value added products suitable for exporting. Profitability analysis for some selected cultivarsFollowing cost benefit analysis was carried out with help of statistics presented by Dr. Shelomi A. Krinshnarajah research officer at Royal botanical gardens. It will be useful to analyse these data to check the feasibility of investment in this sector.Roses acre land-5000 plants Initial investment-Rs.1,000,000.00 Recurrent investment Rs. 125,000.00 Yield of flowersYear1-10,000 FL Yearr2 - 40,000 FLYear3 - 60,000 FL Year4 75,000 FLYear5 75,000 Fl Income -Rs. 20.00 per flowerCash flow analysis for roses cultivationYear012345

Cash out Flow1000000.00125000.00125000.00125000.00125000.00125000.00

Cash in flow0200000.00800000.001200000.001500000.001500000.00

Total cash flow(1000000.00)75000.00675000.001075000.001375000.001375000.00

Payback period = 2 years and 3 monthsNPV at 15% WACC = Rs. 1,752,223Gerbera No. of plants -2000 Grown in a 100x 27 ft poly tunnel Initial investment-Rs. 1,000,000.00 Recurrent expenses-Rs. 60,000.00 Yield-250 flowers / m2 / Yr, leading to 62,500 flowers / Yr. Income-Rs. 15.00 per flower, flowers can be harvested for 02 Yrs.Cash flow analysis for GerberaYear012

Cash out Flow1000000.0060000.0060000.00

Cash in flow0937500.00937500.00

Total cash flow(1000000.00)877500.00877500.00

Payback period = 14 monthsNPV at 15% WACC = Rs. 426559.55

Cut flower R & D supportR&D support given by Peradeniya Royal botanical Gardens and Haggala gardens is limited due lack of research personnel. Parapet wall mentality of government officers hindered the possibility of formation government sector and private sector alliance for mutual benefits. Researchers in these organizations are claiming that development of our own cultivars is difficult due to several reasons. One is the lack of research personnel and the other is the time taken to develop a cut flower variety is very high. The third reason they highlight is that even if we develop our own varieties it difficult to brand it in the international market with fierce competition. Local input supply for temperate cut flower industry has not yet been established well in the upcountry areas whereas tropical cut flower input suppliers are better established in the low country areas according to research officer Dr. Shelomi A. Krinshnarajah. Sales and Marketing of Cut FlowersSeveral distribution channels could be identified in present marketing system of cut flowers. Some large scale growers have their own retail outlets in main cities. There are some collectors in main cities who order flowers from small, medium, and large scale growers depending on their demand. This type of marketing system favours the large scale growers as they are having quality and quantity advantage. These collectors then distribute the flower to retailers. Third category of marketing system was also identified in this industry. Here the retailers directly contact the growers and buy the flowers. In addition to these marketing systems large scale growers directly find buyers abroad and sell the cut flowers. According to the small scale growers unavailability of a proper collection centre in the Nuwaraeliya area is a major problem faced by them. Some kind of a trade centre or collection centre will enable them to find a buyer for their product with ease. Discussions with the grower association indicated that they were not aware of some of the internet based marketing activities are possible with a small cost. The Sri Lanka Export Development Board also provides information to cyber traders who can join the EDB Internet by paying Rs. 850. The Internet is the most important source of information. It gives addresses of organizations, trade journals, exhibitions, buyers and their requirements.Small and medium scale growers use the railway transport and large scale growers use their own freezer trucks for this purpose. Air cargo space limitation has become critical issue in exporting business. Services of Supporting OrganizationsMore than nine Government and private organizations currently involved in supporting the cut flower industry. During the discussions had with value chain actors sub optimizations of their efforts were identified. It was revealed that duplication supporting activities has led to waste of funds and ineffective programmes. There are several organizations like Banks, SEDD, and department of agriculture providing financial support for growers. Efforts of these organizations are not integrated. Similarly there are several organizations involved in R&D activities of the industry. These organizations also do not have any integrated approach.Summary of issues identified in Value chain AnalysisValue chain actorMain issues identified in the VCA

Growers Difficulty for small and medium growers to achieve necessary quantity and quality required for export Lack of common marketing efforts by grower associations to get the joint marketing advantage High price fluctuation during seasons Barriers faced by growers in obtaining quarantine certificates, other private quality labeling systems(GLOBALGAP, MPS, FFP), and EU product quality standards etc

Input suppliers In case of temperate cut flowers only local planting material supplier was the SEDD and they provide planting materials for small growers and large scale growers import directly. So unavailability of local planting material suppliers has become bottle neck in the industry.

Supporting organizations Lack of coordination among supporting organizations leading to waste of resources by duplication and conflicting interventions. Lack of research facilities to develop new export varieties. Parapet wall mentality of government supporting organizations to form partnerships with private sector for national interest. Specially in case of research activities private sector partnership, to eliminate the limitation of funds, would be feasible in developing export varieties. Lack of research personnel to undertake R&D activities of Government research institutions.

PackingStandards like EU product Quality Standards Sanitary and Phytosanitary regulations under WTO Quarantine Standards stipulated by the importing countries Private quality labelling systems (GLOBALGAP, MPS, FFP)

Market infoIn marketing Sri Lankan flowers and foliage traders can follow the example of tea. In the beginning, tea was marketed as Ceylon Tea for more than 150 years. Now tea sells under different brands. Till Sri Lanka becomes a popular source of flowers it is advisable for all flower producers to get together and brand flowers under a Sri Lankan label. Kenya is now in the process of developing a Kenyan label. (The writer could be reached at nevillef@slt.net)

Key Players in each Group1. Their market share2. Their profitability3. Level of of competition in each group4. Five forces analysisa. Current rivalry in the business and their strengths and weaknesses (foreign and local)b. Substitutes Is it synthetic flowers and toysc. Powers of buyers - foreign buyers are strong and backward integration threats are there.d. Supplier Power Mother cut foliage suppliers and labour. Forward integration threat is lesse. Entry barriers - ? is it initial investment which is comparatively high.

Is this the arrangement?Key Success factors (KSF)1. Location2. Trade Relationships3. Technologies and standards4. Government supportQuestions to be asked from Dr.D.S.A. WijesundaraInbound logistics related questions1. Price of land total cost per acre to cultivate various flower crops.

2. Technical aspects of Constructing green houses and cost involved

3. Flower crops suitable for growing under open air conditions and crops suitable for greenhouse conditions.

4. Ethylene sensitivity of various flower crops and how to improve the vase life of flowers.(air containing 100 ppb ethylene (0.00001%) may damage flowers; research finding by John M. Pole and A. Schnelle)

5. Long lived flowers and short lived flowers and their market demand.

6. Seasonality of various flower crops and ways diversify to get the advantage of seasonality.

7. Preparation of planting materials and how quality of planting material effect to the harvest quality.

8. Technical aspects of breeding new cut foliage from a mother cut foliage.

Operations related questions1. Common diseases and treatments

2. Pesticides and their cost3. Fertilizers used for various flower crops and their costs.

4. Temperature conditions required for growing various flower crops5. Site selection

6. Technical aspects of Soil preparation

7. Technical aspect of Field planting

8. Irrigation systems used in cut flower industry

9. Weed control methods and cost involved

Outbound Logistics related questions1. Important technical aspects of post harvest process flow like harvesting, grading, bunching, Sleeving, packing, pre cooling, and transportation.

2. Transportation industry related to cut flowers and its strengths and weaknesses.

Sale and marketing related issues1. Past sale figures of Cut flower and Sri Lankas position in international market2. Present marketing channels3. Can we use web sites like BloomNet.com, 1-800cutflower.com for our online marketing activities?4. Present level of promotional activities and improvements requiredGovernment support1. Tax incentives and any other investment incentives in the sector2. Financial assistance3. Technical assistance through training and entrepreneurial development activities.4. Present level of R & D support5. Foreign network building 6. Subsidized airline freight cost etc.Cluster Concept group of small scale growers can team up to take the advantage of joint marketing and joint purchasing. The team can fight with large scale grower with improved product quality and quantity. (to be highlighted in the report)

Constraints in Cut Flower Production Development The following are the major constraints being faced by the majority of growers: a) Inadequacy and high cost of air cargo: Air Lanka, the national carrier has always given priority to perishable cargo. However, the available capacity is not sufficient. b) Lack of facilities for research and development: So far only the Royal Botanic Garden, Peradeniya has been involved in providing assistance by and large to the middle and village level growers, but this is negligible when compared to the ever increasing demands of the industry. c) Lack of trained personnel: The floriculture industry requires trained personnel at each level of production. Education programmes from schools up to University level and training institutes to conduct courses on high-tech practical skills in floriculture are essential for the development of the industry. d) Big initial investment on farms: Duty free facilities for import of vital items not produced in Sri Lanka such as shade nets, uv stabilised polythene, irrigation and fertilising systems etc. would help to promote the industry. e) Lack of improved systems of marketing: Lack of proper or organised systems for marketing and inadequacy of current international market information on prices, trends, volumes and data on competitive countries etc, severely affect the development of the industry. f) The uneconomical size of floriculture industry: Difficulty in acquiring suitable land and lack of infrastructure facilities also adversely affect the industry. g) Lack of information on pesticides: Current information on pesticides and their acceptance in various countries is essential. h) Phytosanitary clearance: Phytosanitary inspection just prior to shipment are inconvenient and expensive, besides leaving no time to rectify any problems.7. Conclusions Floriculture has a great potential in Sri Lanka even though the existing market share is less than 0.2% of the world market at present. Interest in the cut flower industry is encouraging and many investors, both local and foreign, have started their nurseries to cater to the expanding market. A comparison of the world trend and the production figures of Sri Lanka clearly show that we are not in line with the world trend. However, this situation will soon change with the new policy changes taking place in the country. The Ministry of Agriculture and Lands, Export Development Board and various Floricultural Associations of the country have got together to discuss various issues in this regard and progress so far is very encouraging. Steps should, however, be taken to encourage floriculture research to cater to the special needs of the existing industry and to facilitate long term research programmes to explore the rich flora of the country to develop novelties to satisfy the growing market. The Government should take immediate steps to alleviate constraints mentioned above and to create an Institute or a Centre for Floriculture Research and Development. This could be a semi-governmental Centre or an Institute partially supported from the growers annual income.