EAST ORCHIDS Established in 1989, East Orchids was an orchid farm located in the campus grounds of the University of the Philippines in Diliman, Quezon City. The enterprise started as a hobby of Mrs. Prieto before it was organized as a business. At the time of the case, the owners were also evaluating expansion strategies. What are the prospects of East Orchids given that Mrs. Prieto never had any formal training on orchid growing and business management? Author: Arturo Benedicto Benedicto M. Ilano Discipline: Strategic Management Industry: Orchids – Cut flowers and plants Issues: Expansion strategies, entrepreneurship entrepreneurship Setting: Philippines, 1992 Level of Difficulty: Undergraduate/MBA Length: 7 pages Case Number: 7-1992-21 Teaching Note: 7-1992-21T *Prepared under the supervision of Rafael A. Rodriguez, Professor, University of the Philippines, as a basis for class discussion. The case is not designed to illustrate effective or ineffective handling of managerial situations. Names, financial data and other figures have been disguised. The University of the Philippines Business Research Foundation Inc. and Angping Foundation supported the writing of this case study.
East Orchids was an orchid farm located in the campus grounds of the University of the Philippines in Diliman, Quezon City. It was formally opened on May 31, 1989 by Mr. and Mrs. Max Prieto. East Orchids sold both cut flowers and plants. As is typical with orchidariums, the farm had a 3,000-square meter canopy enclosure of green netting that shrouded a huge inventory of orchids. Behind the farm was the sprawling Prieto home, a brand new structure that was garnished by the Prietos' two Mercedes Benz automobiles parked in front, along with two golf carts. HISTORY
Mr. and Mrs. Prieto hailed from Davao, where Mr. Prieto was a former mayor. It was during the time of Mr. Prieto’s tenure that his wife Princess (“Pinsek” to her husband) became interested in orchids. The decision to grow orchids was very arbitrary, and definitely not for the purpose of starting a business per se. “There was nothing to do at home,” recalled Mrs. Prieto of the time when she and her husband were still in Davao. “Yes, I took care of the kids and fixed the house, but aside from that, there was nothing much for me to do.” “There were a lot of orchid farms there, and I saw that my friends were into orchids. So I got curious. I mean, why is everybody into them? First I bought a couple
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and decided, just for fun, to try to take care of them. It's kind of funny, now that I think of it, because I never even liked plants in the first place,” notes Mrs. Prieto. "I started with just a few orchids. Just a few. But soon, I became obsessed with them. I really don't know why. They just sort of became like my babies. I felt that I just had to take care of them," recalled Mrs. Prieto. “The thing is, I was too lazy to attend seminars on orchid growing. So I just decided to raise the orchids in my style. I asked around and observed, and I ended up sort of like raising my orchids by trial and error.” At first, Mr. Prieto was not too keen on his wife’s new-found hobby, and would often scold her for spending heavily on what seemed to be a frivolous pastime. But Mrs. Prieto was unfazed. “I knew my husband would refuse to give me money for orchids. So what I did was that I would overprice the kids’ tuition, for example,” laughed Mrs. Prieto, “or overprice the utility bills and the groceries. Then I will pocket what's extra.” “Once, I went to Hong Kong on a business trip,” reported Mr. Prieto with mock exasperation, “and I was to bring along a suitcase of cash, around P200,000 worth. When I reached Hong Kong, I opened my suitcase and the money wasn't there anymore. Turns out that my wife here got the money and stuffed the suitcase full of books instead.” Whenever her husband saw her with a new acquisition for her ever-growing orchid collection, Mrs. Prieto would insist that she got them at a very low price. “There was a time when I bought a set of very expensive local orchids, and when my husband asked me how much I bought them for, I lied and quoted a ridiculously low price. Next thing I knew, he was giving them away to his friends because he thought they were so cheap. I just bit my lip. I couldn’t say anything,” recalled Mrs. Prieto with amusement. Mrs. Prieto's orchid collection grew. Soon, they filled up their entire garden and was overflowing onto their driveway. Orchids had to be placed outside the house, to be watched over by their security guards. Soon, neighbors and nearby flower shops were offering to buy cut flowers from her. At first, she simply gave her flowers away, but as orders increased, she began selling these for arbitrary sums. It was when the orchids threatened to take over every living space in their home that Mrs. Prieto decided to sell whole plants. “I never intended to have an orchid business, and I never intended to sell orchids or cut flowers,” said Mrs. Prieto. “But when we saw how much money was coming in, we started thinking seriously about orchids as a business. My husband suggested it. You see, he has always been just barely tolerant of my hobby. Now, when he saw how much I was making, he changed his mind and decided that I could keep my orchids.” Mrs. Prieto claimed that sales of cut flowers alone sometimes reach P15,000 a day. The decision to formalize the business was helped by one other factor. “I'm my husband's second wife,” said Mrs. Prieto matter-of-factly. “I would therefore like to have something that is my very own.” Mrs. Prieto said that a successful orchid business could
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function as a form of security for her. “Besides, my husband had retired, so we could use an additional source of income.” In 1989, with the couple moving to Manila due to Mr. Prieto’s commitments, Mr. Prieto decided to lease 5,000 square meters of land from the University of the Philippines. “The land was originally a garbage dump,” recalled Mr. Prieto, “and you'd even see dead bodies there –– ‘salvage’ victims. We cleared it all up. It cost a lot of money, about P200,000, to do so. But in return, we got the right to lease the land for P12,000 a year. The University was happy with the deal since we took care of the dirty work of clearing the place and making it habitable. And we are much better tenant prospects than the squatters who used to be around the place.” As for the structure, “It was pretty difficult to set up,” noted Mrs. Prieto. “The ground is soft adobe, so the foundation was pretty expensive. We spent about P300,000 for the net enclosure.” All in all, including the water pumps and utilities, the farm's fixed assets were estimated by Mrs. Prieto to cost roughly P500,000 and she felt that the equipment could definitely last five years or so. THE PHILIPPINE ORCHID INDUSTRY
The local orchid industry was said to be a suppliers’ market, where demand is greater than the supply. Thus, the costs of finding clients were minimal –– orders would come in regularly without need for advertising. Nevertheless, members of the Philippine Orchids Society still found that they engaged in a tough competition with each other when it comes to getting prime bulk purchasers, which consisted mainly of flower shops and funeral parlors. Demand for orchid plants came from homeowners who were well into orchid growing themselves or who purchased these for ornamental purposes. In fact, buyers ranged from people from exclusive villages to teachers and government workers. Local propagation methods ranged from the basic cut-and-grow method to “tissue culturing,” in which tissue cells from a donor orchid are grown to maturity en masse in sophisticated laboratories. Laboratories could be found in Davao, for example, and were owned by large, established orchid breeders. Orchid growers also imported what are known as “comm-pots,” or community pots, which contain half a dozen or more small plants. These are cared for in a nursery until they become fully-grown plants. The best sources of exotic orchids are Thailand, Taiwan and Hawaii. In fact, to satisfy the high local demand for orchids cut flowers have to be shipped in regularly from these places. The Prietos have a friend, a Thai national, who commuted regularly between Manila and Thailand and had made a business out of placing orders with Thai farms for Philippine orchid growers. He regularly asked the couple for orchid orders, if they have any, and then shipped them in.
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“Every six months, I buy seedlings in bulk to replenish my stocks,” said Mrs. Prieto. “I spend about P300,000 every time I do this. The seedlings I buy will be enough to get me through the next six months.” This estimate was based on the frequency of Mrs. Prieto’s orchid buying when the farm was still just a hobby. OPERATIONS
The farm has 10 “boys” who were directly supervised by Mrs. Prieto. Four of them were experienced gardeners, and they took care of propagating the orchids and transplanting cuttings from mother plants. The other workers took care of watering the orchids and applying insecticide, fungicide and fertilizer. During warm days, the plants were watered up to four times a day. Fungicide was applied two to three times a week, with Mrs. Prieto using the cheapest brands, as these were no less effective than more expensive ones. The type of fertilizer was changed regularly. Each of the boys received P1,200 a month. “But that doesn't include the costs of feeding them and of their lodging,” noted Mrs. Prieto. “After all, they get to live here.” The average monthly expenses for fertilizer and other organic chemicals was P5,000. The average bill for water was estimated to be P6,000, while the average electric bill was P15,000. The meters for water and electricity did not differentiate between the residence proper and the farm, but according to Mrs. Prieto, the household’s use for these utilities was minimal. The large utility figures can be explained by the fact that four water pumps were required to make sure that the orchids were adequately watered. “She has no formal training in raising orchids, and she definitely has no management background,” said Mr. Prieto about his wife. “And yet here she is, producing some of the best orchids around. If you compare her orchids to those of other trained orchid growers, you will see that her orchids are much fatter and healthier.” Mr. Prieto attributed this to his wife's not following standard orchid growing practices. However, the fact that Mrs. Prieto spends practically all of her days monitoring and closely supervising the care of her orchids may also be a major factor in her producing quality orchids. Mrs. Prieto can always be seen at any time of the day milling about her farm, telling her workers what to do, and inspecting each and every plant. She practiced a very tight, hands-on approach. “My wife would wake up at five in the morning,” said Mr. Prieto with half-concealed admiration, “and immediately, she will be off to the farm to check on her orchids. And she would stay there until way past dinner time. I tell you, she sleeps, eats and thinks orchids.” “I still take care of my family, of course,” clarified Mrs. Prieto. “I know my responsibilities. But when everything is taken care of, I go straight to my orchids and I just stay there.” Mrs. Prieto estimated that she has about P1 million worth of plants in her farm, if taken at cost. “However, I recently received an offer for P15 million for the entire farm, representing a figure for the structure and for the inventory of plants inside,” claimed
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Mrs. Prieto. “That figure pretty much gives you an idea of how much orchids can be worth when fully grown, when compared to their cost.” For promotions, Mrs. Prieto had decided that it would be beneficial for her to join the Philippine Orchid Society (POS). She considered the society to be a good venue for meeting foreign buyers who are interested in local orchids, and for exposing one’s shop via exhibits and orchid shows. Although the POS imposed price controls on its members, it still gave enough allowance for Mrs. Prieto to routinely underprice her competitors. PRICING
“I would say that our costs are around 30 percent of sales,” said Mr. Prieto. This, however, is a top-of-mind estimate which may or may not be accurate. The couple says that prices are based on their competitors' prices. “About once a week, I would do my rounds,” said Mrs. Prieto. “I would check on the prices of other orchid growers. I would then price my orchids a bit lower than these others. If a vanda is being sold at P800 elsewhere, I would price mine at P750. I usually trim P50 off existing prices.” Mrs. Prieto also monitored the prices of other growers through orchid shows. She believed that if other orchid growers can make profits at their prices, then so could she, since she believed she had much lower overhead expenses. Once competitors’ prices were noted, a rough price list was drawn up. A key person on shift was then armed with this price list, and this was consulted whenever a buyer came for a visit. “Other orchid growers nearby are worried since they are afraid that their clients would come to us instead,” said Mrs. Prieto. She claimed that sales levels for the past three months have averaged some P200,000, and that even the onset of the rainy season did not seem to threaten a reduction in sales. THE FUTURE
It seems that from the start East Orchids was set up primarily as an extension of Mrs. Prieto's hobby. Other than the emphasis on raising healthy orchids, little or no truly aggressive marketing or expansion is being done. Mrs. Prieto has up to now been solely responsible for supervising every detail of the operation. Now, the amount of sales that the farm has registered seems to have emboldened the couple to execute an expansion of sorts. “We lack space here. Therefore, we plan to move our cut flowers somewhere else where there's a lot of room and the land is cheap. Davao, for example,” said Mr. Prieto. “We have the land, and manpower is much cheaper. We have relatives who can take care of supervising the business there. We planned to set up a large nursery in Davao because everybody knows that Manila is polluted and expensive. Now Davao is cheap, especially in labor and fertilizer. We can set up the nursery there, and then we will ship the cut
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flowers back here. In the meantime, this farm would have more room for selling grown plants and can function as our display area for the cut flowers.” The fact is, however, that the Prietos have not yet decided as to whether to invest in Davao or in some other place. “Yes, Davao seems ideal,” said Mrs. Prieto. “However, it means that I would have to shuttle back and forth at least once a week to check on the place. That would cost me about P6,000 a week in plane fare. It’s too expensive. Aside from that,” noted Mrs. Prieto, “in Davao, we have relatives who would be asking for handouts. To me, that would be a big headache.” Other options for cut-flower land are Los Baños and Antipolo, where a large tract of land was being offered to the Prietos for P50 per square meter. Laguna and Batangas also have wide tracts of land being sold for around P500 per square meter. “Labor is never a problem,” said Mr. Prieto when asked as to the staffing of their planned nursery. “Wherever we may set up, labor would always be available. With the rate of unemployment that we have, it is very easy to get people whom you can train. Orchids are not exactly a technical industry. I personally train each of my boys.” Mrs. Prieto also hinted that her husband may just eventually buy her a laboratory of her own for high-tech tissue culturing. A laboratory, she said, would cost about P12 million. No plans are in the works thus far, but their options seem to be open, particularly since Mrs. Prieto is in the process of sweet-talking her husband into buying her the laboratory in the future. There are, however, no serious plans as yet on implementing this, and for all intents and purposes, it is still in the "dream" stage. Recently, though, a more immediate problem has come to the attention of the Prietos. There is a possibility that the University of the Philippines will not renew their lease on the land, which means they would have to move out in about two years’ time. A Vice-Chancellor has offered them land in UP Davao that is about four times as large as their Diliman farm. Nevertheless, the effort that may have to be exerted to move out is great. “We are trying to negotiate with the UP people to give us a second term on this lease. After all, this land would still be a garbage lot were it not for us,” said Mrs. Prieto. “We spent an awful lot clearing up this place.” Despite this recent development, though, Mrs. Prieto was still optimistic about her business. “I never think about whether our business might fail. I just have this vision that I will earn.” Mrs. Prieto continued to spend most of her time among her orchids, not worrying at all about the company's performance but rather simply focusing on producing quality orchids. The revenues that the company had experienced in its first few months seemed quite high, and this may be the reason for Mrs. Prieto’s apparent complacency. Nevertheless, it was also possible that Mrs. Prieto did not see the actual financial picture of the company. An accountant dropped by every week to post transactions into the company's books, but Mrs. Prieto saw bookkeeping as simply a necessary evil rather than as a means of keeping track of finances.
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Study Questions
1. Is East Orchids really a profitable enterprise? If it is, do the margins justify the company's existence? If not, what justifies the company's existence? 2. How is Mrs. Prieto, who is not a trained orchid grower or businesswoman, able to compete with established orchid growers? 3. Should the Prietos push through with their plans for expanding their business? Would such an expansion be compatible with Mrs. Prieto's current method of managing the business? 4. Would you consider Mrs. Prieto as a true entrepreneur? Why or why not?
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