Glen William Greenhouses Ltd

During the first week of June 1988, Jim Wood, principal owner and manager of Glen William Greenhouses Ltd of Glen William, PEI, had just received the results of a market research study he had commissioned in April, 1988. Mr. Wood was considering constructing a one hectare greenhouse to grow and market hydroponic lettuce in the Maritime provinces. Based on the results of the market study, Mr. Wood had to decide whether to proceed with the plans to construct the greenhouse.

Hydroponics

Hydroponics is a method of growing vegetables indoors without the use of soil. The vegetables are cultivated in an inert medium, such as porous volcanic rock, rockwool, or polyester wicks, using a tray or channel system. The trays or channels are linked by plastic tubing which carries a nutrient solution directly to the roots of the individual plants. This water-based solution provides the complete nutritional requirements of the crop. The grower can tailor the nutrient solution to the particular vegetable grown or to the specific requirements of the vegetable at any stage in the growth cycle.


This case was prepared by Professor Sean Hennessey of the University of Prince Edward Island for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.


The vegetables which can be grown in a greenhouse using hydroponic technology include tomatoes, lettuce, English cucumbers and peppers. In certain areas (Netherlands, Germany, the United Kingdom, parts of the US, Ontario, and British Columbia), hydroponics has proven to be a superior method of production in comparison to soil.

Yields can be 20% to 30% higher, growing times measured in days versus months, quality superior, nutritional value higher, and shelf life longer. All this is achieved without the use of pesticides or herbicides. The plants are not sprayed since insects are not a problem in a greenhouse and disease is very rare. The vegetables also appear in grocer's produce departments in near perfect form, perfectly shaped and fresh looking with no blemishes. Hydroponic vegetables as a result, usually command a premium price in comparison to the field grown competition.

The key to ensuring a superior hydroponic product is handling, from the minute it is harvested to the final display in the produce department. The product must be cooled as soon as it is picked, packaged, and distributed as soon as possible. Wholesalers and retailers must also handle the product properly. If this is done, consumers have displayed a willingness to purchase the product and pay a premium. For example, shoppers in Large urban areas have paid up to a 300% premium for hydroponic vegetables.

Hydroponic Lettuce

Hydroponic lettuce has been grown successfully for a long period. Originally, only leaf lettuce (boston bibb and green and red leaf) was grown hydroponically. Over the past decade however, the more popular varieties of head lettuce (iceberg and romaine) had been successfully grown hydroponically. There are large hydroponic producers in the US, British Columbia and Ontario devoting five to six acres of greenhouse capacity to the growing of head lettuce year round. Hydroponic iceberg lettuce looks like field grown iceberg, but the head is not so tight and it will weigh at least 15 to 20% less.

The advantages of hydroponic lettuce over field grown lettuce include the general advantages discussed above, especially higher quality; it is non-allergenic and fully digestible, important features for many seniors. Also, it is free of dirt and grit, a very common occurrence in field grown lettuce. Many hydroponic producers, in fact, recommend that their lettuce not be washed as tap water may soil the lettuce. Furthermore, hydroponic head lettuce lasts longer and the whole head can be used. There is no waste.

If, however, the product is not handled correctly, then it can deteriorate very quickly after picking. The maximum shelf life for lettuce which is handled and displayed properly is three weeks. This would be extremely rare and the more usual shelf life expectancy would be seven to ten days. Lettuce, not handled correctly as soon as it is picked, could be unfit to sell a day or two after picking.

Many chefs prefer hydroponic head lettuce even though it is more expensive than the field grown competition. The advantages cited are that it saves labour time, there is no waste, and it is much fresher. In general, the chefs felt that with its advantages, hydroponic lettuce is definitely worth the extra cost.

Glen William Greenhouses Ltd

Glen William Greenhouses Ltd began operations in July 1982, when Jim Wood, the manager and major shareholder, constructed an 8,000 square foot (sq. ft) greenhouse in Glen William, PEI to grow hydroponic tomatoes. After carefully studying the market for tomatoes in the Maritime provinces, Mr. Wood felt there was a definite need for a locally grown, quality alternative. During the winter and spring, the tomatoes on the market were generally imported from the southern United States and were not in good condition by the time they were displayed in grocery stores in the Maritimes.

Glen William Greenhouses gradually expanded to 26,000 sq. ft by 1988. After testing a number of different crops including tomatoes, lettuce, peppers, and cucumbers, Mr. Wood had concluded that he could consistently grow good quality tomatoes and lettuce. The problem he faced was that an operation of his size had to specialize on one crop.

Expansion Plans

Given the opportunities for expansion, Mr. Wood was considering constructing a two hectare greenhouse: one hectare to grow tomatoes, one to grow lettuce. His problem was that he only had capital available to construct one hectare. One hectare was equal to 2.47 acres. Since one acre was 43,560 square feet, the total available growing area was roughly 108,000 sq. ft. Therefore, he had to make a choice regarding the possible alternatives. Since he had been growing and marketing hydroponic tomatoes for seven years, he felt he had a sound grasp of the market for tomatoes.

Mr. Wood was less certain about the market for lettuce. He was certain he could grow good quality lettuce, but unsure about the varieties which would sell. He knew there was a large market for lettuce, but was not certain of the exact size nor of the price the market was willing to pay. He was also interested in the experiences of the existing producers of both field grown and hydroponic lettuce in the Maritimes as well as the distribution channels they used. Mr. Wood felt that "with care and proper attention to the marketplace and with judicious advertising, there was a place for greenhouse lettuce on a large wale in the Maritimes".

With these thoughts in mind, Mr. Wood commissioned a market research study into the production, consumption, and distribution of lettuce in the Maritime provinces. At this point in the process, Mr. Wood was less concerned with the financial aspects of the project. Once he received the results of the market research study, he would then be in a position to make a decision regarding the feasibility of marketing the product. If the results of the market research proved to be positive, then additional research on the financial considerations would be completed. It was April and in order to proceed with the plans to construct the greenhouse, Mr. Wood required the results of the market research by the first of June at the latest. In the meantime, he was considering production volumes.

Expected Production Levels

Mr. Wood wished to estimate the production (number of head lettuce) he could expect from a one hectare greenhouse devoted solely to the growing of lettuce. To estimate his potential production, Mr. Wood knew he would have to account for the differences in production between summer and winter. Winter lettuce normally took much longer to grow and the resulting head was usually significantly smaller than the summer lettuce. For example, the size of a summer head of lettuce normally averaged 7 oz while the winter lettuce average was 5 oz.

The winter months were considered November to March, the period when days were the shortest. The remainder of the year was deemed summer months. The time to grow a head of lettuce to maturity in the winter averaged 11 weeks while in the summer the average fell to approximately 6 weeks. In a one acre greenhouse, approximately 120,000 heads of lettuce could be growing at any point-in-time.

Pricing Information

As with most produce, the price for lettuce fluctuated with the supply. In winter, when field grown lettuce had to be imported from the southern US, prices were high. An average retail price of $1.39 per head for iceberg or romaine was not unusual. In summer, when the locally grown product was available, prices fell to an average of $.79. Offsetting the reduced price for a hydroponic product was the fact that costs of producing the lettuce were 40% less than during the winter. Retail margins on lettuce were roughly 40% while wholesalers normally required 20% to handle the product.

The Market Research Study

The team of market researchers reported their results during the first week of June. The report provided information regarding the demand for lettuce, the production of lettuce, the growers of hydroponic lettuce, and the distribution channels used for lettuce. A summary of the findings in each of these areas is provided below.

Demand For Lettuce

Exhibit 1 outlines the total amount of lettuce consumed in Canada, the amount produced domestically, the amount imported, and the consumption per capita for the five years 1982 to 1986. The dollar value of the lettuce imported over these five years averaged approximately $87 million per year. In 1986, the dollar value of the lettuce imported into Canada was $107.5 million. Over 99 percent of the lettuce imports originated in the United States.

There were few statistics for lettuce consumption in the Maritimes. Based on the Maritime provinces' populations of approximately 1,710,000 and the 1986 Canadian per capita consumption of 222 pounds of lettuce, the expected consumption of lettuce in the Maritimes would be almost 40 million pounds. However, according to a 1984 report by Ironwood Consulting Services of Almonte, Ontario entitled "Atlantic Vegetable Situation Analysis", Atlantic per capita lettuce consumption was only half of the national level.

Actual statistics available for lettuce were for "unloads" imported into the Maritime provinces. Exhibit 2 provides Agriculture Canada data for 1986 and 1987. Since only two markets in the Maritimes were followed by Agriculture Canada, it was quite possible that not all of the lettuce consumed had been accounted for. Statistics Canada also traced lettuce imports into the Maritimes. Exhibit 3 outlines the figures reported by Statistics Canada for 1986 and 1987.

Lettuce Production in the Maritimes

In the Maritimes, approximately 22 operations grew lettuce in significant quantities. Of these, three produced lettuce year round, hydroponically Exhibit 4 provides 1986 and 1987 data by province, of the number of traditional (field grown) growers, the number of acres planted, the production marketed, and the value of the production, also included is the same information for Canada as a whole for 1986.

Approximately 75 percent of the field lettuce grown in the Maritimes was iceberg. The remainder was romaine with a number of operations also growing a small amount of leaf lettuce. Some of the operators had grown bibb lettuce in the past, but it was considered a specialty lettuce, and for the small amounts sold, not really economical. Iceberg and romaine were the types of lettuce which were purchased by consumers in the maritime provinces. Combined, they accounted for at least 90 percent of the lettuce market.

The field grown lettuce was planted in the first week of May and harvesting began during the last week of June. Maritime producers sold the majority of their lettuce directly to the large retail stores. The reason for this was the higher price. Retailers paid growers the same price for their lettuce as they paid for imported lettuce. Some growers used wholesalers, but only when they could not sell directly to retailers.

During July and August, the bulk of the locally grown lettuce was harvested. As a result, most retail stores sold only locally grown field lettuce during this time. This resulted in imports declining quite substantially during the summer period. Exhibit 5 displays the quantity of lettuce imported into Halifax and Canada during the months of April, May, July and August for the years 1986 and 1987. While the quantity of lettuce imported into the Maritimes from the US was reduced quite significantly during the summer months, imports from Quebec began to enter the market.

Growers of Hydroponic Lettuce

In the Maritimes, three producers grew hydroponic lettuce, two in Nova Scotia and one in New Brunswick. Similarities in their operations and views concerning the production and marketing of hydroponic lettuce was discussed.

First, the greenhouses for the three producers were 11,000 sq. ft and 22,000 sq. ft in size. Their respective production figures for lettuce were 70,000 head, 156,000 and 200,000 head per year. Production during the summer was approximately double what it was during the winter All three companies grew other vegetables, primarily tomatoes. The three producers each grew the same three varieties of lettuce: boston bibb accounting roughly 60% of total production, green leaf 25%, and read leaf 15%. These varieties were considered specialty lettuce.

Second, the producers sold their lettuce directly to large retail stores and restaurants in their areas of operation. The sellers were responsible for delivery of the lettuce to the individual stores. Urban centres seemed to be the areas where hydroponic lettuce of these varieties were sold. The chain stores, like IGA and Sobey's, were the retailers of choice for the growers.

Third, the producers did not now use, nor would they use, wholesalers to sell their lettuce. The principal reason for this was handling problems. The growers did not believe that the wholesalers would take proper care in handling the lettuce and, therefore, retailers would either not buy it, or would only pay a reduced price.

A second reason for not using wholesalers was the growers' concern about losing contact with the retailer, more specifically, the produce manger. The growers felt that contact had to be maintained in order to ensure that retailers carried the product and continued to handle it correctly A third reason for by- passing wholesalers was the 20 percent margin required by the wholesaler. From the grower's perspective, the wholesaler was not worth this cost.

Fourth, each of the growers packaged their lettuce in a similar manner. The lettuce was packaged in a plastic bag with the roots attached. The bag had a watertight pouch in the bottom in which the roots were placed. An elastic band held the roots in place. On the bag was printed the producers name, in some cases a brand name like 'live lettuce" or 'living lettuce", and information about the lettuce. The information on the package included such items as non-allergenic, no pesticides used in growing, fully digestible, and chemical free.

Fifth, growers did not receive a premium price for their lettuce, nor did retailers charge a premium price for hydroponic lettuce. Hydroponic lettuce was perceived by the existing growers as having some benefits over the field grown lettuce; however, produce managers did not share this view.

Sixth, the growers believed that in order to increase the demand for hydroponic lettuce, both retailers and consumers had to be educated concerning the benefits of hydroponic lettuce. This view might have been held in part because of the types of lettuce they produced. Consumers in the Maritimes primarily purchased head lettuce: iceberg and romaine. Since the three producers felt that they could not grow these varieties, they had to educate consumers not only about hydroponics, but also about the three specialty varieties produced.

Seventh, each of the producers had used in-store promotions to encourage consumer purchases. The promotions were used by the growers when the lettuce was first accepted by the retail chains. In each store carrying the lettuce, point of purchase displays were set up. After the introductory time period, promotions were used, but very infrequently and at irregular intervals.

The promotion consisted of a booth in the produce department of the store. Samples of the lettuce, information sheets describing hydroponic lettuce, and recipe cards for salad dressing for the lettuce were available. The producers felt that these promotions were very useful in encouraging consumers to try the lettuce and once they tried the product, they would repurchase it. In this context, the promotions were considered a success.

The growers also used price promotions during the summer months, when production was high. Growers offered the retailers a price reduction if a certain number of cases of lettuce were purchased. No other types of promotions or marketing had been attempted by the producers.

Eighth, at least one of the producers had completed some very preliminary market research and determined the following:

  • The lettuce sold best in urban versus rural areas. All the growers sold to the Halifax market and all agreed that this was the market having the greatest potential.
  • The lettuce sold best in locations where there was a large ethnic population.
  • The lettuce sold best in areas where income level per capita was higher than average and where education levels of the population were greater.

Experience showed that the lettuce sold well in Fredericton and Moncton, but not in Saint John. It also sold well in Sackville and Wolfville, but not in Amherst.

Wholesalers of Lettuce

Wholesalers located in the Maritimes did not carry hydroponic lettuce since, as previously discussed, the growers sold directly to retailers and restaurants. Wholesalers appeared, however, to have a good knowledge of the concept of hydroponics. Some had previous experience with both the distribution and retailing of hydroponic lettuce. The consensus was that in order for wholesalers to distribute the hydroponic lettuce, growers would have to convince them that the product was high quality and that it could be delivered in top condition.

Also, wholesalers felt the retail price should be competitive with field grown lettuce, not premium, at least in the beginning. Finally, growers had to promote and educate the consumer regarding the hydroponic concept. This promotion was very important to help pull the product through the system. In short, wholesalers were willing to Carry the product on a trial basis, especially the more popular varieties of romaine and iceberg.

Retailers of Lettuce

Retailers believed that hydroponic lettuce sold best in the urban areas and that Nova Scotia consumers were the most exposed to hydroponic leaf lettuce. Hydroponic lettuce accounted for less than ten percent of the lettuce sold by the retail stores which carried it. The retailers felt that growers had to consistently promote the product to the end buyers. The special packaging and labelling used for the lettuce served as a very limited form of promotion. Generally, the retailers did not consider premium pricing as feasible for hydroponic lettuce. Based on past experience, the retailers believed that consumers bought first on price and then on quality.

The retailers perceived that the product would be of better quality and fresher if it came directly to them from the grower rather than through the wholesaler. The wholesale system added more handling and time that could adversely affect the product quality. On the other hand, the growers felt that they had to educate retailers on the handling requirements of hydroponic lettuce. The reaction of one of the growers to this situation was that the produce managers in many of the retail stores "don't put in the extra efforts. They couldn't be bothered".

Generally, most retailers carried hydroponic lettuce. This acceptance was conditional on the variety, quality, price, timing, delivery and grower support; conditions similar to those stated by the wholesalers. The retailers felt that consumers were receptive to hydroponic lettuce given the exposure and positive response to hydroponic tomatoes. They felt the positive perception would be carried over to lettuce.

Conclusion

With the results of the market research study available, Mr. Wood had to decide whether he should proceed with his plans to construct a one hectare greenhouse to grow hydroponic lettuce. He had already devoted a great deal of time and money to this project and before proceeding with a study of the financial aspects of the greenhouse he wanted to be sure he could sell his production. Was there a market for hydroponic lettuce in the Maritimes?


Exhibit I

Statistics Concerning Lettuce
Consumption in Canada

Lettuce
Consumed
Domestic
Production
Lettuce
Imported
Lettuce Imports
as a Percentage
Consumption
Per Capita
(pounds)
year (millions of pounds)
1982 517.6 86.3 431.3 83.3 19.5
1983 546.1 95.3 450.8 82.5 20.4
1984 571.3 104.0 467.3 81.8 21.1
1985 578.6 113.5 465.1 80.4 21.2
1986 605.8 90.1 515.7 85.1 22.2
Source: Apparent Per Capita Food Consumption in Canada Statistics Canada (32-230)

Exhibit 2

Inload Statistics for Lettuce Unloads
in the Maritime Provinces(a)
(in ooo's pounds)
Lettuce Variety

exh201.jpg (16771 bytes)

Notes: (a) Statistics for 1986 and 1987 for the unloads at the two locations in the Maritimes for which data were maintained.

(b) The term "domestic" simply means that the unload originated from a domestic market the lettuce shipped may not have been grown domestically For example, lettuce was imported from the US to Montreal. Some of this lettuce may have then been shipped to St John. For the purpose of this exhibit, this lettuce would be considered domestic.

Source: Annual Unload Report:
Fresh Fruit and Vegetables
Crop Development Division
Agriculture Canada
February 18,1988

Exhibit 3

Lettuce Imports into the
Maritime Provinces (a)
(in 000's of pounds)

Year Nova New PEI Total
Scotia Brunswick
1986 359 19,178 213 19,750
1987 226 18,418 0 18,644
Note: (a) These statistics were reported by the importers, based on the declared quantity on the bill of sale, directly to Statistics Canada.

Source: Statistics Canada
computer Print-outs May 1988

Exhibit 4

Production of Lettuce (field grown)
in the Maritime Provinces

exh202.jpg (21088 bytes)

Note: (a)The reason for the substantial decrease in lettuce production marketed between 1986 and 1987 was not known, however, it may have been caused by the hot, dry weather that the Maritimes experienced during the summer of 1997.

Source: Statistics Canada
Fruit and Vegetable Acreage, Production, and Values
(22-003)

Exhibit 5

Lettuce Imports for
Specific Months
(in 000's of pounds)

exh501.jpg (17609 bytes)

Sources: Annual Unload Report: Fresh Fruits and Vegetables, Agriculture Canada, 1987
Vegetable Market Review, Agriculture Canada, 1986-87