The average modern consumer is smarter, better informed, values provenance, and has much higher demands than 50 years ago when seasonality, availability, and a pre-globalization market all made choice prohibitive. We’re experiencing a gradual, yet dramatic shift in mindset with vertical farming becoming a hot topic in most developed and indeed, developing countries. This is backed up by large-scale investments in several “early adopter” companies, namely Aerofarms and Plenty, which preceded an explosion in the number of small-and-medium-sized vertical farms. Among the various factors contributing to the rise of vertical farming are advances in lighting technology (led by the Cannabis market), pressure on resources, globalization, and climate change.
Despite such positive steps, the industry is still moving in a direction which is uncertain. Profitability, even at a small-scale, is still to be proven. There have been no exits to significantly influence the investment community, whilst the underlying business case for vertical farms is more often than not based on a narrow range of products and a host of similarly-positioned technology solutions. The retail and food and beverage industries, which are ultimately important gauges for determining the future success of a product class, are still widely closed off to the mass introduction of vertically-farmed products and – for baby leaf varieties – continue to be dominated by seasoned producers with history and scale.
World, meet microgreens
A common tactic implemented in new product classes is to focus first on the niche. Many new and even established vertical farming companies choose, or are limited, to growing high-margin varieties, such as microgreens and herbs. An alternative is a premium play in the baby leaf market, which is being seen in the U.S. at present. Microgreens can command gross margins of up to ninety percent and can be grown in as little as ten days. They also tie in nicely with food trends, healthy eating, and emerging research into the comparative value of eating microgreens as a replacement or supplement to products farmed using traditional methods. However, as this is a new area of research, the evidence-base for many crops is still lacking.
The market for microgreens has a ceiling – which we will reach at some point – and this is significantly lower than that of “larger” staple consumer products, such as root vegetables, baby leaf greens, and full-head lettuce. This “flip” from microgreens to larger products is capital-intensive, requires significantly more space (which is at a premium in urban settings), and offers lower margins for products that require more time, energy, money, and expertise to grow. In London, for example, there is evidence of at least three vertical farms – all focused on microgreens – going bust in recent years, citing cash, market dynamics, and OPEX as reasons for failure, among other factors.
In the beginning... there were technology choices to make
New market entrants who are reliant on outside technology solutions have a lot of choice – and difficult decisions to make. However, we find that the vast amount of solutions available share a common set of characteristics and are primarily based on rigid, immovable systems and first-generation lighting that has been re-purposed from the Cannabis industry. These circumstances are commonplace in new industries and are widely unavoidable, especially with little regulation and an underdeveloped investor ecosystem; such is the case with vertical farming.
Making the wrong choices in the beginning can lead to issues further down the line, as well as cost implications which come with the inability to negotiate discounts due to a lack of scale. This erodes the future business potential of the start-up, and in turn the ability to scale quickly and grow larger, lower-margin products to address a wider market segment. Furthermore, when dealing with multiple technology providers or an “all-in-one” solution, there is almost always a lack of long-term support concerning plant science, hygiene, and food production; all of which are high-risk areas, where at some point there is likely to be some fallout for the general public, if not properly managed and/or regulated.
Eating your margins
A third consideration is the intensive nature of indoor vertical farming, particularly where automation is not involved. Many farms set up and think first about maximizing growing space, yet forget about the process flow, systems engineering, and expertise required to run a successful farming business. This is further multiplied when microgreens are the chosen product, as these products are delicate and require more human involvement in the growing and post-production processes, if manual harvest is the case.
Some farms also struggle through increased OPEX due to poor farm design, choosing not to involve basic automation or LEAN principles, or inadequate allocation of space for automated packaging and other post-harvest activities. In short, the relationship between the various activities and technologies involved in a vertical farm – and the impact that this can have on operational efficiency – should not be underestimated.
Many approaches to innovation in the vertical farming space over the past few years appear to have been absent of consideration for the issues addressed above; have proven too expensive to build when considering the materials and technologies used; or have simply repeated existing technological approaches. This, together with more competition and a narrowing market, means that the financial bar for growers to succeed and survive has been set higher than in previous years. But exactly what kind of technological solutions are required for vertical farming companies to take the leap towards “larger,” more mainstream products and to reduce CAPEX and OPEX along the way?
One solution to the technology conundrum is joining forces, leveraging the different skill sets of competitors in the vertical farming market to create a stronger combined proposition, capable of taking on larger, established “traditional” growers. Partnership and M&A activity such as this is likely a difficult ask, especially in a fast-moving market where attention is invariably inward looking in the early stages of growth, which are the most important. Increased grant funding directed towards agricultural technologies and indoor agriculture is a promising sign that this barrier may be overcome, enabling cross-industry cooperation in future years.
For vertical farming companies only interested in going it alone, this is a more challenging route to take. New vertical farms, even with little experience, often want to take on the “holy grail” of vertical farming, building complete, integrated systems to sell to other growers. This is already becoming a crowded market, so an alternative strategy is to focus on discrete technologies that form part of the wider picture and seek specific technological advancements or improvements “at the margin.”
A final approach is to look to other sectors for sources of innovation and indeed, reinvention. Advances in process handling within vertical farms have in recent years arrived from other sectors, such as the Automotive industry. Simple tricks and engineering processes can be adapted or re-purposed to solve vertical farming challenges without the need to reinvent the wheel.
For continue to conversation or learn more about our work, visit us at www.verticalfuture.co.uk.