with end customers, such as retailers, wholesalers, individual consumers and food service providers, by building capabilities to reliably supply at scale and deliver high-quality products. In a rapidly evolving industry, creating differentiation in product, operations and branding will be key. For greenhouse and vertical farm start-ups to achieve significant scale and product expansion, significant improvements in key technologies, such as LED lighting and automation development, will be inevitable. With LED technology already operating close to their theoretical maximum of efficiency 18 , achieving marginal improvements will be tough. Unproven business models In terms of cost, there is still a big gap between traditional open-field, vertical farms and emerging greenhouses. The cost of producing leafy greens in emerging vertical farms and greenhouses is three to six times more expensive than traditional outdoor leafy greens 19 . To gain significant market share within the fresh produce industry and grow beyond select niche segments, emerging greenhouses and vertical farms will have to significantly reduce grower costs. One could argue that CEA products will be likely positioned on the premium end of the offering, however a three to six times pricing difference might be too much of a stretch, even for the most health- savvy end-consumer. In a highly competitive industry, developing profitable operations is going to be paramount for survival. The current macroeconomic environment doesn’t bode well for CEA start-ups. Rising interest rates and increasing material costs negatively impact any new construction that is going to take place in the next few years. Besides the construction costs, even operational costs are primed to rise with rapidly

increasing energy costs and inflationary effects on other consumables.

With advanced software and data science capabilities, it is fair to expect novel business models being employed by the vertical farm and greenhouse start- ups to achieve profitability. For example, by using data, vertical farms could improve plant genetics to drive faster plant-to-harvest timing thus increasing yield. Additionally, it could further reduce operational costs by optimizing LED characteristics for plant growth and developing fully automated processes to minimize labor use. However, achieving this is going to take time and further investment. In the near term, emerging greenhouses may have a winning edge due to familiarity in the industry, especially given the association with traditional greenhouses that have been producing fresh produce for years. Furthermore, they have a more favorable cost structure compared to vertical farms driven by significantly lower up-front capital expense and growing costs. Competition from traditional players With the CEA market projected to grow at more than three times the fresh produce market until 2025, most of the revenue earned by the CEA players will be at the expense of traditional open-field growers. Displacing established relationships with end customers and strong supply chains will be extremely challenging. If at all possible, traditional greenhouse growers look to be the most likely to capture the majority of the projected growth.

Traditional greenhouses currently are a major presence in the fresh tomato and cucumber supply

18 Vertical farms expand as demand for year-round produce grows | The New York Times, April 2022 19 The economics of local vertical & greenhouse farming are getting competitive | Agfundernews, April 2019

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