Editor’s Note: Hiroki Koga was a consultant at Deloitte Japan with a focus on the healthcare and agriculture industries for six years. He has worked with many of the world’s leading companies in the vertical agriculture sector and has developed industry reports in the past. Hiroki specializes in the American, Japanese and Southeast Asian markets. He is also a current student at Haas (UC Berkeley) MBA, with a study focus on entrepreneurship.
What do the words “vertical farm”, “hydroponic” or “aquaponic” mean to you? They probably didn’t mean much to most people 10 years ago. But with lots of media coverage in the past decade, many people know what they are; they’ve probably seen photos of lettuce growing on top of each other in huge indoor warehouses, lit up by LED lights, and fed by water pipes.
Growing produce under artificial lighting in a completely closed environment is not a new technology. NASA heavily invested in research on the concept in the mid-20th century, but it was never commercialized due to high costs and inability to compete with outdoor farming.
This is now changing, and indoor farming is becoming a viable business opportunity against the backdrop of depleting water, land, and other natural resources that are challenging outdoor farming.
Ten years ago there were only a handful of indoor farming operations, but today there are well over 200 vertical farms operating around the world. Many are still not profitable, but there are some emerging, profitable models such as Japanese leader SPREAD. The successful vertical farming company produces a variety of leafy greens and is inspiring a wealth of startups to try and replicate its model to become the next SPREAD in their own regions.
Like SPREAD, most startups are focusing on producing leafy greens. Why is that? What about other produce or crops? The answer is simple; leafy greens are the only crops that can be grown profitably indoors at this point. Technically, most vegetables and crops could be grown in a vertical farm if we ignore cost. So what makes leafy greens profitable? Here are the top three reasons:
- Short growing season. Leafy greens take around 30-40 days from seed to harvest and even less for microgreens. This quick turnaround means indoor farms can leverage land efficiently.
- There is less variance with leafy greens in taste compared to other crops, which have stronger, more distinctive tastes. This makes it easier to grow leafy greens that are acceptable to the market in taste.
- Leafy greens are in demand year round creating a huge market in any city.
There are some vertical farms growing other produce, however. I recently visited Ichigo Company, a vertical farm growing strawberries, based in Tainai, Niigata, Japan. And it looks like the company is well on the path to profit.
Ichigo, meaning strawberry in Japanese, is one of few vertical strawberry farms in the world. It operates in an abandoned building that used to be an elementary school but was closed due to a decline in the local child population. It is one of many rural towns that is facing the severe problem of an aging society and lack of industry other than rice farming, which is heavily subsidized by the government. The company was co-founded by Takafumi Ono, the CEO of a local construction company, and Yuki Matsuda, another CEO of a local business that runs a specialty care center for elderly people. Neither of them were farmers, but they both wanted to start something new, leveraging the infrastructure of the elementary school.
“A new style of farming has always been of interest, but I knew the leafy greens space was becoming saturated, or at least already well established, so I wanted to try something different. When I heard that vertical strawberry farms had not quite taken off yet but had huge market potential, I knew this was going to be my next challenge,“ said Matsuda.
With support from the local municipality, and leveraging Ono’s assets and resources from his construction company, Matsuda and Ono built their first prototype in 2013 in the “Teacher’s Room” (Image 1). It’s a 600 sq ft room, filled with four levels of strawberry growing racks with LED lighting systems attached on each level, and growing 1,200 plants. Their second farm, which was constructed in the “Cooking Room” of the old school, is 800 sq ft and grows 2,000 plants at a time.
“Most of the materials we used to build this prototype can be purchased at mom and pop stores in the village. The quality of the berry doesn’t depend on the quality of the shelf, so we decided to keep it as simple as possible to cut costs,” said Matsuda.
They also developed their own software to control the room temperature, lighting, and watering frequency to reduce human labor. Their current facility is operated by one manager with the help of a few part-time harvesters.
So, are they making a profit yet? At this point, no; they had to spend a lot of money in R&D and infrastructure over the past two years. But Matsuda says that they see very strong numbers regarding gross margins which are primarily achieved by their unbelievably high product price in the market.
They are currently selling their medium size strawberries at around $5 per berry, not per package. They only sell through their own channels or at high-end department stores in Tokyo, and they admit that their product is not for people to purchase at supermarkets for daily consumption, but a luxury product for gifts.
“We do not compete with other established strawberry brands. Our rivals are Godiva chocolates and expensive cakes sold in European shops in Tokyo. By being the Ferrari in the strawberry category, we can compete in a completely different space,” said Matsuda.
With this branding strategy, Ichigo has succeeded in selling its produce at a store in Tokyo last November. It packages most of its berries in patented individual packs with prices starting at $2.5 for 25-70 gram strawberries (Image 2), and they even have a special line that costs $150 for four giant berries (Image 3) that come in a fancy box with LED lighting decorations. Surprisingly, these strawberries were all sold out, mostly bought as souvenirs and presents for special occasions.
They are fully aware that this business model is not sustainable and scalable in the long run, and not applicable to other markets. But they are consistently positioning themselves in a super niche market, rather than hurrying to a larger market targeting the masses as they are confident in their R&D of their new strawberries that allows them to produce slightly smaller berries at a much lower cost, which is going to be their main revenue source in the future.
“Our strategy is to start at the top of the pyramid (Diagram 1) and establish our brand image. We will then come down slowly to the mass market,” said Matsuda.
This is similar to the Tesla model. Tesla launched its first car “Roadstar” at approximately $100,000 to cover R&D costs and also to establish a premier car brand. With the reduction in R&D costs per car, they are now able to offer other models at much more affordable prices. This is exactly where Ichigo is going.
Another interesting stance is that Matsuda and Ono do not regard themselves as farmers, but as system manufacturers and they intend to franchise the technology to third party growers. They already have a packaged deal that includes the initial setup of all infrastructure with a running maintenance fee of 5 percent of revenue annually. Ichigo will centrally produce all the plants in their own farm, and distribute them to the franchise locations where they can grow the berries and harvest them right next to consumer hubs.
“Now we are ready to tap into the mass production, branded berry space. We are receiving many inquiries from foreign countries, especially those where they cannot grow strawberries due to weather constraints.
At the moment, Ichigo is not patenting any of its R&D-related technology as it thinks that patenting will give away secrets to other followers. Matsuda is confident that no one can replicate the technology, at least for a while.
“Our secret is in the plant itself and the ecosystem using bees for fertilization, which was said to be impossible under LED lighting. We will not patent our technology, and even our franchises will not be able to figure it out, because they will be running a system that is already set-up, and getting plants from our centrally-managed factory. They will be in a situation where they don’t know what’s going on, but it works fine. This is the ideal state. We have a business model that keeps the essence in a black box by keeping all the secret sauce in our own factory,” said Matsuda.
Through their continuous innovation, Ichigo has established disease control system that does not use any pesticides, and that also controls the sugar content level of the berries. At the same time, they succeeded in creating berries that can continue production for 18-24 months, while conventional ones only last for about six months on average, which means that they can cut down more than half of their re-planting cost.
Ichigo’s plans do not stop here; Matsuda is also excited by the opportunity to apply the company’s technology in the medical sector. Interferons, proteins that signal the presence of pathogens, viruses, bacteria, and tumor cells in the body, are found in strawberries. And strawberries are already used as cures for periodontal disease in dogs.
“There are so many opportunities ahead of us that can be tackled as we continuously enhance our strawberry farm to become more efficient,” he said.
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