Indoor ag has hit ‘a bump on the S curve,’ not the trough of disillusionment – EY agrifood leader

There are plenty of labels these days for the state of controlled environment agriculture (CEA): depression; correction; the increasingly popular “trough of disillusionment,” that thrive-or-die low point on the Gartner Hype Cycle startups must navigate.

But for EY food & agribusiness leader Rob Dongoski, CEA’s current situation is more S-curve than trough.

“I don’t think this is a trough of disillusionment in a pure kind of tech hype cycle,” he recently told AgFunderNews. “I think it’s more complex than that.”

CEA’s troubles are well documented, and its story is a tale as old as the tech industry itself: investors pumped hundreds of millions into startups promising fresh, local produce grown at scale in tech-enabled indoor environments.

When promises failed to deliver, interest waned and funding dried up. Bankruptcies and closures proliferated, and most industry experts agree we haven’t seen the last of them.

The plot line reads much like a journey into the trough until one considers the external forces at work.

“We’ve got headwinds from a macroeconomic standpoint when you think about food inflation and capital markets and high-interest rates,” says Dongoski. “The food system is inherently connected to economics, geopolitical situations. Those are the things that make this more complex than just a straight run-of-the-mill tech company Gartner Hype Cycle type of situation.”

CEA companies, he says, are still “early on the S-curve.”

“They’re all looking for shelf space at grocery stores or scale in food service. This is a bit of a bump on the S curve, not a trough of disillusionment, and we’ll get past it.”

Dongoski believes we’ll see CEA companies move more steadily up the S-curve once interest rates go down, capital markets open up and inflation is stabilized. Geopolitical stability and the upcoming US election will also play a role.

Big Retail is watching

While geopolitical stability and macroeconomic factors can be unpredictable, one thing that’s remained steady is consumer preferences in CEA.

“They’re not reversing,” says Dongoski, who adds that consumers are not “trading down” and buying cheaper produce because of the current inflationary environment.

“Consumers desire to know more about their food, and they really want more fresh and local. The real key is fresh and local and you can’t rely 100% on the Central Valley of California to deliver it to Amherst, Massachusetts or Nashville, Tennessee.”

His prediction is that we will see more Big Retail as well as quick-service restaurants (QSRs) partnering with CEA companies “relatively soon.”

In grocery stores, companies like Bowery, Gotham Greens, Local Bounti, and many others already sell packaged mixed greens and herbs.

“Think about the reformatting of the grocery store,” says Dongoski. “We really believe that we’ll see the grocery store divided into kind of a dark store versus live store environment, where everything at the center of the store [aka, shelf-stable goods] will go into a warehouse environment and will only be accessible in an online channel.”

“What’s left is this live store concept.” This would effectively be a farmers market inside the grocery store, he says, where local farmers and CEA companies alike can display their wares.

The concept is already alive and well at Whole Foods, for example, via its program for local suppliers, whose wares sit side-by-side with greens from CEA companies.

Notable partnerships in the QSR (aka fast food) realm are harder to come by, although Wendy’s said in 2019 it would source tomatoes from local greenhouses.

Sustainability will be a big draw for consumers in both retail and foodservice, according to Dongoski.

CEA startups: don’t be the hammer looking for the nail

Up to now, much of the focus of CEA has been on optimizing technology if not outright building it from scratch.

Consumers don’t really care about this, says Dongoski. At the end of the day, whether something was grown in a vertical farm or greenhouse or with AI or robotics won’t impact buying decisions.

“It starts with taste and affordability,” he adds. “Think about your markets and don’t be a hammer looking for a nail.”

Along these lines, he urges CEA startups to consider whether leafy greens are a logical starting point based on their particular end market.

US-based Oishii is a good example of this. Having seen the demise of indoor leafy greens in Japan a decade earlier, founder Hiroko Koga opted to move in an entirely different direction with strawberries. While the price point on Oishii berries is still high — $2.50/berry — the company is largely focused on optimizing taste right now and says it’s never been more confident about the future of vertical farming.

“Most people, when talking about CEA, get into a pretty crowded discussion around leafy greens. But do you start in another crop altogether?” says Dongoski. “Figure out your market size and who is going to be your end market.”