Is UK eGrocer Ocado’s $22m Vertical Farming Investment a Bargain? – updated

Updated Jun 12 4:32pm ET, to add details of first farm in China.

Readers of the Grimsby Telegraph, a niche northern English newspaper, may have spotted a striking headline in print last November: “Inside the world’s most advanced vertical farm which will soon be run by a robot — and it’s in Scunthorpe.”

The claim of “the world’s most advanced” is contentious. Representatives from vertical farms like Plenty, Bowery, Aerofarms, Growing Underground and countless others would doubtless take issue with this — and it is worth wondering whether any enraged letters to the editor have since been dispatched to the Telegraph’s offices in Grimsby, a seaport town in Lincolnshire.

More fodder for any such letter could be found in the claim that the Scunthorpe farm “will soon be run by a robot.” The robot in question is called Frank; but half a year on from that article’s publication, Frank still does not look like he will be running the farm fully autonomously any time soon. A more concrete fact has since emerged about who will be running this vertical farm, however, which is currently Europe’s largest in operation. It will be the British online supermarket firm Ocado. The tech-savvy retail giant announced this week that it has bought a majority 58% stake in Jones Food Company (JFC), which operates this 17-stack high vertical farm in the industrial town of Scunthorpe. JFC chose a former cold storage unit on the Foxhills Industrial Estate for the purpose, operational for less than a year. Its facility produces leafy greens and herbs for UK customers, and its capacity is expected to grow to 420 tonnes per year, the company claims.

In a statement released early Monday morning, Ocado revealed how its majority stake was part of its $22 million vertical farming gambit, which also includes its co-founding of ‘Infinite Acres’, a three-way joint venture alongside the Dutch climate control and water quality experts Priva, and the US-based 80 Acres Farms, which describes itself as “focused on being the best operator in the world of indoor farming facilities.” 80 Acres clearly do not share the Grimsby Telegraph’s editorial view either.

During an interview with Reuters, Stewart McGuire, Ocado Group’s head of corporate development, said vertical farming “has always been on our wish-list for a lot of strategic reasons, but we were really busy doing other core things.” Those other core things, in fact, included damage control. The year has not been a golden one for Ocado, starting with a disastrous fire at its newly built, high tech Andover warehouse. But the company seems to be putting that behind it, and Ocado is still well-placed, having carved out favourable tech licence deals with Kroger Co in the US and Casino Guichard-Perrachon SA in France over the past few years. “As the company installs automated warehouse systems to help companies like Kroger adapt to online retail, the inclusion of vertical farm capabilities would enable it to offer automated grocery supply services as well,” says Chris Sworder, an associate at Cleantech Group, a consultancy. “This is an exploration of a new market.”

Small in Comparison

It all seemed like the big news of the week for indoor vertical farming. But that was all until it just really wasn’t. This Tuesday, barely a day later, the Berlin-based portable vertical farm startup InFarm disclosed a vast Series B raise of $100 million, bringing its total funding to $134 million and shamelessly eclipsing Ocado’s big move. That debt and equity round was led by London’s Atomico, alongside Astanor Ventures, Cherry Ventures, and TriplePoint Capital.

In a memo released on its website, Atomico explains the fundamentals of its investment decision: “Infarm’s vertical farming units are unique because they are distributed not centralized, more efficient than soil-based agriculture, data-driven and biodiverse.”

“They have partnered with 25 major food retailers including Edeka, Metro, Migros, Casino, Intermarche, Auchan, Selgros, and Amazon fresh in Germany, Switzerland, and France and deployed nearly 300 farms in 150 stores, producing approximately 500,000 plants. They aim to be in 10,000 supermarkets by 2022, serving 350 million people, and by 2050, to be the leading provider of fresh produce for the 7B people living in urban centers.”

Such a whopping sense of investor enthusiasm and hype for companies like InFarm, meanwhile, is starting to become a new normal. A spate of other recent funding rounds has been fairly stellar as well. In 2017, indoor vertical farming company Plenty managed to raise $200 million of Series B funding, led by Softbank’s Vision Fund. Similarly, in December 2018, Bowery Farming, the New York-based indoor farming group, secured a $90 million Series B round, led by Google’s venture arm GV. 80 Acres, one of Ocado’s new partners, raised a not insignificant $40 million round earlier this year, to complete what it said would be the world’s first fully automated farm.

To Infinite Acres … And Beyond?

So has Ocado perhaps clinched a bargain? By launching its JV Infinite Acres, Ocado becomes a third wheel to two companies used to running in tandem; 80 Acres and Priva have already been working together for over four years to design “turnkey solutions” to sell to vertical farming clients worldwide; they forecast revenues in 2019 of over $10 million and anticipate significant growth after that.

“We’re leveraging one another’s strengths,” Infinite Acre’s new MD Tisha Livingston tells AFN by phone from the GreenTech horticulture conference in Amsterdam. “This is an execution play,” she explains, describing how Infinite Acres was about leasing the shared experience, data and know-how of all three companies to help prospective clients get into the vertical farming space, whether that’s governments, retailers or traditional producers.

There is also scope for more partners to join the venture, which is currently split equally three ways. “On our first project, we’re partnering with Signify. We’re pursuing whether it makes sense to go into long term solutions with them,” she says, keeping the door open for further partnerships to be announced in the weeks and months to come.

Also on the line from Amsterdam was 80 Acres CEO Mike Zelkind, who warned that a lot of entrepreneurs and investors risked making the same mistakes all over again with vertical farming: “A lot of folks are starting to raise a lot of money,” he says. “But why have so many companies failed so far? Because everybody tries to go it alone. Everybody is trying to conquer the world by themselves.”

What’s needed to get vertical farming to meet lofty investor expectations, he says, is a spirit of collaboration and sharing of best practices. Anyone in the vertical farming world, he says, soon realises that it is a highly complex, multifaceted business of plant and data science, narrow profit margins, logistical challenges, as well as water, air, and lighting difficulties. He believes Infinite Acres is about bringing all the various supply chain specialists together to tackle these problems head-on. “Finally, there’s a group of companies that has a chance,” he says proudly of the new JV, believing that no individual company today has the sole capacity to go their own way on vertical farming without going together in coalition.

“Essentially what we’re doing is reducing the risk for anyone entering the space,” he says. “You don’t have to first spend tens and tens of millions of dollars screwing up.”

China’s Orisis Is First Customer

On Wednesday, more details emerged at the GreenTech conference. Inifinite Acres, which is to be headquartered in Delft, the Netherlands, inked its first contract with Orisis, a major Chinese horticulture company. Orisis CEO Yanwen Huang said the partnership was to “fulfill the rapidly growing requirement for chemical free and high-quality crops in China. The project will demonstrate to China and the rest of the world the indoor food growing possibilities in densely-populated urban locations.” The Orisis indoor farm will be in Pinghu, Zhejiang, the first agricultural development zone in China, located around 100 kilometers southwest of Shanghai. The company claims its farm, which is under construction, will feature an internal, vertical design consisting of five layers and will have more than 1,600 square meters of grow zone.

The Vertical/Greenhouse Debate

There’s still room for debate, however, over whether to go for the vertical or the glasshouse approach, says Oliver Lamb, director of Bloom Innovation, an agtech consultancy. Vertical is not the way to go for everyone, he notes. At least not yet. The glasshouse method still has lower operational expenditure, he writes, through less use of light or labour, along with a lower capital expenditure-to-plant ratio, which can make scalability easier. There’s also reduced risk when converting crops, says Lamb. That said, he believes the perks of vertical come squarely in the form of increased environmental control, security, and product consistency. Its stacks allow for a skyscraper effect of decreased land use. There’s also easier planning consent on the regulatory side. Crucially for some purposes, there’s easier licencing for pharmaceuticals. On a longer-term view, vertical farms depreciate typically “less than glasshouses,” he notes, while being “easier to automate” and “offering greater crop density.”

Sworder, of Cleantech Group, believes there’s still plenty of creative tension over what will be the right business model when you go vertical. “While core vertical farming technology, such as lighting, nutrition, or automation systems continue to develop,” he writes, “the new battleground for vertical farming start-ups is in business model innovation. Ocado’s investment in JFC is part of a growing trend to coordinate logistics networks with vertical farms. This gives the vertical farmer access to customers without having to invest in its own distribution systems.”

Further examples, he notes, are the Square Roots tie-up with Gordon Food Service, or IKEA installing Bonbio’s system at select locations.

So A Bargain In Scunthorpe?

JFC’s fledgling successful tie-up with Ocado is not just a welcome relief in Scunthorpe, where all too often the media focus is on the ongoing plight of British Steel, a beleaguered industrial mainstay for the town. It’s an impressively large scale operation: with more than 5,000 square metres of production area and 12 kilometres of LED lights, JFC management reckons it has the ability to produce consistent crop yields throughout the year; the team plans to expand crop types and production across the UK. JFC’s clean-room operations provide additional options to cultivate cosmetic and pharmaceutical-grade crops. Rather than sticking to micro-herbs and lettuce, crops grown under highly controlled conditions for cutting edge pharmaceutical or nutriceutical products, could offer high enough profit margins to justify high levels of operational and R&D expenditure.

In a statement released this Monday, JFC CEO James Lloyd-Jones expressed his delight at Ocado’s investment: “We are certain that the combination of their world-leading logistics and automation systems coupled with our advanced growing technology will transform the way customers experience fresh produce – delivered fresh to their door a matter of hours from ordering.”

Another note for corporate optimism at Ocado is a recent joint venture with M&S, a UK supermarket chain, which was announced back in February. It sees almost $1 billion spending power heading into Ocado coffers in return for M&S grabbing a 50% stake in Ocado’s retail business. It is a sign that the pockets are deep enough at Ocado for more significant vertical farming plays if they so wish to take part in another vertical leap of faith.