BrightFarms is a startup that builds and operates urban greenhouses for supermarkets. In December, the New York City local-food company raised $4.3 million in Series A funding, and last week it secured the right to build a sprawling rooftop greenhouse in Brooklyn that may grow a million pounds of produce a year.
The company's hydroponic greenhouses use no soil but can grow greens year-round in any climate, according to CEO Paul Lightfoot. BrightFarms has built several greenhouses in NYC and plans to open three supermarket farms this year.
I recently interviewed Lightfoot about the company's unique business model, and how moving produce from faraway farms to the supermarket roof might affect customers, farmers, and grocers.
DF: What does BrightFarms do?
Lightfoot: BrightFarms finances, builds and operates greenhouse farms on behalf of our clients to cut time, distance and cost from the produce supply chain. We can bring to our supermarket clients produce that is fresher, longer-lasting, safer, tastier, more nutritious, and better for the environment.
A lot of produce executives are looking at a tomato, and they know that they're paying as much for fuel as they are for a tomato. That can't be good for the customer.
DF: What kind of produce do you sell?
Lightfoot: Initially we're looking to displace product that is coming from a long way away. Instead of having a series of tomatoes and lettuces and herbs that come from Canada or Mexico or Arizona and California, you'll have it being produced right there.
DF: What's your business model?
Lightfoot: We developed a business model based on a transaction called the "produce purchase agreement" which is based on the power purchase agreement used by the solar industry. We say to a retailer, if you merely agree to buy produce for a long term at a fixed price and for no money upfront, we will build it, and then will hire a local farmer to actually operate it.
DF: How does this pencil out for the supermarket?
Lightfoot: We will provide you with product at prices that are competitive with the wholesale market. But we say that even if our unit prices are equal with the market that we think you're going to make more money with us.
One big reason is that your shrink rates will be less. Lettuces right now have pretty high shrink rates because it's got a certain number of days of shelf life and about half of that is spent traveling. The store ends up throwing away a meaningful percentage. If all you did was replace that with product that lasted longer, and you were able to capture, say, five percentage points more, it's as if you were getting revenue from five percent more volume. In an industry with very, very thin margins, it's meaningful.
At the same time, price volatility -- not as much in lettuce but in tomatoes in particular -- is absolutely brutal. We just had a glut in tomatoes because of environmental circumstances. The climate in Florida and Canada caused huge yields that happened all at once, so prices for tomatoes have been very low on the commodity market. To some degree, retailers are like, oh, cool, we love it when prices are low. But they'll tell you they're always nervous as well because they know prices will go back up. Their prices get squeezed when margins rise, because they can't raise the retail price as fast as the wholesale price.
The third major economic reason is that our prices are fixed and rise by CPI [Consumer Price Index] as time passes, which is a hedge for us against the rising cost of labor. If you look at the last 20 years, the prices of lettuces and tomatoes rose at much higher rates, more than twice the rates of CPI. If the future is like the past -- or even more like the past --there will be a long term discount to the market that our clients will enjoy.
If you believe that oil prices will rise strongly over the next 10 years, then you know that the correspondence is very high for long-distance produce. it's very oil-dependent.
DF: Where will these greenhouses be built?
Lightfoot: We will be more flexible in our early sites that we will be down the road. As I start to think about our 2013 and 2014 sites, I'm much more focused on waste heat opportunities than I am this year, when we're still putting the rubber to the road and testing the concept out.
I have another project where we're building right outside a [supermarket] distribution center and pulling the waste heat from the HVAC. That's really important in a cold climate because we don't want to be using fossil fuels to heat our greenhouses. You'll see us looking for cogeneration opportunities where we'll pull waste heat and CO2 from power generation. Pumping CO2 into a greenhouse enables you to grow better at higher temperatures, which is important in almost all climates in the U.S. It also increases yield.
DF: Your relationship with farmers is interesting. The farmer at a greenhouse doesn't work for the grocer, but for BrightFarms as a contractor. Why that approach?
Lightfoot: A couple of things, but one of them is that we wanted to have an owner on site. And by owner, I mean in the sense that that "the fruits of my labor go to me." That sense of ownership is something that can only be achieved through entrepreneurship.
We also realized that in this country, the local farmer has become an endangered species over the last 75 years. There's a lot of great work being done by the government, by foundations, by nonprofits, to support local farmer, but we feel like a lot of those efforts are spitting into the wind because the real volume demand is not returning.
Almost 75 percent of supermarket lettuce is purchased from Arizona and California. The stuff you see at the farmer's market is not meaningful on a volume basis relative to supermarkets. You can do anything you want to help local farmers, but unless you can find real demand for them in the marketplace, then there's only so much you can do. What we wanted to do was bring demand back into these local markets and use it to enable the demand of a much larger market for local farmers.
