May 18, 2020
Written By: Michele Butturini
What is a business framework and why is it needed for vertical farming? Interview with Emiel Wubben. Urban Greenhouses and the future of food: A 3 part blog series inspired by this book.
Emiel Wubben is an associate professor of strategic management at Wageningen University and specializes in agrifood clusters & circular business. His prime interest is about: “strategizing business transitions towards a more sustainable biobased and circular economy.”
The first time I heard about the work of Emiel Wubben was during VertiFarm2019, where he gave the presentation entitled “Where is the business? A study into the key variables of the Vertical Farm Business Framework.” The research paper in which that presentation was based on, will soon appear in the European Journal of Horticultural Science. Wubben kindly allowed me to read the submitted version of the research paper and on that, I based the questions for this interview.
What exactly is a business framework and why it is needed for vertical farming?
A business framework, in this case, is the list of key items that are considered important from a business perspective by the insiders. The development of a business framework for vertical farms was taken as the objective of this exploratory research because more substantial concepts, such as the “business model canvas”, could not be applied. We wanted to know the items of prime importance in strategic decision making on a vertical farm. "Business framework" is not a standard term. For example, "business model" is a standard term, but you often need more information to make one (i.e. capital expenditures, operating costs, expected revenues): this is something that was not possible in the case of vertical farming. There are three reasons why this was not possible:
1 - the industry is too fragmented with a wide variety of vertical farming operation types
2 - nobody wants to share information considered competitively sensitive;
3 - lack of history, there is not enough longitudinal data.
This partially answers my second question: What is missing to decipher if vertical farming is a viable business?
Indeed, the 3 points I just mentioned. I would like to make a clarification concerning point 1, namely the excessive variety: there are a variety of types of vertical farms, and also a variety of contexts with different local market prices, climates, available partners, demand preferences, etc. Furthermore, about point 3, if there is a track record, and there's no plurality, no repetition, then you cannot build distributions of results to do a meaningful analysis. And, as I said in point 2, all this data is often confidential because vertical farming companies try to keep the monopoly on their data. And when the lab is sufficiently big (that’s not often the case), it does not mirror a real-life setting with less trained employees, failing system controls, diseases, etc.
There's quite a lack of public data that may help us to assess the feasibility of these businesses. Similar to the algae hype a few years ago: there were enormous promises, but actually nobody really knew how feasible it really was. That's also the case here. You see some examples that seem to work, yes, some in the US some in Japan. However, we can't verify if vertical farming is really successful.
Can it be like that forever? What is the time span for a market to be so vague?
I don't know. A bubble can last and can explode quickly: there are no timelines for bubbles. However, there's a difference between the management of expectations and the practices, between the opinion of the public arena and thereby the investor’s arena, and the opinion of insiders. What you often see is that practice goes on in data gathering, as it was for bioproducts, algae, and second-generation biofuels. However, you also see that people over expect and then they are up for disillusionment. And actually the practice may not be that bad, but immature!
That's with almost every new area of technology that is considered to be interesting. For example, that was also with the internet. The initial expectations are way too high and then people get disillusioned and turn away, while it may take the generation's lifespan to bring technology to maturity. Typically, if we have complex technologies the time to market can take from 10 to 20 years, because there is food safety regulation, there are consumer habits, etc… So, in the case of vertical farming, I think it will take quite some more time. And I think there's also pressure in some countries to make it work, sooner or later. Especially in Japan, which has a low number of new farming employees, little space, but a willingness to pay a premium, I foresee that there is really an incentive for Japan to continue studying robotized controlled vertical farming. While the hype in Europe and America may wither away, I think that in countries like Japan and Singapore, they will continue trying until they really know that it does or does not work.
Do you believe we will see more subsidization of the vertical farming sector?
It's critical because you want to use limited space. You often want to reuse buildings, and somebody sets the criteria that define if you are allowed to use that building for the purpose of vertical farming, or not. And that may be interfering because if, for example, they consider it an area where sprinklers have to be installed, then you have a very expensive setting, while if it's considered to be something like a distribution center, with more or less automatic systems, you have a way simpler setting and the safety requirements are way lower. In the end, that is decided by public authorities. And this is about restrictive regulation.
Positively, you can have financial support, but you can also have support by simplifying regulations. There are quite a lot of ways that authorities can help. For example, offering a building that is standing idle and agreeing "you can use it for five years because demolition is not planned yet. And we will not be very stringent on all the criteria we normally have". That's one way to support that we can consider, more or less, financial support. Furthermore, they can help to create the supply chain, to find buyers or help the process of startup funding.
An item that's not mentioned at all is the European agricultural subsidies. There is a lot of money going into food subsidies in the European Union (In 2018, about 38 percent of the EU budget went to agriculture). However, there's no talking about subsidizing food that comes from a vertical farm. Vertical farming doesn’t meet the criteria for the distribution of the agricultural budget laid down in the Common Agricultural Policy, and this is because vertical farming is not performed in soil and is done within a building, often in an urban context, and not in a rural area.
Would that be a game-changer?
Yes, I think that would really change a lot. I think that could be quite important. There could be a lobby by local authorities or investors to get that worked out.
In your article, you mention three business models. Could we consider leasing a farm, or even setting up franchising, a fourth business model for vertical farming?
You only see that in the containerized vertical farming. It might be the fourth one, yes, but there are really just a few initiatives there, as far as I know.
For example, what do you think of in-store units for supermarket chains? Besides the greens, it provides a sort of entertainment, and in a way, an advantage to the shop that hosts the unit.
It's a totally different objective: it is not to grow a lot of food for the community at large. It's to show how food is growing: that's a different ballgame. The same stands for urban farming in soil for social enterprises. If we limit the definition of vertical farming, in-store units may fit but then they are not just for food production, and it can hardly be a serious option for that.
What do you mean exactly when you say “Over time disadvantages of such so-called vertical integration may come to dominate the advantages”
What you see with vertical integration is that, for instance, you have the final consumer nearby or that you take a lot of steps from the value chain or from the processing and distribution on your own plate. Vertical integration is typically suited for a startup, for an early setting of an industry, when there are no specialized companies around. When you want to grow and expand you often need to focus your resources and your employees, while you are often short of money, you lack specialized people, you lack management time. So then having a vertical integration becomes a burden.
So, while vertical integration can be necessary to get started, with growth you want to outsource many activities, you want to specialize in the value-adding part. And typically you see that the distribution becomes outsourced, or that a shop near the building will emerge or that a contract with the retailer makes more sense, instead of having a home distribution network yourself. That’s typically a standard idea about how industries actually evolve: in early stages, you have to do it all by yourself because things are lacking; later everybody goes to specialized skills, specialized funding, and specialized market activities, whereby commoditization of intermediaries take place. That is suited also for expansion because some items don't need to be upscale in the same manner as other items do: in distribution actually investment maybe not that extensive, while especially if you are consolidating, then you probably need new buildings instead of the inefficient old buildings, causing moving around the produce often. And so then you want to settle, and that is often quite costly. That’s how you see that specialization takes place.
What is the future of vertical farming? How do you see the industry in the coming five years?
In countries that import a lot of foods, like Japan and Singapore, I think that they will have an incentive to continue the attempt of vertical farming successfully. I think that, in some countries, there's quite some pressure to get vertical farming working, while in Europe, I don't see that there is a lot of eagerness to get vertical farming done. In America, you typically often see the financial drive, motivating competition and selection. I expect more vertical farming expansion on the outskirts, such as on ships, but also on the north and south pole, in deserts, where these technologies can easily be brought and somebody can run it as a franchise. But I think it will become more like a chain or with someone who owns and runs a lot of them. I think that the container-farms may succeed and be the format that will work earlier since they are easily movable and easy to do data gathering and data sharing. I think that the technology is still too complicated for franchises to build. Large vertical farms for buildings are very investment intensive it will.
There's no stable format yet: I think it will take some decades, probably 20 years, before franchising for large vertical farms will be around. Also, McDonald's took decades to grow and optimize with its simple machinery.
Indeed, the question I have next was: is the future middle-scale or large scale?
I think mid-scale for the coming decade, or you can call it also a smaller format (container). You need time and expertise. You need data. These containers are way quicker in gathering data and optimizing the procedures in the container. So, within five years the container could be quite a topic.
So, the quickness of data gathering is one of the drivers of this business
Yes.
This Article is part of 3 part blog series inspired by the book “Urban Greenhouse and the Future of Food” that illustrates the results of Student Challenge “Design the Ultimate Urban Greenhouse” and shares the visions of experts involved.
Acknowledgment:
I thank Leo Marcelis (Wageningen University and Research) and Luuk Graamans (Wageningen University and Research) for providing very useful information.
Short Bio of the Author: Michele Butturini
Researcher at the Department of Horticulture and Product Physiology, Wageningen University (NL). Passionate about urban farming, vertical farming, and controlled environment agriculture.