Are Supermarket Rooftop Farms the Killer App for Local Food?

Every time gas prices go up, local food gets another shot to make its breakthrough to the mainstream. At $4 a gallon, when food in a supermarket travels an average 1,500 miles to get to the store, local food becomes more economically competitive. Still, no matter how high gas prices go, local food is still marginal in terms of market share (though we don’t know yet what the results of Wal-Mart’s local food initiative will be).

One of the main reasons for this failure was that the right model was never found to make local food a genuinely feasible alternative. Now BrightFarms, a NYC-based company, says they finally found the right model – building and leasing hydroponic farms on supermarket rooftops.

BrightFarms, which defines itself as a finance, development and management business, has created what they believe to be a win-win model that will generate gains both for the company and the supermarkets they partner with. The company offers supermarkets to design, build and operate hydroponic greenhouse farms on their rooftops. These farms will provide the supermarkets with fresh produce that is chemical-free, safe and of course tastes better than produce that traveled hundreds or even thousands of miles to the supermarket.

So far so good, but there are two elements that are supposed to make this model an offer supermarkets can’t refuse. The first is the price of the produce grown in the greenhouse and the second is the cost of the whole operation for the supermarket.

One of the obstacles that kept local food a marginal part of the food system is cost – unlike the industrial food system, local food production is usually done at a smaller scale and therefore local produce is often more expensive than regular produce. BrightFarms aims to change this equation by building relatively large greenhouse farms (one-acre) that use energy and water very efficiently and save transportation costs as they’re located on the supermarket rooftops. The new equation, with the help of rising gas prices, enables BrightFarms to offer supermarkets competitive wholesale prices that in many cases match the prices supermarkets pay for regular produce and in some cases are even cheaper.

The second element is the price of the operation for the supermarkets. Even though the deal offers both “better food and better food business”, my guess is that most supermarkets would be reluctant to invest about $2 million (BrightFarms’ estimated cost) in such a farm. So BrightFarms’ solution is similar to the solution offered in the case of solar panels, where supermarkets and other retailers had difficulties paying a large sum in advance for the panels –instead of an expensive product, the company offers an affordable service.

BrightFarms don’t ask the supermarkets to pay a dime in advance for constructing the farms. Instead the company asks supermarkets to agree to buy the produce from the greenhouse for 10 years at a fixed price that is tied to the consumer price index.

For supermarkets it definitely looks like a promising deal from a cost-benefit point of view. Their risk is rather low as they don’t pay for the infrastructure and the benefits they can generate are plenty -  from marketing the supermarket as a provider of fresh and affordable local food (guided tours at the greenhouse, anyone?) to reducing the volatility of their wholesale produce prices and generating greater profits. BrightFarms reported that it has signed up eight supermarket chains around the country, including three of the largest 30 national chains. Four of the farms, according to the company, are under construction.

So supermarkets get fresh and cheap quality produce from their rooftop, but the big question is what about BrightFarms? Can they profit from this sort of operation? This is the key here – if they manage to transform these farms into a profitable business then they have a good chance to be the first to bring local food to the masses (unless Wal-Mart beat them to it..).

Paul Lightfoot, CEO of BrightFarms, is positive they can meet this challenge. He told the New York Times he predicts each farm would generate $1 million to $1.5 million in annual revenue, and that he expects his gross margins to be extremely attractive because the company’s business model eliminates farming’s biggest expense, shipping.“Our plan is to achieve $100 million in revenues by the end of 2015 and $1 billion by the end of 2020,” he said.

BrightFarms certainly has the experience and the expertise from designing rooftop greenhouses for  various projects such as the Manhattan School for Children and Gotham Greens, a commercial greenhouse in Brooklyn, NY.  The company also plans to focus on produce where they can make the most out of their most comparative advantages, i.e. hydroponic farming and no need in shipping, such as lettuce, tomatoes, peppers and herbs and cucumbers.

No matter how you look at it BrightFarms is the party that is taking most of the risk here and it’s not clear yet what is the average payback period for the company’s initial $2 million investment in each of these rooftop farms. Still, investors seem to have confidence in the company’s model and last month the company announced the completion of a financing round, with a long list of well-known investors, such as the successful entrepreneurs Ali and Hadi Patrovi and Brian Robertson and Jigar Shah, the founders of SunEdison.

I can only hope these investors are right. The success of Lightfoot and his team will be not mean only a financial boon for the investors, but also a blessing to all of those who has been waiting so long to see local food go mainstream.

Image courtesy: BrightFarms

Raz Godelnik is the co-founder and CEO of Eco-Libris, a green company working to green up the book industry in the digital age. He is also an adjunct professor in the University of Delaware’s Alfred Lerner College of Business and Economics.