Hot weather this summer has lowered yield, reduced quality, and increased the prices of leafy greens, strawberries, and other summer staples. Grocery store buyers are paying more and still experiencing extended shortages, which are causing them to raise prices, change their buying habits, and look for alternatives. While this is a problem for traditional growing regions, it is a huge opportunity for controlled environment agriculture. If indoor ag can provide local, high-quality, reliable solutions, and capture market share, this could be a turning point for a maturing industry looking for a new stronghold.
There are three different problems for grocery stores and shoppers. First, there is less produce available which is driving prices up. Produce prices rose 11% in August, which is higher than the national inflation rate. Second, the quality is worse. The produce arriving at grocery stores is smaller than normal, it has damage from pests, diseases, and the sun. Plus, it has a shorter shelf life because of previous exposure to high temperatures. Finally, some items, like strawberries, are completely unavailable.
When everything is working, it is risky to try new things. However, when facing higher prices and shortages, it is risky to stay the course. Exploring new options is the smart business decision. Some experiments will work and be adopted as the new standard. Others will revert to the previous normal.
Disruptions and Opportunities
Grocery stores are experimenting. They are purchasing from other growing regions like Canada, Ohio, Florida, and New Jersey. They are making in store changes, like reducing produce shelf-space and offering discounts to move product through the stores faster to reduce shrinkage. Indoor agriculture is uniquely positioned to leverage this period of uncertainty, because it reliably provides a predictable and high-quality product.
Historically, the challenge for the industry was a higher cost of production compared to major outdoor growing regions. Convincing grocery buyers and consumers that indoor agriculture was worth the extra cost was difficult. Rabobank reports that three varieties of lettuce are at 16-year highs, making the price difference between traditional and indoor products much lower. With a lower comparative price premium, buyers are often willing to substitute up. Plus, during inflationary periods like this one, everyone expects to pay more. Consumers are willing to pay more, so the price of CEA products might not create the same sticker shock as normal.
There are several reasons why grocery stores will not balk at higher prices right now. Having product on the shelves is more important than the prices. Consumers are willing to pay more for produce and grocery store profitability is determined by the value of a basket of groceries not an individual item. The basket is more important than the whole.
First, to stay in business, grocery stores need products to sell. Therefore, reliable production is critical and if reliably delivered products cost more, then grocers will pay it. When everyone is reliable, then price is important, but facing shortages, buyers will pay a premium for certainty.
Second, the in-store cash register data supports that consumers are willing to pay more for produce. Register data showing that produce prices increased by 11% and purchases only fell by 5%. This should alleviate some of the grocery store fear about passing on higher prices. Right now, prices are rising faster than sales are dropping.
Finally, grocery store profitability is tied to basket profitability rather than individual items. This starts with the items that bring people into the grocery store. Lettuce is one of these staples. If a grocery store does not have lettuce in stock, then consumers will shop elsewhere. The store could lose the lettuce sale and the rest of the basket. Having these staples is essential to attract shoppers.
Another interesting thing about grocery store is that complements, products that are bought together, have strong relationships. When a consumer purchases lettuce they also buy tomatoes, salad toppings, and salad dressing. If they do not buy lettuce, they will not purchase these other things. So, grocery stores might be willing to sell leafy greens at a tiny profit or even a loss, because they can make high profits on the complements, making it valuable to sell this low margin item. The profit comes at a whole basket level, not the sale of one item.
Grocery store buyers make purchasing decisions with all these factors in mind. Indoor agriculture is insulated from weather and labor challenges facing California. Ongoing extreme weather will make buyers wary and will support sourcing from other regions, including indoors.
Indoor growers that leverage the current situation, build relationships, and expand sales will be in the best position to capitalize on the grocery industry’s short-term need for new sources. The high cost of indoor production has forced the industry to grow high value crops, which aligns perfectly with what grocery stores are demanding, particularly, leafy greens and strawberries. Once these relationships are built, indoor agriculture can expand its footprint into supplying year-round, fresh produce locally.
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