"The whole controlled environment agriculture (CEA) space is very cluttered," said Hurlbert.
"There's been a lot of money raised and a lot of different ways of going about it... but the whole industry has been plagued, in my opinion, with a a lot of over committing and underachieving," Hurlbert told FoodNavigator-USA following the announcement that Local Bounti, a relatively small player with a ~500 store footprint, would acquire California-based Pete's (parent company: Hollandia Produce Group, Inc) with three greenhouses distributing leafy greens to 10,000+ stores including Albertsons, Kroger, Target, Walmart, as well as Whole Foods, and Amazon Fresh.
Investment in the CEA space surpassed $2bn across North America and Europe in 2020, according to S2G Ventures, which predicts that CEA-grown produce will comprise 10% of the market by 2025.
"There have been billions of dollars raised in the last five years and many of the companies in the space are not projecting positive gross margins for two to three more years... what I think Local Bounti is doing with this transaction is showing that you can have positive economics inside of a CEA business and a footprint that is second to none and I think that brings a level of financial leadership into this space that has been missing," said Hurlbert.
According to Local Bounti, Pete's has a strong financial track record, generating an estimated $22.7m of revenue in 2021, historical gross margins greater than 45% over the past five years, and positive EBITDA from its two operational farms in California.
After completing its Georgia facility in the second quarter, Pete's expects to achieve initial run-rate revenue of at least $30m at full production, excluding the expected future positive impact from additional capacity due to incorporating Local Bounti's Stack & Flow Technology being implemented at three facilities.
Build vs. buy
While a relative newcomer to the CEA space, launched in 2018 by Hurlbert and co-CEO Dr. Travis Joyner who both came from the energy sector, Local Bounti went public on NYSE in a $1.1bn SPAC (special purpose acquisition company) merger with Leo Holdings III in late 2021 and along the way attracted several high-profile investors in its business model including Cargill and BNP Paribas.
Prior to the acquisition of Pete's, Local Bounti was on a mission to build seven of its own indoor growing facilities by 2025, and while that goal isn't completely off the table, Local Bounti saw a greater immediate opportunity to grow via acquisition.
"Somewhere in the early part of October we really started to evaluate this build versus buy concept," said Hurlbert. "[With the Pete's acquisition] We go from 500 doors to over 10,000 doors, 20x-ing our current footprint.
"It's a transformative transaction for Local Bounti but it's also, in my opinion, a transformative transaction for the entire CEA industry. Now you've got one company that is focused on financial leadership with great unit economics, which leads to positive gross margins which leads to ultimately shareholder value and EBITDA positivity," he said.
Hurlbert credits Local Bounti's superior unit economics in large part to its patent-pending Stack & Flow technology, which combines the best of vertical farming with the best of horizontal farming and will be deployed at Pete's indoor growing facilities to deliver 30% - 35% more product output per year, claimed Hurlbert.
"You’re turning the farm more each year, with the same capex and Op X so, by definition, your unit economics get better," he said.
With the acquisition of Pete's, Local Bounti will be able to access a whole new swath of consumers in California (where Pete's holds a roughly 80% share of the CEA category in the Western US) and on the East Coast from its Georgia facility.
"So many of these customers they've had in place for ten years and one of the things that we feel is we'll be able to go approach that customer base and upsell our SKUs to their customers," said Local Bounti CFO Kathleen Valiasek.
Hurlbert sees demand for indoor-grown produce only accelerating as food security and local production become more valuable propositions to consumers and retailers. With Local Bounti's current model, produce goes from the facility to store shelves within 24-48 hours and due to the shorter distance traveled, Local Bounti products can last three to six weeks in the fridge providing additional value to consumers.
While Local Bounti wants to be a leader in the CEA space, its ultimate target is disrupting the conventional field-grown produce industry where he believes basic consumer standards around taste, food safety, and quality have not been met.
"This combination gets us one step closer to competing head-to-head with those traditional producers and candidly gets us one step closer to really being able to meet pent-up consumer demand," noted Hurlbert.
"At the end of the day, we can all fight amongst ourselves in the CEA space, but really our ultimate target is $30bn in total available [produce] market."