Start an Ugly Produce Business

I have spoken about the need for cheaper fresh produce (fruit and vegetables) in South Africa before and my focus has always been on vertical farms or plant factories closer to the city. Today we look at a different approach and how the problem of expensive produce (and food waste) is being tackled in the US.

In the fresh produce industry, there are various standards, in South Africa, the first class are usually exported or sold in speciality retailers, second class will find its way to general retailers then there is the third class which is often sold in informal markets these are stalls usually found in lower-income areas where the people are not as picky and the price is more important than the shape of the fruit or a bruise or two. These are fruit and vegetables that don’t meet the standards for export or traditional retail, essentially food rejects, but they are also produce that have met their “sell-by dates”. You see to retailers cosmetics are important, they have a lot of waste and that is why fruit and vegetables are so expensive at PickPay and Checkers because they contain a premium due to their limited shelf life. Stuff like apples is no longer weighed but sold per unit so expensive it has become.

Now it is the latter food waste that has driven foreign startups into what has become known as the ugly produce industry. Imperfect Foods, Misfit Markets, Hungry Harvest have all entered the direct to consumer, or “farm to doorstep” ugly food business. There are even companies that process these types of food and are proud to admit it such as Preserve Farm Kitchens. These companies use terms such as “rescuing food” or “eliminating food waste”.

But unlike in South Africa where the ugly produce is confined to places like townships these companies target middle-income people. Often they adopt a subscription model, where they partner with local farmers and selling their excess produce in a box at a time. That is because by the time they get it they need to move it fast as it’s a “yesterday special”. A consumer signs up for a subscription and a box of fruit and vegetables gets delivered in a certain period usually on a weekly basis. So let’s say someone pays R200 a month, and every week they will receive a R50 box of produce. Now if you thinking but what does R50 buy you, you will be surprised! For some, this is technically waste that often found its way to the dumpsite with no income derived here they can sell it to maybe buy some pesticide or fertiliser they can use to grow overpriced veggies to sell to Woolies.

How will this business do in South Africa?
Many middle-income people in South Africa are under pressure financially and they cannot afford to shop in mainstream retailers. If you look at the growth of salvage and surplus stores over the years, it’s not just poor people. Giants, the biggest surplus operator in the Cape, is situated in the suburb of Brackenfell opposite the R800m+ Hyprop-owned Cape Cape development. So in the same area where the owners of Canal Walk has a fancy mall, there is a large business selling, surplus, short-dated and expired foods in an area where houses start at R2m.  If you look at Brackenfell’s demographics at last census 44,842 people 79% white, 71% Afrikaans speaking it reaffirms what I have been saying before the middle-income generational wealth aspirants is where the large surplus and salvage profits are at, not the “môre sorg vir homself” (tomorrow takes care of itself) mentality we find in lower-income areas. That being said costs need to be kept low, unless you have significant investment and scale you are going to have to operate from the periphery and not the target area itself due to higher rent.

I already buy ugly produce, I pay R10 for a mixed bag of fruit of around 20 pieces and that is retail, pictured is an actual bag below. As you will see there is a pear that is a little deformed and some bruising here and there, God forbid these are sold by retailers in a country where most people are struggling!

However, I don’t buy from an ugly produce company that is bought from a usual stall by colleagues who live on the Cape Flats. Now it is a known fact that people who focus on generational wealth are far more frugal than the poor. I work hard for my money so I make sure I get value, they taste great and are excellent in smoothies. Not only that but all my money has an opportunity cost that is lost when I spend it. That R5 that others spend on an apple at Checkers I would rather buy ugly produce at 50c and put the rest into advertising my business, depending on the niche you can drive up to 10 even more people to a website had you put that R4.50 into Adwords.

I don’t like paying the supermarket premium because I know most of that money ends up not with the farmer but with middlemen, transportation, storage, retail and the food waste premium that retailers charge to cover fruit that “got old”. I also have a problem with the way most South African retailers operate as is we are in a rich country. The prices are just crazy, I buy most of my food from surplus and salvage operators. How low-income people survive is beyond me.

Now, this produce has to be cheap, even better if you can source more exotic and organic fruits. But most importantly you need a large supply and you need to focus on a suburb by suburb basis. Clients can’t be too far away from each other or delivery will cut into margins. Or you can offer a collection service as well.

This is a volume business on either side, both in securing produce and clients. Seeing there are existing markets, I would even sniff around cancelled export or import orders for supply. We are dealing with something with a limited lifespan, depending on freight method air freight is expensive, sea freight takes long there is a lot that can go wrong.

Securing clients is the second challenge, preferably return clients. If you working on a weekly subscription and you making let’s say R25 profit on a box, then 100 clients will only yield R2500 for the week. Yes like anything else you can potentially make more money if you process it into juice or smoothies or baby food but then we no longer talking about ugly produce but a different business completely.

Overseas a lot of ugly produce businesses have diversified into meats and seafood. The problem is that requires refrigeration. There might be an opportunity for short-dated dry goods or to buy goods that would have ended up in factory shops but then you veering off course into surplus & salvage and clearance territory.

The foreign market
A lot of the foreign players in this industry have raised venture capital to scale up, which has raised some criticism over there. They have been accused of using activism (remember food rescue, food waste elimination slogans) for what is essentially a market solution meaning these foods don’t end up in the poor channels. This is a similar argument that is made in the used clothing industry whereby Instagrammers are accused of buying cheap stock and adding high markups meaning poor people can’t get affordable clothing anymore.  Here is what grinds my gears, every time when moaners complain about “sustainability” and how much food and clothing end up in landfills they want to moan again when solutions are found. I also want to point out that there are “food justice initiatives” that have emerged in response to food insecurity and economic pressures that prevent access to healthy, nutritious, and culturally appropriate foods but they lose traction cos “who will pay them?”. So the food justice warriors want to be paid to run community vegetable gardens in poor areas but entrepreneurs can’t make money to prevent food from ending up in a dumpsite?

What is curious is how these players have scaled overseas and the amount of venture capital that has been pumped into these companies, $526.5 million for Misfits Market including $225m Series C from Accel and Softbank VF just a few days ago (at a $2 billion valuation), $229.1m for Imperfect Foods and $20.9m for Hungry Harvest. Yes, the US has a population of 5.5x South Africa but it does pose interesting questions around the commodifying of “ugly produce”.