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We need to talk about Mushrooms
Understanding the 🍄 market & future through Smallhold
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Last year, a trip to Singapore led me to a restaurant that changed the way I thought about mushrooms forever. On the menu was a curry dish, traditionally chicken-based. On a whim, I ordered it, and what landed on my table could've fooled any chicken-lover. The flavor, the texture—it was all there. Curiosity piqued, I asked the chef for the secret ingredient. Lion’s Mane Mushroom, he said.
Back home, I found that Lion’s Mane Mushrooms were elusive. The supermarkets had plenty of the usual Button Mushrooms, but that was it. Online, I discovered grow kits that promised to let you cultivate these exotic fungi right in your home.
Then I stumbled upon a company called Smallhold. They're doing something entirely new in the mushroom business, a fresh approach that had me eager to dive deeper. So, here we are, exploring the untapped potential and new directions in the world of mushroom cultivation and consumption.
Let’s dive in 🌊
First: let’s talk about Mushrooms 🍄
According to the U.S. Department of Agriculture, the average American munches through about 3 pounds of fresh mushrooms every year. Now, put that next to the staggering 214 pounds of meat consumed annually, and you start to see the big picture. When it comes to mushrooms, it's mostly the usual suspects: white button, cremini, and portobello (which are the same type of mushroom harvested at different ages) make up over 95% of mushroom sales stateside.
Mushrooms are a great alternative protein: they grow easily (and preferably) indoors, are nutrient-packed, thrive on waste materials, and could very well be among the planet's most eco-friendly sources of calories. All they really need is water and a basic growing medium like sawdust. Plus, they're quick growers with cycles as short as six weeks.
Why Mushrooms are a great Alternative-Protein
Want to understand better why Mushrooms are a great Alternative-Protein?
Here 6 perspectives:
Mushrooms have a relatively high protein content with an average of 19%-35% protein by dry weight, which is comparable to or even higher than some meats like pork and beef. They also contain all 8 essential amino acids required by humans, making them a complete protein source1.
When comparing protein content per 100 calories, mushrooms hold their own against many common meat products. For example, while 100 grams of raw mushrooms only has 3.09 grams of protein compared to the higher protein content in meats, on a per 100 calorie basis, mushrooms have 14.04 grams of protein, which is comparable to or better than some meats like pork2.
Mushrooms have a significantly lower environmental footprint compared to meat. They require a fraction of the land and water needed to produce animal protein and emit substantially less greenhouse gas. The cultivation practices for mushrooms and mycelium are environmentally-friendly, contributing to their sustainability345.
Mushrooms offer a range of vitamins and minerals, often in higher amounts per 100 calories compared to meat. They are also low in calories, fat, and cholesterol, making them a healthier choice.
Mushrooms provide a unique texture and umami flavor that can replace the savory taste commonly associated with meat, making them a satisfying substitute in various dishes7.
They are often more cost-effective and easy to incorporate into diets, thus providing a low-cost protein alternative, particularly important in addressing global concerns about food security amid rising populations8.
Mushrooms are all-natural and not ultra-processed like many other alternative proteins. Their minimal processing maintains a rich nutrient profile, making them a more wholesome choice.
Despite this, traditional mushroom growers haven't been as quick to innovate in terms of technology, variety, quality, or environmental impact.
A look at the mushroom market
At first glance, the potential in the fresh mushroom market overshadows anything else you might find in the produce aisle. Think back 25 years. Your supermarket's greens section was a pretty simple affair: iceberg lettuce, maybe some spinach and romaine if you were lucky. Fast-forward to today and a trip to a place like Whole Foods is a feast for the eyes. We've got kale, microgreens, Thai basil—you name it.
In the same way that kale and other specialty greens shook up the lettuce world, exotic mushrooms are starting to nudge aside the button mushroom's reign. Sure, button mushrooms still rule the roost in terms of sales, but specialty varieties like shiitake and lion's mane are quietly making their move. As consumers get more savvy, they're not just looking for new flavors; they're also hunting for the unique health benefits these exotic mushrooms offer. The end result? Rising sales and a market ripe for innovation.
Over the last decade, the market has been sprouting like, well, mushrooms after the rain. We're not just talking about the staples; specialty mushrooms like shiitake, lion's mane, and oyster are making waves. In fact, sales of these exotic fungi shot up by 32% in the 2021-2022 season compared to the previous year. This is not small mushrooms—it's a billion-dollar opportunity, and it's got the wind at its back in the form of several strong market trends:
When we step back and look at the bigger picture, the U.S. mushroom market, valued at $1.4 billion, is just a fraction of a much larger pie. Globally, mushrooms are a booming $87 billion industry. But wait, there's more. Extend the lens to the broader $600 billion ingredients market, which includes things like veggie burgers, and you start to see the enormous potential for mushrooms to go mainstream. Add to this the adjacent $180 billion-plus market for value-added products, like prepackaged salad kits, and it becomes clear that mushrooms have a role to play in multiple high-value markets.
A look outside the US
In 2019, world production of commercial mushrooms and recorded truffle collection reported to the Food and Agriculture Organization was 11.9 million tonnes, led by China with 75% of the total.
State of the players
A large chunk of America's mushroom supply comes from a small area in southeastern Pennsylvania. Kennett Square, to be exact, is the hub where 70% of the country's mushrooms are grown. Mostly, these are the already shown button mushrooms, which find themselves in styrofoam containers, sealed with plastic wrap, and can take up to 10 days to finally land on your local store's shelves.
Today's mushroom market however isn't just a local affair; it's a global competition between 3 parties.
On one side, you've got traditional U.S. growers, mainly from Kennett Square, sticking mostly to button and portobello mushrooms. On the other, you've got international players, particularly from Europe and the Asia-Pacific region, who are diving into the world of specialty mushrooms. And last but not least we have the new Vertical Farm Companies, startups trying to innovate.
Let’s review them:
US Mushroom Farmers
These aren't small-time operators; we're talking about massive commercial farms that specialize in the production of button mushrooms. With an industrial-scale setup, they have the capability to grow these fungi in huge quantities and distribute them nationwide. Their reach is extensive, spanning from local grocery stores to big chains, making them a formidable player in the mushroom market. Given their scale and established distribution networks, they have the muscle to get their products on store shelves across the country, often in a shorter time frame than smaller or newer entrants to the market.
Phillips Mushroom Farms, L.P.
When it comes to mushroom imports, a significant player is China. These mushrooms make their way to the U.S. through container ships, covering thousands of miles before landing on store shelves. While these imports add variety to the market, they often fall short on quality. Coming in cans ro wrapped in plastic, they don't exactly scream "fresh," which is increasingly what today's consumers are looking for. Moreover, the long journey they take inherently means they aren't locally sourced, another factor that matters to a growing number of shoppers.
Vertical Farm Companies
Vertical farms have been popping up globally with the promise of revolutionizing agriculture, especially when it comes to leafy greens. The idea is enticing: stack crops vertically in controlled environments to maximize yield and minimize land use. However, many of these operations face significant hurdles when it comes to scaling their production and actually getting their products out the door. Even as they hit bumps in the road, they often announce new varieties they claim to grow, only to encounter the same scalability issues all over again.
Spotlight: Bowery Farming
Bowery Farming, based in New York, is recognized as the largest vertical farming operation in the US, where it grows pesticide-free lettuce, leafy greens, and herbs, serving major retailers across over 850 locations. The company raised a total of $472 million from Google Ventures, General Catalyst, GGV Capital and Temasek.
Bowery Farming operates with the mission of transforming the fresh food supply chain to become smarter, safer, and more sustainable. Their indoor vertical farms, situated outside cities, are designed to produce food without pesticides and pollutants, utilizing lesser water and land compared to traditional farming methods. This farming model is powered by their proprietary farm operating system, BoweryOS, which integrates AI, software, and hardware to streamline the food system while focusing on freshness, flavor, and safety. Bowery's farms can generate 100 times more produce per square foot of land than traditional agriculture, using 100% renewable energy and 90% less water.
So far they haven’t launched a mushroom product, but they might be working on it.
Smallhold initially entered the market as a supplier of fresh mushrooms to restaurants and grocery stores in New York City. Recognizing an opportunity for on-site cultivation, the company launched Minifarms, compact mushroom-growing systems that could be placed in partner hotels and restaurants. The COVID-19 pandemic served as a catalyst for change in Smallhold's business strategy. With more people cooking at home, the demand for unique and quality ingredients like mushrooms increased. The company adapted by adding a direct-to-consumer model, offering mushroom grow kits for home delivery.
During this period of uncertainty, Smallhold's mushrooms gained traction as a source of culinary exploration for many households. Customers reveled in watching the unique shapes and colors of their mushrooms grow, and then experimenting with new recipes.
After the pandemic Smallhold’s go to market focussed again on retail: Currently, Smallhold's freshly harvested mushrooms are available in over 500 retail stores, including established chains like Whole Foods, Central Market, and Albertsons. Notably, Smallhold has become the fastest-growing fresh mushroom brand in Whole Foods, shifting the chain's previous reliance on California-based small scale suppliers.
Why grow indoor
Mushrooms are an ideal candidate for indoor cultivation for several reasons, giving companies like Smallhold a competitive edge over outdoor growers, especially those focused on leafy greens. Firstly, mushrooms have a low dependency on light, which is a significant advantage when it comes to indoor farming where natural light is limited. Secondly, mushrooms are traditionally grown in a vertical arrangement, making efficient use of space—a crucial factor for indoor setups where real estate can be expensive. Lastly, mushrooms thrive under tightly controlled environmental conditions, such as specific humidity and temperature levels. These conditions are challenging to maintain outdoors, where weather can be unpredictable, but are easier to regulate in an indoor setting. Overall, these factors make mushroom cultivation more suited for indoor environments and allow Smallhold to compete more effectively than those growing crops that are more dependent on outdoor conditions.
Smallhold has 3 approaches: Macrofarms (large centralized farms that then deliver the finished mushrooms to shops), microfarms (boxes inside shops that grow mushrooms), D2C (grow kits).
Smallhold's Macrofarms serve as specialized mushroom-growing facilities designed with mushrooms in mind. These spaces are constructed using modular refrigeration panels that come in flat-pack form, making them easy to assemble. This efficient design enables a streamlined and optimized environment for mushroom fruiting, allowing for greater control over variables like temperature and humidity.
In 2022, Smallhold took its concept of farm-to-table even further by installing "mirco farms" directly in markets. These eye-catching units are constructed from glass and metal and emanate a blue glow, giving them a futuristic appearance. More than just aesthetically pleasing, these minifarms serve a functional purpose. They allow mushrooms to be grown and harvested on-site, ensuring peak freshness and minimal transit time from farm to consumer.
Smallhold's grow kits offer a simplified, hands-on experience for those interested in mushroom cultivation at home. Each kit contains a bag filled with a specially-prepared substrate, which is the material that mushrooms grow on. Once set up, the substrate bag will fruit, meaning it will produce mushroom bodies. Depending on the size of the kit, customers can expect a yield ranging from .75 to 3 pounds of fresh mushrooms. This DIY approach not only provides an educational experience for the consumer but also caters to the increasing demand for local and sustainably produced food.
The bull case on Smallhold
So why am I bullish on Smallhold? 6 reasons why Smallhold will succeed.
Variety of Products:
Smallhold offers more than 10 types of mushrooms, each having its own unique flavor, texture, and nutritional benefits. This variety aims to cater to a wide range of consumer preferences, especially those interested in exploring options beyond the common mushroom types.
Unlike centralized mushroom farms, Smallhold's farming facilities are spread out across the U.S. This distributed approach aims to reduce transportation distances and, as a result, lower the company's overall carbon footprint.
Certification and Technology:
The farms operate under organic certification and utilize advanced technology to create optimal conditions for each type of mushroom. The goal is to produce a high-quality, environmentally responsible product.
Smallhold's farming operations are designed to be efficient in terms of water and energy usage, aiming to go beyond industry standards. The company also opts for compostable packaging to further its commitment to sustainability.
Smallhold grows all its mushrooms on sawdust, effectively repurposing a material that often goes to waste. This approach aligns with the company's sustainability goals and also diverts waste from landfills.
The U.S. mushroom market currently lacks a dominant, recognizable brand. This presents an opportunity for companies like Smallhold to establish themselves in a growing market.
The bear case
And now time for the bear case: 6 reasons why will Smallhold will not succeed.
Limited Market Reach
Smallhold focuses on exotic mushrooms, which have not yet gained widespread popularity. The mainstream market still leans towards traditional varieties like button and portobello mushrooms. It will need a lot of education to show the consumers everything they can do with these new mushrooms.
The company faces strong competition from established mushroom growers. What is stopping them from going into exotic mushrooms too?
Other vertical farming startups with larger financial backing could easily diversify into the mushroom sector.
Smallhold's distributed farming model could lead to issues in quality control and consistency.
Managing multiple growing locations may result in increased operational costs.
Retail Space Requirements
Smallhold's "Micro Farms" need to be placed in retail spaces, requiring retailers to give up valuable square footage - and they would be more willing to do that to the established partners.
DIY Mushroom Kits
One Go to market of Smallhold are DIY mushroom kits. The concept may not appeal to the mass market, limiting this revenue stream.
The kits also face competition from ready-to-eat mushroom products.
Maintaining organic certifications and other regulatory standards can be complex and may impact production and costs.
Overall, while Smallhold has a novel concept approach and good track record so far. It faces significant challenges in market acceptance, competition, operational efficiency, and regulatory compliance that could limit its growth and profitability.
Mushrooms are poised to play a significant role in the future of sustainable food production, and companies like Smallhold are leading the charge. With their innovative approaches to mushroom farming, ranging from large-scale macro farms to microfarms situated right in the grocery stores, they're setting a precedent for what the future of food cultivation could look like.
Let's keep our eyes on this fascinating shift in the food landscape. Who knows? The next time you're at a grocery store, it might not just be apples and oranges catching your eye, but a vibrant array of sustainably grown, locally sourced mushrooms.