10 September 2020

Darsh Lathia and Yamini Vivek

Hydroponics is a method of growing plants in a water-based, nutrient-rich solution without soil, where the root system is supported using an inert medium such as perlite, rock wool, clay pellets, peat moss or vermiculite.

The roots are suspended in a purified water system enriched with nutrients, thereby reducing the chances of pest and insect attack. This technique caters to a host of challenges, such as water and arable land shortage, global warming, and overuse of harmful pesticides and fertilizers. 

Although hydroponic systems depend on water and water-based solutions, they use only about 1/20th of the amount of water used in traditional farming. Based on Frost & Sullivan’s analysis, productivity was found to increase by 3-10 times the conventional output in the same amount of space as conventional farming. The technology allows the decrease in time between harvest and consumption, leading to higher retention of nutritional value for the end-product. Many crops can be produced twice as fast in a well-managed hydroponics system.

Hydroponics on the Rise in India
Hydroponics is at a nascent stage in India, with the majority of farms being operated as startups. However, large corporates are entering this business, which will increase their acceptance at the commercial level. Based on our research, there are over 40 commercially active hydroponic farms in India and a couple of new farms are underway. With produce being perishable, the majority of farms cater to the nearby metro cities and companies try to set up farms close to demand centres for ease of logistics.

The large farms are concentrated in southern and western India. According to our analysis, Southern India accounts for the highest share, with cities like Hyderabad, Bangalore, and Chennai having a large number of farms and many new small and medium farms being established.

Farms are forming near the Mumbai-Pune belt and other western regions of Maharashtra, such as Nasik and Kolhapur. Competition is currently not intense as the technology is in a very nascent stage and the awareness level is low, even amongst chefs and food enthusiasts. However, it is expected that the popularity of hydroponics will increase, and the competition will intensify correspondingly.
 
Our research revealed that Hydroponic farms in India are largely used to grow leafy greens like lettuces and herbs like Italian basils and vegetables like cherry tomatoes, cucumbers, and red and yellow bell peppers. In terms of volume and value, large greens like cherry tomatoes, bell peppers, and cucumbers, account for the major share of the hydroponic output, which is followed by leafy greens like various lettuces, arugula, and pakchoi.
 
The Green Conundrum Facing Farmers
Our research reveals that hydroponic farming is largely a B2B business model with HoReCa (Hotel, Restaurant, Cafe) and organised retail accounting for a 90%-95% share, and remaining by the unorganised sector. Organised retail is the primary mode of selling supply products in the retail market. The unorganised sector is almost negligible and the penetration of e-commerce is minimal. The organised retail outlet offers decent volume off-take and better margins compared to HoReCa.

With the unorganised retail market being price-sensitive, conventional farm output has a stranglehold due to its pricing. Transportation is done primarily through transport vans delivering the produce to adjoining city centres, typically about 100-200 km from the farm. Only farms supplying long distances (over 500 km) use reefer trucks.
 
Commercial hydroponic farms typically have a land area of 10,000 sq. ft. to 50,000 sq. ft. Usage of the grow bag technique accounts for 70%, whereas NFT (Nutrient Film Technique) and others account for the rest. As per Frost & Sullivan’s analysis, the cost of setting up a grow bag/trough system for growing large greens is almost half compared to setting up an NFT system for growing leafy greens and, hence, large greens are the preferred product category. Although leafy greens go through six to seven crop cycles and large greens take one to two crop cycles in a year, the output per plant for large greens in terms of volume is up to 20 times that of leafy greens. Also, in terms of value, large greens fetch about 25%-30% more value per kg compared to leafy greens.
 
Farm utilities include equipment for setting up the farm, plant seeds, minerals/nutrients and water, organic pest control solutions, packaging, and so on. Greenhouses, NFT channels, grow bags, net pots, fogger and auto dossers are some of the major farm equipment used. Plant seeds and nutrients account for the largest component of the operational expenses, some of which are imported from Europe and America.
 
HoReCa and Healthy Lifestyles Set to Boost Hydroponics
HoReCa is considered to be the largest customer segment for hydroponics as it has a bulk requirement, and farm owners trying to offload their volume prefer to cater to the HoReCa segment.

Hydroponics also ensure a smooth supply, despite weather conditions and monsoon seasons, when supply is usually interrupted for traditional vegetable suppliers. Within HoReCa, high-end cafes and restaurants not only have a decent off-take but also offer better margins as this sub-segment prefers high-quality vegetables and is open to paying a premium. With health-conscious customers requesting vegan, Keto diet, and so on, the menu is revised constantly to cater to the demand of the customers, and there will be increased growth of detox juices and salads. The entry of more salad outlets is leading to the growth of exotic vegetables, thereby creating opportunities for hydroponically grown vegetables. Since 2017, salad consumption has increased by 25%-30% and this trend is expected to continue in the coming five years.

With an improved lifestyle, high disposable income, and growing awareness, there is an increasing demand for healthy menus like low-carb and organic, where customers are requesting more leafy vegetables that are organically grown. Not only Tier 1 cities, but Tier 2 and Tier 3 cities also are expected to follow a similar disrupting trend in the coming years.

Over the past few years, the share of expenditure on health and wellness has increased among the young working class. According to the Federation of Indian Chambers of Commerce & Industry, the foodservice industry is expected to reach ?5,52,000 crore by 2022, growing at a CAGR of 10%. Of this, the health-conscious segment is expected to cater to over 1 crore people in the top six Indian cities by 2022, registering a growth rate of 12%.

Organised retailers and specialty grocery stores, especially in major cities, have higher-volume off-takes and also offer comparatively better margins for hydroponic growers. This is because the consumers visiting these stores are willing to pay a premium for high-quality produce. However, prices offered at unorganised retailers are too low for the hydroponic farmers to break even. Direct-to-customer offers a higher margin compared to HoReCa or retail; however, it also requires additional effort in acquiring customers, creating awareness, offering innovative packaging, and so on.

Hydroponics Headed in the Right Direction
Hydroponics holds advantages over traditional farming. However, organically grown products have already become popular among young consumers. HoReCa and organised retail still prefer organically certified products over hydroponics.

Conventionally grown products are available at a much cheaper rate compared to hydroponically grown produce as well. The presence of hydroponic players in India was limited until 2015; however, with the growing popularity of the technology and year-round supply, which conventional farms cannot offer, it has gained attention in recent years. New players are expected to enter the market in the coming years and revolutionise urban farming in the country.

The authors are consultant and consulting analyst, chemicals, materials & nutrition practice, Frost & Sullivan. They can be reached at Srihari.Daivanayagam@frost.com)