Case study: Agri Investor takes a look at Verde Farms, a pasture-raised beef business that was founded in 2005 and is organic and regenerative agriculture certified.
“Everyone has a busy life and they don’t have time to research every aspect of every supply chain, of every product they buy,” says Verde Farms founder and CEO Dana Ehrlich.
Ehrlich is talking Agri Investor through how the pasture-raised beef business founded in 2005 has been scaling its operations since it received its first substantial capital injection in February 2020, when Manna Tree Partners made a $15 million minority equity investment in the company.
Having made the commitment to provide only pasture-raised beef products to consumers from the outset, the company also ensures cattle are not exposed to pesticides, fertilizers, growth hormones and antibiotics. It is certified organic and received its regenerative agriculture certification from Land to Market at the start of the year.
“This is what makes the value of a brand even more important as a shortcut for the consumer who is trying to do the right thing,” adds Ehrlich.
The company is now well on its way to building its clout as an identifiable brand in the US recognized for its organic and regenerative credentials. Five years ago, roughly 4 percent of its sales were branded with the Verde Farms logo – by the end of this year, this is expected to rise to half of all sales.
As a Manna Tree portfolio company, Verde Farms will be hoping to follow in the footsteps of free range pasture-raised eggs business Vital Farms, which had a successful IPO in August 2020 and is described as an “early bullseye” for Manna Tree by co-founder and managing partner Ellie Rubenstein.
Vital Farms returned 4x invested capital and a net IRR of 80 percent in gross terms, as it proved out the firm’s strategy of investing in niche food businesses that place a strong emphasis on sustainability and nutritional value – the same vertical in which Verde Farms sits.
The business has been on an almost 20-year journey, starting out at a time when retail buyers “didn’t even want to hear the conversation, never mind be educated” on the benefits of pasture raised beef, says Ehrlich, to now being recognized as one of the leaders in its growing segment.
The aha moment
The idea for Verde Farms came following Ehrlich’s trip to Argentina in 2004, where he spent time in the countryside and had a lot of exposure to organic grass-fed beef.
Upon returning to the US, he “couldn’t find Argentinian beef, couldn’t find grass-fed beef, organic livestock standards had just been finalized in the US and were nowhere, and so that was the aha moment,” says Ehrlich.
Alongside co-founder Pablo Garbarino, Ehrlich spent the next three years knocking on retailers’ doors and trying to get their product into the market, but take-up was slow.
It wasn’t until 2009 that the fledging business got its first pound of meat on a major supermarket shelf through a deal with Wegmans, which itself required the founders to go through a two-year sales process.
From there, things started to accelerate as another partnership, this time with Costco, came to fruition later the same year.
Until Manna Tree’s 2020 investment, the business was asset light and used third-party logistics, cold storage and packers, some of which have gradually been brought in-house as the business has sought to drive costs out of its operations.
“By the end of this year, we should have almost 100 percent of our production in-house. We’re not at scale yet, meaning we’re not at full capacity, so we have a lot of room to grow,” says the CEO.
Sourcing the right beef
Verde Farms does not own any farmland or cattle herds. Instead, the company started out by sourcing from the South American farms that inspired the idea for the business in the first place.
Like Argentina, many farms in Uruguay raise their cattle on pasture and are grass fed. The freedom they are given to roam means they don’t have to be given antibiotics in the same way as those that are raised in close-quarter feedlots and have historically not been given growth hormones.
“We’ve also scaled and diversified across countries so we source domestically, we source from Australia and a few other places as well”
Dana Ehrlich
“That is how they’ve been running things for hundreds of years and so in many cases, getting an organic certification is a paperwork exercise,” says Ehrlich. “They’re already running organically – they’re just not certified. We’re the largest importer of Uruguayan organic beef into the US and have very deep relationships across multiple suppliers.
“And so we’re not buying the cattle but we are specifying requirements that go above and beyond the USDA requirements. We’ve also scaled and diversified across countries so we source domestically, we source from Australia and a few other places as well.”
While the pasture raised approach enhances the nutritional value of the beef and is environmentally more sustainable, it does come at a cost. Whereas a feedlot cow that is fed corn and a dose of growth hormones may take around 16-18 months to reach weight, Verde Farm’s cattle take 24-30 months. This translates roughly to a 30-50 percent price premium at the consumer level in comparison with conventionally reared beef products.
The relatively new requirement of regenerative practices that Verde Farms now stipulates to its suppliers also comes with a nutritional and environmental benefit, but this also comes with additional labor requirements at the farm level.
“They generally have a much more active management, where they have flexible fencing systems that might be down to a single hectare and the cattle will be in each individual area for one to maybe three days,” says Ehrlich.
This has the effect of concentrating the natural fertilization of the grass in smaller parcels, which allows more nutritional grass to grow. The cattle also naturally aerate the farm and enhance the amount of carbon the soil can capture.
“It’s both a profitable and sustainable system that also produces animals that reach slaughter weight at a lower age, which produces more tender and better marbled products,” says Ehrlich.
Distribution, distribution, distribution
The next step in Verde Farm’s growth is getting more of its products on the shelfs of regional and national food stores.
As well as the longstanding Wegmans and Costco partnerships, the company’s products are also now available through Amazon Fresh, Kroger subsidiary Harris Teeter, Stop & Shop and has also been available via Target since September.
“Any additional investment that comes in is really going to be focused on growing the brand and growing points of distribution, predominantly across the US”
Dana Ehrlich
“Looking ahead it’s really just distribution, distribution, distribution. When we do gain distribution, we have the highest velocities in our sector and we also have the largest shopping baskets,” says Ehrlich. “So retailers recognize that we’re bringing in the most valuable shoppers. When they come in for meat they pick up lots of other stuff like organic milk and organic eggs.”
Ehrlich declined to comment on how close Verde Farms is to reaching profitability or whether this is a higher priority than growth right now, but he did say that the combination of bringing product packaging capabilities in-house and increasing the share of branded products sales is helping drive higher margins.
“Branded revenue is almost always at a higher gross margin relative to the store brand programs and as more volume comes into the system, that makes our manufacturing more efficient,” he says. “So there’s a substantial amount of fixed assets and the more you can amortize those fixed costs over more pounds, the lower our cost per pound. So those are really the two major focus areas.”
As well as Mana Tree’s February 2020 $15 million investment, Verde Farms took another $10 million from minority investors including Johnsonville Holdings and NHL player Alex Biega in October 2020, to take total investment to date to $25 million.
Ehrlich would not be drawn on the timing of the next funding round being targeted by Verde Farms, but when it does secure its next capital injection, he is in no doubt as to how it will be put to work.
“Any additional investment that comes in is really going to be focused on growing the brand and growing points of distribution, predominantly across the US,” he says. “But we do think there’s potential for international growth in the future as well.”
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