In The Art of War, Sun Tzu expanded on an older Chinese proverb, saying, “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” It is for precisely this reason that I’m exploring these concepts. I want to develop a pattern language to articulate what we are seeing in the market, so we can better define ourselves and the other actors in the space that we will inevitably be competing with.
After publishing the first installment in this series, I realized there was a need to further divide the mushroom market beyond the traditional (button) market and specialty mushrooms. Because I think distribution is the key point to consider during the next decade or so, I’ve divided the market into tiers primarily based on the distribution models available.
Tier 1 - Oysters, Lions Mane and other fast fruiting, short shelf-life mushrooms. The idea here is that these are going to be best served through hyper-local production and distribution, and will be fairly resistant to inroads by remote farms because of this. A tier 1 operation would be defined, then, as one that handles sales and transport internally.
Tier 2 - Shiitake, Maitake and other slow growing, longer shelf-life mushrooms. This tier will face greater competition from remote farms because the mushrooms can arrive in viable condition after storage and transport, and therefore are acceptable through a food distribution network. A tier 2 farm is one that relies on external distributors to transport and sell their mushrooms.
Tier 3 - Portabellas, Crimini, and Buttons. These have absurdly long shelf lives relative to any specialty mushrooms, and have the benefit of public familiarity. All other mushrooms will struggle in grocery stores for some time yet, but a tier 3 farm specifically refers to the ability to sell down the chain as far as retail.
Tier 4 - Truffles and other ultra-premium, long term investment mushrooms. These have their own distribution models, which I may touch on in a later installment in this series. For now we’ll just recognize that this is a discrete market segment, with very little overlap on the lower tiers.
Tier 0 would be wild harvested mushrooms, regardless of their type. These are a bit of a curve-ball. 0 because they are not cultivated, but they properly belong at the top, or sometimes the bottom. It’s weird. There’s a surprising amount of overlap here with tier 4. Again, we’ll get to this later. I only even mention it to round out my system.
This is a classification based on the appropriate cultivation and distribution models available for the mushroom, and I realize it is not perfect. Blue Oyster is technically tier 2, at least for now, but I consider it best placed in tier 1. Shiitake is tier 3-ish, but the vast majority of volume is still in tier 2, as far as I can tell, so we’ll leave it there.
Why Does this Matter?
This classification system has its roots in a discussion Andrew, Samantha, and I had over two years ago about Shiitake. It should be no surprise that we are space limited, given that we are a basement operation, but at the time we were just running into our max incubation capacity. After staring at the wall of Shiitake blocks waiting to brown, we fell back to one of our favorite pass times - running the numbers. Even though we were making an extra $2.00/lb on Shiitake, the sheer velocity of money from the fast-growing tier 1 mushrooms meant that it made no sense to grow Shiitake. We also made sure to account for our time in the overall cost, and the extra labor involved in cold-shocking and harvesting those things sealed the deal. We have been growing exclusively tier 1 mushrooms ever since.
If we analyse the implications of the tier structure, a few things become apparent.
The higher the tier:
The longer the shelf life
The longer the incubation time
The more space is required to grow the same amount of weight
The more infrastructure is required
The more work is required
The financial investment to get started is higher
The margins are thinner
The market reach is wider (more outlets available means more lbs can be sold)
An important point to consider is that any mushroom categorized in a higher tier is capable of being sold in any lower tier’s distribution, but the opposite is not true. Any attempt to sell tier 1 mushrooms through a food distribution network is unlikely to be successful, and (with very little exception) you can forget about grocery stores. On the other hand, a tier 1 operation managing their own distribution could happily sell Shiitake or Crimini all day, if they had the space and infrastructure to grow them. This operation would also keep the quality advantage.
Quality, Total Sales Volume, and Pricing
I told you in my last post that these were the three main factors under consideration for the course we’ve charted at Mossy Creek Mushrooms. We also discussed the advantages a tier 1 operation has from the higher quality of their mushrooms, so now it’s time to consider the total sales potential of our approach.
I mentioned at the end of Part 1 that I thought a tier 2 farm would have the advantage over a tier 1 operation in the beginning, and I stand by that. The reason is that building an effective system for sales and delivery is far more difficult than growing mushrooms. A decent grower with a moderate investment can quickly reach the point of growing 1000s of lbs of mushrooms each week. A decent sales team will be hard pressed to move all of that until their name and reputation has been built, and they work out a system to handle all of it.
That last point, however, is the key. Once the system has been built, with a strong reputation to back it, the selling does itself. It is for this reason that we internally focus so strongly on systems. We have a sales system, a production system, a lab system, and fruiting systems that all contribute to the strength of the whole, or we kill them and rework the system. Some of our systems fail to reach maximum efficiency in isolation, but when considered as a whole they are all over-yielding. This is a large part of why we’ve stayed small for so long - we’ve been focusing on refining each part of the process until everything fits together just right. It’s much better to learn the hard lessons on the small scale where it’s cheap.
To be clear, though, tier 1 doesn’t necessarily mean small. Tier 1 mushrooms are part of our superpower in opening doors and making sales, but once we’re in, we’re in. We have standing demand for almost 1000 lbs a week in Knoxville alone, not to mention the other areas we haven’t touched yet that are well within our reach. Once we transition to a dedicated space, we plan to go broad until we’ve reached that demand, and then go deep by adding additional varieties. Once we’ve reached full-scale production there will be very little place in the local market for mushrooms sold through a food distributor.
As more and more tier 1 operations level up over the coming years following this method, the tier 2 farms will begin to face demand shortages. At that point, they will be faced with a choice: Either slog it out through the price wars, go up market to the grocery stores and face the thinner margins up there, or go down market and start handling their own distribution and benefit from the increased margins by cutting out the middle man, while taking on the extra burden and difficulty. In either of the last two scenarios these farms will be latecomers in whatever tier they enter, right as the market is beginning to be faced by the pricing squeeze that inflating supply inevitably brings. These will be hard times across the industry, but particularly for tier 2 farms.
I don’t think we’ll see these kinds of pressures coming to a head for at least the next five years because the total supply of mushrooms is still so low. During the latter half of the 2020’s though, I think a lot of tier 2 farms that have been very successful will be blindsided, as pricing and demand pressures hit them first. Different areas will be hit at different rates, primarily depending on the influx of tier 1 operations in the region. That’s not even mentioning competition from China.
Growth Strategy for a Turbulent Market
Given this tasty bit of speculation, our strategy is simple. We have refined all our required systems and continue to review them with a critical eye to make effective improvements. We’ve built a strong local reputation that we will maintain by our high standards of quality and consistency. Now we are building our brand through developing a distinct aesthetic and online media presence. We are leveraging the high margins of our integrated approach to fund our expansion with minimal or no debt, by operating an incredibly lean system in this small space with very little overhead. Once we’ve moved to a dedicated location and are growing at max capacity, it will be very difficult for any tier 2 farm to make any headway in our region.
We welcome other tier 1 farms, knowing that maintaining a good working relationship with them helps us collaborate to avoid price pressures as long as possible. When price pressure does come from distribution networks, we will be ready for them. Armed with the knowledge that the squeeze will come, we will continue to develop our infrastructure to further improve efficiency and broaden our reach to allow us to weather the turbulence of the market.
Join in the Conversation
Everyone has blind spots, but the great lesson from the Open Source software movement is that the more minds working on a problem (and the more interesting and impactful that problem is to those minds) the better the solutions. We are actively cultivating an Open Source mushroom growing strategy that is forward looking, lean, and efficient. We welcome your feedback, particularly if you can find a flaw in our reasoning. I would much rather become better than simply fight to prove I was right.
If you’re just starting out, or are struggling to define or develop your systems, check out our YouTube Channel. Andrew has made it a huge labor of love to break down the barriers to mushroom growing by showing our simple, open source approach. When you’re ready to level up, consider hitting up Andrew for a phone consultation. We have worked hard to develop a system that is accessible and adaptable, and I feel that Andrew is providing incredible value there.
Suggested Reading - The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change) - Clayton Christensen completely blew my mind with this one. This is actually one of the books that inspired me to begin exploring the implications of the very points I’m discussing in this series. It’s been years since I read it, but I reflect back on this book on a near daily basis.
P.S. I do feel like there is certainly a place for a mixed approach straddling multiple tiers. I made a strong divide between them not to imply that they are incompatible, but to highlight the differences between each tier. If you have the space and can’t sell everything you grow locally, it would be foolish to not work with a distributor. Hopefully, though, I have clearly expressed why I think it is worth focusing more energy developing your own distribution, rather than spending more effort pushing more mushrooms through other sales channels.
Also, I realize that much of my speculation depends on food distribution networks not making much improvement in terms of time to delivery. I stand by that expectation for the short-term, but I believe that mushrooms and other ultra-perishables will set the stage for disruption of the food distribution systems. The existing players are heavily invested in their infrastructure, and the size of the opportunity is too small to be of interest to them right now. If you’ve read The Innovator’s Dilemma, you may join me in believing that it’s a classic case of a market ripe for disruption. I think we’ll see more and more types of farms going a tier 1 route (I’m already seeing this with micro-greens) until some upstart distributor changes the game and nails the logistics puzzle.
We’ll deal with that wild-card another day.