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Startups attract investment for selling ugly produce

Startups focused on turning a profit from food that would otherwise go to waste are gaining traction with investors.

Colorado Springs, Colo.-based FoodMaven Corp. and Emeryville, Calif.-based Imperfect Produce, say they are looking to expand into new corners of the U.S. in 2018 from their existing regional footprints.

FoodMaven said Jan. 9 that it raised $8.6 million in series A funding, a sum gathered from investors including Walton Enterprises, a fund managed by the founding family of Walmart Inc.

The startup, founded in 2015, sells mainly to restaurants and other buyers that need large volumes of produce and do not care about minor blemishes or deformities. This produce could include crooked carrots or strawberries that are smaller than normal.

Similar operations are already focused on selling less-than-perfect produce to consumers: Imperfect Produce has raised about $11.7 million in funding as of Jan. 24, according to Crunchbase. In December 2017, the company expanded outside of the Western U.S. for the first time as it set up operations in downtown Chicago.

Customers sign up to receive selections of fruits and vegetables at home, but the company has also expanded its stock to include dry groceries, selling brown rice that had been broken into smaller grains and Clif bars that were near the expiration date.

Still, most of the company's business comes from customers that are looking for fresh produce, often at a discount to retail prices, Reilly Brock, content manager for Imperfect Produce, told S&P Global Market Intelligence in an interview.

"We're really all about home produce delivery," Brock said.

As they grow their businesses, the companies are taking advantage of both produce that grocers refuse to buy for size or cosmetic reasons as well as excess stock that retailers do not sell.

Cheap food, grocery competition are key drivers

Both FoodMaven and Imperfect Produce tell retailers that they are able to recover revenue from food that they would otherwise donate or throw away — an especially tempting pitch, given that fresh fruits and vegetables are often among the products in a grocery store with the widest profit margins, California Polytechnic University professor Steve Hamilton said in an interview.

In a competitive grocery industry, retailers often stock more than they need to ensure they are able to meet consumer demand and that they do not lose customers to rivals, Hamilton said.

"It's way less costly to throw stuff away than have customers put their baskets back" and shop at a competitor instead, he said.

Broadly, competition among grocers has intensified since Amazon.com Inc. purchased Whole Foods Market Inc. in August 2017 and German discounter Lidl Dienstleistung GmbH & Co. began opening stores in the U.S. in June.

Compounding the problem in recent years has been historically low food prices. While the federally tracked Consumer Price Index has ticked up since July 2017, grocers are still recovering from an 18-month stretch during which food price inflation was the lowest it had been since immediately after the Second World War.

Those historically low prices have also increased consumer waste of food as customers buy more than they can eat, Hamilton said.

Both FoodMaven and Imperfect Produce plan to expand their reaches in 2018. FoodMaven is looking to grow to a national operation from a service area currently limited to parts of Colorado, and Imperfect Produce is considering entering other markets in the Eastern U.S., according to websites for both companies.