The great siege: Vegans gunning for the US$1.4 trillion global beef market

By Trevor Muchedzi, CFA

You have to agree, that burger looks so appetizing! What might surprise you though is that the beef patty in between isn’t natural beef but rather a plant-based “meat” substitute manufactured in the lab directly from peas, coconut oil and cellulose from bamboo among other plants. What will even blow your mind is it actually does look, cook, smell and taste like the natural beef patty but without all the unhealthy stuff.

The vegans are in town

Consumer tastes are changing and with that, the demanding for healthy food is trending upwards. Rising incidences of health disorders have increased the level of health and fitness consciousness among consumers who are now more discerning about what they eat. Beyond Meat, a U.S. based company, is on a mission to blur the lines between vegans/vegetarians and traditional meat eaters by providing plant-based meat products that appeal to both sides but are also indistinguishable to natural meat. A survey in retail chain Kroger, revealed that ~93% of people who buy plant-based burger patties do not identify themselves as either vegetarian or vegan but as people simply looking for a healthy alternative to the traditional red meat.

From the company’s perspective, this is a very important distinction. Their products are not targeting a niche vegan/vegetarian segment but the much broader customer base which include traditional meat eaters. To aid this mindset shift, Beyond Meat burger patties for example, contain beetroot juice extracts that mimics the blood flow of a natural beef patties when you grill them. And for good measure, the company insist that their products be sold in the fresh meat section of a supermarket and not in the frozen food section.

Ten years after it was founded, Beyond Meat is heading for New York Stock Exchange after successfully raising US$175 million at a valuation of US$1.2 billion. The company boast an illustrious list of early investors including Bill Gates, Kleiner Perkins, Tyson Foods, Snoop Dog and Leonardo DiCaprio among others but they aren’t the only game in town. An array of competitors including Singapore-based, Impossible Foods as well as traditional meat processing companies are also developing their own plant-based proteins.

What is Beyond Meat really solving for?

There is a compelling value proposition for proponents of plant-based meat and the picture below from Beyond Meat synthesizes the main points. For Africans with 3rd world problems to contend with, the key selling point is that plant–based meat substitutes are better for our health than traditional red or processed meat and consumer eating habits are shifting to reflect this. Research by WHO shows that 30% of all cancer cases are attributable to dietary factors including consumption of certain meat. Similarly, consuming red and processed meat also increase the risk of heart diseases and diabetes.

According to a research done by consumer company, Mintel, more than half of adults in first world countries highlighted that they eat less red meat today than they did in the past. The same study found that in the U.K. alone, 40% of all millennials agree than by 2025 their diet will probably be “traditional red meat-free”. To support this shift, one Beyond Meat burger patty has a calorie count of 290 of which 190 are from fat which compares favourably to a traditional beef patty which has twice the calorie count of 580 of which 410 are from fat.

Source: Beyond Meat analyst presentation

In addition to the health concerns, additional factors like promoting animal rights, reducing the impact of climate change from animal farming and dealing with issues around global resources constrains are equally as important. The key takeaway is that all these factors combine to provide secular tailwinds for this new phenomenon of plant-based meat products. 

So how big is the total addressable market?

The vegan market is relatively small, about US$3.3 billion in annual sales. But once you start making plant-based products that are inseparable from natural meat, the total addressable market is no longer limited vegans and vegetarian faithfuls but the entire customer set who spend over US$1.4 trillion on meat products every year.

Meat is the biggest food category in the world and sales in the U.S. alone were US$270 billion in 2018 and growing 5% year on year. To disrupt this segment, companies that are able find a way to give customers what they love to eat, both in terms of taste and cost whilst simultaneously delivering the health benefits they so crave will win. If their claims are true, then these plant-based meat companies have unearthed the holy grail.

If we borrow cues from the dairy market (I hate fat free milk – it tastes horrible, but that’s venting for another day), alternative dairy products like soy milk, coconut milk, almond milk now account for 13% of the dairy market share. If we reasonably assume that the alternative meat industry will take up a similar market share then we are looking at global revenue pools of US$182 billion.

As of today, plant-based meat companies have made significant inroads to make their products mainstream. Beyond Meat products are found in over 17,000 supermarkets and 1,000 fast food outlets in North America and the company is also making significant inroads within the restaurants industry. It won’t be long before the meat portion of your menu also include a plant-based option. Impossible Foods has recently inked a deal with Burger King which will see their plant burgers on Burger King’s menu worldwide.

Another important factor driving broad adoption is pricing. A quick comparison indicates that plant-based meat products are infact being priced competitively compared with traditional meat products. In Whole Foods for example, a pack with two Beyond Meat burger patties retail for US$5.99 which is comparable to normal traditional beef patties which cost US$5.89.

In addition, the companies are also moving fast to broaden their product portfolio to include sausages, meatballs, taco and pies fillings and soon pizza toppings, sandwiches, hot dogs etc. which will aid their mass adoption

Show me the numbers

Global supermarket sales for plant-based meat products topped US$880 million in 2018 and the market growing at a CAGR of 20% according to data from consulting firm Nielsen. With sales of US$87.9 million, up 5.5x over the past three years, Beyond Meat has ~10% global market share. But, like many IPOs, the company is currently still not profitable and management have made it clear they will prioritise growth (both reach and product portfolio) over profitability in the short to medium term. The table below summarizes some of the key metrics.

  2018 2017 2016 3-year CAGR
Revenue (US$ m) 87.9 32.6 16.1 134%
Gross profit (US$ m) 17.6 (2.2) (6.3) N/A
Gross profit margin (%) 20% (6.7%) (39.1%)  
         
R&D spend 9.6 5.7 5.8 28.7%
SG&A 34.5 17.1 12.7 64.8%
EBITDA (28.0) (28.6) (24.8) N/A
EBITDA margin (%) (31%) (87.7%) (154%)  
         
Comparison Tyson Food Homel Foods Pilgrim’s Pride Sanderson Farms
Gross profit margins 13.1% 20.1% 7.7% 7.8%

Source: Beyond Meat S1 Filing

Curving out the revenue numbers alone: Q1 2017 to Q1 2019…

Source: Beyond Meat, investor roadshow pack

…And the operating margin profiles

Source: Beyond Meat, investor roadshow pack

A couple of key takeaways:

  • The company’s top line revenue is growing and doing so at an accelerating rate. Year on year revenue growth for Q1 2019 is estimated to be ~205%. For the full year in 2018, revenue growth was 170% up from 102% the previous year. Annualizing the Q1 numbers implies that Beyond Meat can achieve full year revenues of US$160 – US$170 million in 2019 up from $88 million in 2018;
  • The second point of note is gross margins. For the first couple of years, Beyond Meat was yielding a negative gross margin but have since turned positive. This was primarily because the company previously had one supplier for its key ingredient: yellow peas extract which limited its negotiating powers and frequently led to supply interruptions. Management have mitigated this risk by cultivating additional suppliers and also from building their own internal capabilities;
  • Gross profit margin of 20% in 2018 was at the top end of the range comparable meat processing companies in the U.S. This is quite encouraging for investors. Management’s stated long-term goal is to achieve an average gross margin of 30% which is achievable since they now have a better control of the supply chain;
  • R&D spend is increasing and will definitely see new products coming to the market soon

Replicating the Coca-Cola model

Beyond meat has developed a business model that closely resemble that of Coca-Cola. What the company actually make in its lab is the key active ingredient, something they refer to as the “frozen woven protein”. Think about it as the equivalent of the cola which Coco-Cola company manufactures.

The highly guarded frozen woven protein is then shipped to a network of contract manufacturers who are given instructions of how to further process it into beef patties or sausages etc, package them and take them to the market. This model makes it easier and less expensive for the company to expand both within the U.S. and internationally because it doesn’t have to set up the manufacturing facilities and distribution logistics to penetrate and serve new markets. That responsibility and the associated capex is bone by the contract manufacturer.

This also partly explains why management is confident they can achieve a 30% GP margin in the long term (best in class meat processing company only achieve GP margins on ~20%). It is on this basis that Beyond Meat is rapidly expanding into Europe, Australia and developed Asia.

Valuation is somewhat stretched but not nose bleeding

Assuming a mid-point revenue of US$165 million in 2019, the company will list at a forward EV/Sales of 7.2x. Comparably, mature meat processing companies trade at EV/Sales of 0.8x. But to put things into perspective, Beyond Meat is growing sales at over 100% whilst the mature meat companies grow at 4% to 6%. So, from an investment standpoint, Beyond Meat is a standard early-stage, unprofitable growth play but from a business standpoint, it’s a play on changing consumer tastes (whether these are long term trends or not is up for debate). Both of these aspects of the story have both pros and cons.

The pros: There is a long runway for growth and the company can quickly expand into other meat categories: pork and poultry and within various sub-categories in each. By positioning themselves as a healthy meat option, rather than strictly a vegan/vegetarian product maker, Beyond Meat can achieve rapid mass adoption. Preliminary numbers are supporting this thesis: For example, in Kroger, Beyond Meat Burger patties are being sold over 50% faster than the next best-selling packaged burger. See image below:

Source: Beyond Meat, analyst presentation

The cons: How mainstream plant-based meat can become is anyone’s guess. Consumers are fickle and what’s trendy today can rapidly change tomorrow. After feeding on traditional beef since eternity, the company has to find a way to make consumers not miss the taste of real meat. I haven’t tried their burgers so for now I can’t make a call on how they taste.

Parting shots

So just to be clear, for now I will stick to traditional meat: I have never been known as a trendsetter. However, as an investor, I can see a future where demand for plant-based meat alternative can potentially take off, now that, as they claim, have solved the taste issue. Overlay that with a health and environmentally-conscious generation, you have the perfect storm for an explosive growth of healthy meat alternatives. So, I will definitely be putting some money into Beyond Meat when the company starts trading tomorrow. Financially I will be long vegans but will maintain short position in my diet, well at least for now. dowtex

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