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Beyond Meat: what you need to know after IPO sizzles

Investors have bitten at the chance to gain exposure to plant-based burger maker Beyond Meat and its ambition to revolutionise the meat industry. But are they buying into the trend rather than the stock?

Beyond Meat Source: Bloomberg

The world’s eating habits are changing and the vegetarian and vegan diets that have been growing in popularity for decades have morphed into new forms, from the ‘climatarian’ to the ‘flexitarian’ and, more recently, the ‘reducetarian’. But whether driven by concerns over the environment, animal welfare or personal health, all the people that form part of this movement aim to do the same thing: to reduce their meat intake.

In the West, where meat has become a staple of any meal as the primary source of protein, virtually every study or survey you can find suggests swathes of people are moving away from meat and adopting new diets, partly thanks to greater consumer awareness and ‘try and see’ events like Veganuary or Meat Free Mondays.

A study published by the journal Public Health Nutrition last year claimed two thirds of Americans are eating less meat today than they were three years ago. A widely cited report from supermarket chain Waitrose claims one third of Brits are reducing the amount of meat in their diets, while a report from market research firm Roy Morgan found over half of all Australians had cut their meat intake since 2011.

But those claims are overstated and don’t match the facts. For example, the US National Chicken Society says per capita consumption of red meat and poultry hit an all time high in 2018 and expects that to rise further this year. Government figures in the UK and Australia shows meat consumption per capita has remained stable for years, even if the type of meat being eaten has changed, with poultry gaining ground over beef, for example.

There is a clear mismatch between the number of people that want to reduce their meat intake and those that actually do it. This could be caused by a number of things. Those that continue to eat meat could be raising their intake enough to offset the fall in consumption by others. It could be the fact many people find it hard to give up meat even if they want to, whether that is because there is a lack of substitutes in the market or because overhauling a long held diet is difficult. It could also be down to virtue signalling and the fact people lie in surveys.

If it is true that more people want to reduce the amount of meat they eat but they are finding it difficult for whatever reason then it suggests there is a lack of alternatives available on the market – not for the ardent vegans and vegetarians, but for those that enjoy meat but feel increasingly pressured to address their intake for the sake of their health or the environment. The people who, if they could, would still be able to enjoy meat without all the issues that come with it.

One company, Beyond Meat, believes it has found the answer.

Understanding Beyond Meat

Beyond Meat’s philosophy is that people 'do not face a binary decision to eat or abandon meat'. For the company, it isn’t about coming up with a meat alternative marketed at vegans and vegetarians, but a meat replacement for people who want to continue to enjoy their favourite meals without having to replace pork with a jack fruit or mince with lentils. Its products are all built from plants and designed to mimic the taste, texture and other sensory attributes of meat products while enjoying the nutritional benefits of eating, what it calls, its 'plant-based meat products'. For example, its flagship Beyond Burger may be made from plants but it still looks and tastes like a regular quarter pounder, and it even bleeds thanks to the addition of beet juice.

The founder of the California based company, Ethan Brown, argues the world has little chance of solving the growing food crisis facing the world as populations grow and climates become more extreme if 'we insist meat be defined by origin—namely poultry, pigs and cows'. Instead, his company argues meat should be defined by 'composition and structure—amino acids, lipids, trace minerals, vitamins, and water woven together in the familiar assembly of muscle, or meat'.

Beyond Meat argues its products are not only better for human health but much friendlier to the environment. The company commissioned the University of Michigan to conduct a report that found, compared to a traditional beef burger, the Beyond Burger generates 90% less greenhouse gas emissions, requires 46% less energy, has 99% less impact on water scarcity and 93% less impact on land use. It is all about circumnavigating 'agriculture’s greatest bottleneck': the animal, with 60 to 70 billion farm animals slaughtered around the world each year.

Understanding Beyond Meat’s products

The company’s first two products, Beyond Beef Crumbles and Beyond Chicken Strips, are both frozen goods but Beyond Meat began to grow at an alarming rate after releasing its first fresh product, the Beyond Burger, which took several years to develop. It is by far its best selling product, accounting for over 70% of revenue in the first nine months of 2018 and is expected to be the main driver of growth for the 'foreseeable future'. It followed the burger with the Beyond Sausage (representing around 11% of revenue) and in March of this year it launched its ground beef replacement, Beyond Beef.

Net Revenue Breakdown ($, 000s) 2016 Sales Mix* 2017 Sales Mix 9-month 2017 Sales Mix 9-month 2018 Sales Mix
Fresh (Burger & Sausage) 813 4.3% 18,109 48% 11,296 46.1% 51,530 81.7%
Frozen (Crumbles & Strips) 18,236 95.7% 19,588 52% 13,232 53.9% 11,549 18.3%
Discounts -2,867 15.1% -5,116 13.6% -3,399 13.9% -6,659 10.6%
Total 16,182 32,581 21,129 56,420

(*Sales Mix represents the percentage figure for each individual sum out of gross revenue. The Sales Mix for Fresh and Frozen does not take Discounts into account)

The company has gone to great lengths to ensure its fresh products are stocked alongside their traditional counterparts in the meat aisle rather than in the specified meat alternative or vegetarian section. And this, it says, has been key to its rapid growth. For example, it found more than nine out of every ten people who bought its products through outlets of US retailer Kroger in the first half of 2018 had also purchased traditional meat products, which it says is evidence of its 'appeal to meat loving consumers'. In addition, sales of the Beyond Burger have managed to outstrip total sales of all other traditional meat burgers in some specific outlets.

Beyond Meat is not the first company to adopt this model of stocking itself among traditional incumbents rather than isolating itself in health or alternative aisles. The rise of plant-based milks (made from the likes of almond) are often stocked next to cow’s milk in the store and is thought to have taken a 13% share of the market from US dairy farmers over recent years. According to Beyond Meat, if it can replicate that then it would be pursuing a $35 billion category within the $270 billion US meat market alone – with the global meat market thought to be worth over $1.4 trillion.

There are over 40 scientists, engineers, researchers, technicians and chefs working on new products to add to Beyond Meat’s portfolio. They work out of the company’s new Manhattan Beach Project Innovation Center in El Segundo, California, which, at 30,000 square feet, is 10 times the size of its previous lab space.

The company aims to release one new product each year going forward and its newest one, Beyond Beef, suggests it is targeting the right areas. Out of all meat types, red meat is the main one people are trying to cut down on and where consumption has fallen the most in recent years.

Understanding Beyond Meat’s manufacturing

Beyond Meat has two manufacturing plants in Colombia, Missouri, in addition to its headquarters where its new R&D centre is based. Although it manufactures all of the 'primary components' of its products and all the Beyond Burgers sold to restaurants and other food service outlets itself, the company depends on co-manufacturers for everything else. In addition, the company does 'not own any real property' as all its facilities are under lease, and not long ones. The lease on one of its plants comes to an end as soon as June 2019, and its HQ is up at the start of 2022, although there is an option to extend that for two years. The lease on its newer plant runs until late 2024.

Its manufacturing partners are therefore crucial to Beyond Meat’s operations. The company has disclosed its partner’s manufacturing plants are in California, Texas, Georgia and Pennsylvania, and its two main ones are CLW Foods LLC and FLP Food LLC, which make its top selling products. This partnership model has allowed Beyond Meat to scale up quickly and leverage the equipment of others to the extent that Beyond Meat’s monthly production capacity at the end of March 2019 was three times larger than nine months earlier. Beyond Meat intends to sign up new partners as a way of quickly scaling up to meet demand.

However, there are some risks in this strategy. Firstly, there are no written contracts in place with any of its manufacturing partners, which the company has confessed puts the ball in its partner’s court. In its prospectus, Beyond Meat says: 'Because of the absence of such contracts, any of our co-manufacturers could seek to alter or terminate its relationship with us at any time, leaving us with periods during which we have limited or no ability to manufacture our products.'

And, if it were to lose a key manufacturing partner then it admits it would not be easy to replace them, stating it 'believe[s] there are a limited number of competent, high quality co-manufacturers in the industry' that meets its standards.

It is also worth noting the extremely tight labour market in the Colombia area where the company’s manufacturing operations are based, with an unemployment rate of just 2.6%. As a result, Beyond Meat has had to rely on a temporary workforce – 130 of its 350-plus staff are not on full time contracts.

Understanding Beyond Meat’s supply chain

Beyond Meat is also overly reliant on a few key suppliers to source the ingredients it needs to produce its products. All of its pea protein – used in its key Burger and Sausage products – is sourced from just one supplier, Roquette America, which is located in France and ships the pea protein to a storage facility in Chicago, Illinois.

Considering this pea protein is the basis of its core products – accounting for nearly 80% of revenue – there are justifiable concerns about obtaining it from one source. It is odd that Beyond Meat has stuck with a single source supplier for so long even though it has experienced supply issues with Roquette in the past and says it could source pea protein from elsewhere. Beyond Meat only stocks enough pea protein to mitigate a supply issue lasting two to three weeks. Plus, the agreement with Roquette could be short lived as the current two year deal will expire at the end of this year. It has said it was working on securing a second supplier.

Beyond Meat has said the price of its ingredients is volatile, partly because the yellow pea needed is primarily only grown in Canada and Europe. This means there can be fierce competition to procure the product in the first place and, if either one of those key farming regions suffered a bad season or was hit by a weather event, supply could tighten significantly. It says packaging prices also experience drastic fluctuations.

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The volatility in variable costs will translate to Beyond Meat’s margins. The company has said 'many' of its other costs, particularly those related to its new R&D centre, are fixed. This means it has less headroom to cut costs elsewhere to help offset any drastic increase in variable costs. With no control over its variable costs and other expenses fixed, Beyond Meat could lack the wiggle room it needs when times are tough and struggle to move toward sustainable profitability.

There is also a very real threat from its key customers: the supermarkets. Virtually all supermarket brands across North America and Europe are starting to manufacture more of their own products to replace those currently sitting on the shelves that are made by third parties. In addition, ongoing consolidation in the industry is strengthening the buying power of grocers, which could add further pressure on margins in the future.

Understanding Beyond Meat’s distribution

Selling to supermarkets and food retailers remains the core sales channel of the business but Beyond Meat has reduced its reliance by growing the number of restaurants and food outlets that it supplies. In 2016, the firm was making less than 24% of net revenue from restaurants and, although that dipped to 21.8% in 2017, the company made over 34% revenue in the first nine months of 2018 from restaurants versus over 65% from its retail division.

Sales Channel ($, 000s) 2016 Sales Mix 2017 Sales Mix 9-month 2017 Sales Mix 9-month 2018 Sales Mix
Retail 12,342 76.3% 25,490 78.2% 16,796 79.5% 37,173 65.9%
Restaurants & food outlets 3,840 23.7% 7,091 21.8% 4,333 20.5% 19,247 34.1%

Combining its retail and restaurant clients, Beyond Meat has products on offer in over 35,000 places, up from 28,000 at the end of September 2018. Its products are stocked in stores of Albertsons, Kroger, Wegmans and Whole Foods Market, and restaurants that sell Beyond Meat products include BurgerFi, Bareburger, TGI Fridays and A&W Canada. It has also ventured into the hospitality and entertainment sectors with Cinemark Theatres, Disney World, Hilton, Hyatt, LEGOLAND and Marriott also on its distribution list.

Although the company has a growing list of wholesale customers to serve it is once again dependent on a handful of partners to distribute its product. It ships 38% of its product (in terms of gross revenue) through its largest distribution partner, United Natural Foods, with another two, KeHE Distributors and DOT Foods, responsible for another 20%. A fourth partner, Sysco Merchandising & Supply Chain Services, distributes a further 14%. Once again, the company does not have any formal contracts with any of its distribution partners to dictate minimum volumes or apply any sort of commitment from either side.

Beyond Meat: financial performance

The investment case for Beyond Meat, which is just as much about designing food as it is producing it, is similar to that of the many tech companies that have earnt huge valuations based on sustained growth of their top line rather than the bottom.

Beyond Meat’s latest quarterly revenue figure was nearly treble the sum reported a year earlier and has more than quadrupled over the last 18 months. Still, it is loss making and in the 11 quarters to the end of September 2018 the company has burnt through just shy of $105 million, principally to support the development and production of the Beyond Burger, and with respect to 2017, the Manhattan Beach Project Innovation Center.

($, 000s) Q1 2017 Q2 Q3 Q4 Q1 2018 Q2 Q3
Net revenue 6,173 5,565 9,391 11,452 12,776 17,367 26,277
Gross profit/ (loss) -37 -3,503 419 930 2,057 2,612 5,042
Total operating costs 4,841 7,578 7,072 6,883 7,636 9,888 13,046
Inc R&D 1,409 1,181 1,470 1,662 1,605 2,497 2,165
Operating loss -4,878 -11,081 -6,653 -5,953 -5,579 -7,276 -8,004
Pretax loss -5,000 -11,215 -7,161 -7,003 -5,696 -7,396 -9,342

Beyond Meat has said it needs to raise capacity if it is to meet demand, which will require more expenditure and investment even if it aims to minimise costs by leveraging the plant and infrastructure of third parties.

It is also worth noting that Beyond Meat’s business is seasonal, with sales peaking in the second and third quarters of the calendar year when the weather improves and the barbeques come out. This is currently hidden because of the surge in growth but will become more evident when sales slowdown and stabilise.

Unsurprisingly, Beyond Meat does not pay a dividend and there is no intention to introduce one anytime soon. The company is far from reaching sustainable profit and any earnings it does produce are being ploughed back into the business.

Beyond Meat IPO

Beyond Meat launched its initial public offering (IPO) on 3 May, 2019, to raise funds to aid its expansion plans. The company raised just under $241 million at $25 per share, giving it an initial valuation of $1.5 billion. That was larger than the initial plan to raise $184 million at $19-$21 per share for a valuation closer to $1.2 billion.

While the share prices of many companies to have gone public this year, particularly those momentum stocks that earn valuations on growth potential that ignores their losses, have fallen dramatically after listing, Beyond Meat was warmly embraced by the market. Beyond Meat shares closed up 163% on the first day of trading at $65.75 and, after hitting a peak of $85.45, they currently trade (as of 8 May, 2019) at just over $79.00, giving it a valuation of $4.6 billion.

It said it would use the proceeds from its IPO to invest in new manufacturing facilities and research and development. Although it has said the proceeds should fund its plans for the next 12 months it has also warned it could need to raise further funding – whether that be through equity or debt – sooner than planned depending on how things pan out. This means early shareholders could be watered down in the not so distant future if Beyond Meat opts to raise equity.

Understanding Beyond Meat’s growth strategy

As has been established, Beyond Meat is chasing top line growth rather than profitability. The firm needs to capitalise on its early mover advantage and penetrate as much of the market as possible. It already has a lot of competition from plant-based rivals like Boca Foods, Field Roast Grain Meat Co., Gardein, Impossible Foods, Lightlife, Morningstar Farms and Tofurky. Established brands are also implementing their plant-based products, including Nestle, Unilever and most supermarkets. Plus, as Beyond Meat wants to compete against traditional meat products rather than other alternatives it has to take on the big names in meat production like Cargill, Hormel, JBS, Tyson and WH Group.

The biggest barriers that could prevent the momentum behind Beyond Meat’s growth is production capacity and growing the amount of supply it has to match demand. Although it has already got the Beyond Burger into some of the biggest retailers in the US it still needs to push its newer products like Beyond Sausage and Beyond Beef into many of them. Sales growth through US retail channels will be driven by both existing and new customers.

On the restaurant side, the company plans to continue to 'aggressively expand' its network of partners and has promised several 'prominent' launches in 2019. In April, Del Taco Restaurants, the second largest Mexican fast food chain in the US, rolled out the new Beyond Taco nationwide.

The US will remain the core growth market for the business and, although Beyond Meat makes just 3% of its sales outside of its home market, this has grown from 1% in 2017 and that proportion will continue to grow. It currently sells through distributors in Australia, Canada, Chile, China, Germany, Hong Kong, Ireland, Israel, New Zealand, South Korea, Taiwan, the European Union, the Middle East and the UK.

Europe looks set to be the next key market for the company, which launched in the region in August 2018. It has said it is in talks with 'some of Europe’s largest grocery and restaurant chains' and said it intends to establish manufacturing operations in Europe in 2020. It has also said it will use its existing presence in Hong Kong to fuel an expansion into Asia.

Beyond that, the company seems to have endless ambitions for global expansion. It has applied trademarks in other countries across Latin America, Asia and the Middle East.

Will the world go Beyond Meat?

There is no doubt that demand for plant-based alternatives is rising but investors considering adding Beyond Meat to their portfolio need to ensure they are doing so because they want to buy into the stock and not the trend.

There are other companies on the heels of Beyond Meat: rival Impossible Foods has been trialling out its own plant-based ‘Impossible Whopper’ with Burger King in the US ahead of a national roll out. Others have decided to keep things in-house, like McDonald's which has introduced the McVegan burger in Scandinavia, while some have made their entry through acquisition, like Unilever’s purchase of the Vegetarian Butcher late last year as part of efforts to move 'towards a portfolio with more plant-based products'. It will also have a tougher time breaking into Europe, where established brands have already made their move. Nestle plans to introduce its plant-based burger in eight European countries before heading for Beyond Meat’s main market in the US.

Competition is rife and more rivals with significantly greater firepower and reach are emerging. Plus, there are flaws in Beyond Meat’s business model with no profit or dividend on the horizon - although many other companies have become huge successes in similar conditions. Fevertree Drinks, which outsources most operations and relies on sourcing exotic ingredients from abroad, has turned itself into a market leader in the mixer business and its share price has soared over recent years.

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