Plant Power: A Look at Beyond Meat and Its Competitors

Natasha Ketabchi

A new crop of meat-alternative and other plant-based foods companies are emerging; while veggie burgers and sausages have long existed, what makes these new companies interesting is that they are trying to replicate meat synthetically, creating a product that resembles meat very closely and, thus, will be marketed primarily toward non-vegans and vegetarians. The appeal of this for investors is very clear: It creates an entirely new potential market.

Nothing captures the zeitgeist more than the Beyond Meat company IPO in May 2019, which has been one of the stand-out financial events of the year. However, can the company live up to the hype and satisfy its investors? This article analyzes Beyond Meats stock performance, the history of the company, the market for meat alternatives, and some of its competitors.

Beyond Meats History

Beyond Meat (NASDAQ: BYND) was founded in 2009 by Ethan Brown, a Californian entrepreneur with an interest in environmental topics, who is also a vegan. The mission of the company is focused on plant-based meat alternatives, using pea and other plant protein isolates.

In a letter included with the prospectus for BYNDs IPO, Ethan Brown revealed that he sees the nutritional benefits of meat, but that he aims to remove the connection of meat to the animal that it came from, seeing it instead as meat by composition and structureamino acids, lipids, trace minerals, vitamins, and water woven together in the familiar assembly of muscle, or meat and pushes for a technological innovation in production that bypasses the animal and uses technology to achieve the same composition and texture. He lists the impressive environmental advantages as 90% fewer greenhouse gas emissions, 99% less water, 93% less land, and 46% less energy for the production of Beyond Meat compared to regular meat.

Another interesting point is that the company targets a mainstream market: They quote a statistic highlighting that 93% of shoppers at Kroger in the first half of 2018 that bought a Beyond Meat product also bought regular meat. This gives credence to the idea that the company can convert clients with more traditional diets, and not just vegans, to their products.

Finally, one point worth highlighting is that meat alternatives are still very expensive compared to traditional animal meat. An interesting report from CB Insights breaks down the costs.

Financial and Post-IPO Stock Performance

The stock was initially offered at $25 and immediately jumped in price, exchanging hands on May 2nd at $45. At one point, the stock even broke the $200 barrier, trading at 800% of its initial offering price of $25. In fact, its IPO was the best performing one for a company listing for over $200 million since the financial crisis of 2008. Even though sales are growing at the company, the sales multiple implied by the stock price is out of line with anything seen in the food sector. The company is forecasting sales of $210 million for this year, breaking even. The current stock price of $150 gives a market capitalization of $9.109 billion, or a P/S ratio of 43.3x, which is higher than what Google saw when it went public. Typical EBITDA multiples for food processing are 11.92, which demonstrates that BYNDis seen as an incredibly innovative company, but also that foreseeable growth is fully priced in.

In reality, Beyond Meat is still a small company. Investors are counting on the sector growing and on the technology and production abilities of the company growing. Nonetheless, Wall Street equity analysts seem unsure of whether the company can sustain such a high valuation, with most having the stock rated as a hold.

As mentioned, the rise of veganism is a well-documented trend, but it is hard to find reliable statistics to back this up with quantitative evidence. A recent poll by Gallup puts the number of vegans in the US as approximately 3% of the population, a small increase compared from the 2% reported in 2012. The number of vegetarians, according to the poll, was stable at 5% over the same period.

This is also reflected in global data about meat consumption: Meat consumption rates have shot up globally, with production today five times higher globally than 50 years ago. This phenomenon is not solely driven by the increase in living standards in the developing world. While there is strong statistical correlation between growing income and growing meat consumption, overall meat consumption has not significantly decreased in the US and in Europe. In fact, meat consumption is increasing, but the type of meat preferred is changing, with poultry overtaking beef, in a trend consistent with health and environmental concerns linked to beef and meat production.

Meat Consumption in the US and Globally

To put this into perspective, sales of plant-based meat substitutes in the 12 months from June 2017 to June 2018 amounted to $670 million, while processed meat sales (excluding organic) were $200 billion while overall meat sales for the same year were $270 billion (including organic). The high cost of alternatives is often cited as a reason for their limited market share and the resilience of meat sales. Beyond Meat does, however, remain one of the fastest growing food companies in the worldits volume sold (fresh + frozen meat) increased over 3.8x from 3.98 million pounds in 2016 to 15.24 million pounds in 2018.

Competition and Investor Interest

This section will briefly cover both the direct competition that Beyond Meat faces in the plant-based meat sector, as well as other companies that operate in the same space, such as meal replacements and dairy alternatives. This market has garnered increasing interest from investors, who have invested more than $16 billion in the space, including $13 billion in 2017 and 2018 alone.

Top-funded plant-based food companies

Closest Competitor: Impossible Foods

Impossible Foods is possibly the closest and most comparable competitor to Beyond Meat. The company announced another round of funding shortly after the IPO of Beyond Meat, raising $300 million. It is now backed by investors such as Khosla Ventures, Google Ventures, and Bill Gates.

Impossible Foods is creating bleeding burgers and is currently working on replicating whole cuts of meat. Similarly to Beyond Meat, the company was founded out of environmental concerns and the view of using science to recreate the texture and characteristics of meat using plant-based proteins. The company does not intend to go public in the near future.

No revenue figures are disclosed for Impossible Foods, but the company has struggled with meeting demand for its products as it launched some national projects, such as the cooperation with Burger King. Impossible Foods production issues include reallocating some staff from the R&D department to production and packaging while it improves its production facility.

The Involvement of Larger Corporates and What the Future Might Hold

To conclude, it would be fitting to look at what the reaction of the incumbents in the meat industry has been to this surge in food innovation.

While the meat-alternative market is only a fraction of the entire market for meat, particularly when taking a global perspective, the growth rates it has seen certainly do bring it to the attention of meat executives. Tyson Foods, as discussed above, is currently an investor in Memphis Meats, and was a shareholder of the Beyond Meat company, holding a 5% stake up to the IPO. They have interests in other similar startups and are watching the space, despite only 18% of their revenues currently coming from non-animal foods. Tyson and its competitors will most certainly have M&A ambitions when the sector matures and technologies become more profitable.

The last point to address is perhaps the biggest obstacle to be solved for alternative meat producers: can the production cost of their products be brought down in line with those seen in animal meats? Can they scale production sufficiently?

With the current high production costs and accessibility issues, meat alternatives are most likely to be a novelty, occasional splurge purchase by wealthy, health-conscious urban dwellers. Not only that, but the latter would also probably not be affected by the loss of jobs and income in the agricultural sector that would come to pass were plant-based alternatives really to go mainstream. The founders of these companies have as their stated objective a revolution in the way an important food group is produced: Certainly, this will affect life and livelihood in the rural areas that produce it and for all that are participating in its current production chain.

Questions:

Plant Power reviews the incredible success of Beyond Meat, but raises concerns about its future. For example, the article notes total sales of vegan meat replacements for the past year were $670 million while sales of actual meat surpasses $290 BILLION. Its stock market valuation is, at this point in time, about $9 Billion, a value that greatly exceeds the value of the entire meat substitute market as a whole.

Does Beyond Meat have any competitive advantage that will allow it to both resist competition from the meat industry (e.g., meat producer are lobbying states to ban how Beyond Meat and other meat substitute manufacturers advertise and market their product by, for example, making it illegal to put fake meat in the "meat" section of the grocery store), as well as from other substitute meat producers?

What should it do to strengthen its competitive position over time?

Feel free to speculate on what Beyond Meat should do. However, all your recommendations should be advanced using tools and concepts presented in the text and lectures.