Investing in non-meat meat
The Beyond Meat share price exploded last week.
It doubled, then tripled and blew investors away with how well the plant-based meat company performed.
So, at Spaceship HQ, we ordered Beyond Meat burgers to see what all the fuss was about.
We thought they were... okay?
They didn’t taste quite like meat, but then, are they meant to?
A vibrant discussion ensued about whether plant-based options are meant to substitute meat entirely or just offer an alternative.
Note: All the burgers were eaten.
As investors, there are two questions for us about Beyond Meat (and other plant-based meat businesses):
- How do they make the plant-based meat?
- How do they make money?
In answer to the first one, in extremely basic terms, they mainly use mixtures of pea protein isolates and coconut oil.
(This is extremely general and lies at the heart of what would actually set Beyond Meat apart.)
Ethan Brown - the founder and CEO of Beyond Meat - wrote a really great letter at the beginning of the Beyond Meat prospectus.
He outlines how important a carnivorous diet was to our ancestors, and how it grew their brains and enabled us to evolve.
With bigger brains, came smarter humans and over time we developed agriculture and farming and population growth exploded.
“We responded with a full display of human ingenuity and creativity,” writes Mr Brown of the invention of farming.
“Across different geographies, soil types and climates, we grew and harvested crops and raised and slaughtered livestock.”
But this incredible population growth has ultimately lead to a decline in human health, climate change, depletion of natural resources and a response to animal welfare.
Mr Brown’s point is we’ve capped out our need for animal produced meat.
“We do not, however, face a binary decision to eat or abandon meat.”
“If we insist meat be defined by origin—namely poultry, pigs and cows—we face limited choices. "But if we define meat by composition and structure—amino acids, lipids, trace minerals, vitamins, and water woven together in the familiar assembly of muscle, or meat—we can innovate toward a solution.”
And that’s what Beyond Meat works on in its labs.
So how does it make money?
- Beyond Meat has a team of scientists that have developed (and keep refining) their meat substitutes.
- They sell the products to grocery stores and food providers who use them to make burgers (or whatever) and onsell those to customers.
That’s pretty much it - Beyond Meat spends money on developing and expanding their range - and then spends money marketing it and expanding the customer base, supplier network and co-manufacturing partners.
They make money from the sales of their meat-substitute to places like Carl's Jr and Del Taco in the fast food market, 20,000 grocery retailers including Amazon's Whole Food Market and Kroger Co supermarkets and 10,000 restaurants, hotels and universities.
It’s not an overly complex business model (that’s not to say making plants taste like meat is easy!), but they definitely appear to spend more money getting the meat made and getting it out there than they make from you and me buying it.
As investors we need to think about whether Beyond Meat will make that switch to profitability in the future.
And to do that we look at revenue growth, which they appear to have successfully grown over the years.
In the first nine months of 2018, the company generated revenue of $US56.4 million.
In the year earlier period, they generated revenue of $US21.1 million.
For the whole of 2017, they generated $US32.6 million.
So more and more money appears to have steadily come in the door.
But its net loss in the first nine-month period of 2018 came to $US22.4 million, only slightly less than the $23.4 million loss posted in the year-earlier period.
The company’s loss for 2017 came to $30.4 million, wider than the $24.1 million loss posted in 2016.
So the difference between spend and revenue isn’t necessarily getting smaller just yet, but it’s all about whether you think they’ll get ahead in the future.
We believe that the market opportunity is pretty enormous.
The global meat substitutes market is expected to reach $US6.4 billion by 2023. (Which is still minute compared to the global meat market, which is set to be worth around $US7.3 trillion by 2025).
But they’re not the only ones fighting for a grab of this non-meaty market (sorry).
One of these competitors is Tyson Foods, which was actually a Beyond Meat shareholder until last month’s IPO. They’ve sold their shares and are now going it alone.
Also food giant Nestle is set to launch its own version of a plant-based burger.
Impossible Foods is another in the same market and this week it also announced it has raised $US300 million. It has teamed with Burger King in the US to trial what it calls the Impossible Whopper.
So there’s plenty of competition to tap into the market.
Like with most consumer products, we believe it will come down to what the taste-buds of the market think as well as whether there is a shift in social attitude towards plant-based meat alternatives.
We want to know things like, what is their competitive advantage and will it go mass market (or remain niche)?
How big can they get?
We don’t think there’s enough data on that - in addition to the enthusiastic discussion at Spaceship HQ - to invest in the stock.
Particularly given it’s increased so phenomenally in value!
But the theme is one we will keep an eye on.
Enjoy your week.
P.S. The header is called "The Bean Eater" and is a painting by the Italian Baroque painter Annibale Carracci, dating from 1580–1590.
