Why is this significant?
Unicorn startups are rare enough and even more so in the food manufacturing sector. Beyond Meat’s IPO has received enormous attention and there’s many lessons to be learned. One is that this type of investment comes with significant risks which need to be understood.
Beyond Meat’s record breaking IPO is certainly a great result and congratulations are definitely in order. They had a 163% jump in the IPO opening price, raising about USD240m on a market valuation of some USD3.8 bn.
However, investment in Beyond is certainly not without its risks! As MarketWatch point out there’s some things to note when investing in Beyond;
1. It doesn’t make a profit and probably won’t for quite a while.
Revenue has grown from USD21.1 m to USD56.4 m in the comparable 2017 and 2018 nine month financial periods but the nett loss has barely moved at USD22.4 m vs USD23.4 m. Their prospectus says they plan to use the IPO funds partly to “…invest in our distribution and manufacturing facilities, hire additional employees and enhance our technology and production capabilities…”
Like so many new technologies scale is a major issue, but particularly so for Beyond, given competitors like Tyson Foods and Nestle in the wings. Beyond currently has a lot of product co-manufactured, and that has its own risks, as we’ll see below.
If Beyond don’t scale rapidly with their own facility then they risk being crushed by the marketing and distribution muscle of their massive conventional meat competitors. Even if they have a new facility on the books it’ll take a minimum of 12 months construction time. They’re also apparently “planning to open manufacturing facilities in Europe in 2020” but again they haven’t broken ground yet so it’s mid 2020 at best.
A lot can happen in 12 months!
2. The potential market size is huge.
On the up side the global meat market is (depending on what stats you use) some USD1- 1.4 trillion! In the US alone it’s a USD270 bn market. If the US plant-based meat market achieves the same 13% penetration that plant-based dairy has in the conventional dairy market, then that’s over USD35bn! Worldwide that’d be a staggering USD130 bn to USD182 bn!
Beyond could be well poised to take a sizable slice of this market and, providing the scale successfully, a billion dollars of sales in the next 5 years doesn’t seem unreasonable.
3. There’s a lot of competitors.
There’s definitely a lot of competition from companies such as Impossible Foods, Lightlife, Tofurkey etc, let alone meat companies. However, the plant-based segment’s not yet a zero sum game where one company can only win at the expense of another. The pie’s big enough for many players at this stage. The biggest threat is from incumbent conventional meat companies with established manufacturing, market, sales and distribution channels. Whether Big Food and meat companies can be successful with consumers is the big question. Nestles Garden Gourmet plant-based range was withdrawn for retail sales in the UK, perhaps people just don’t believe Big Food as kind, plant-based planet friendly companies?
4. Can their ingredient supply keep up with demand?
The main ingredient of Beyond’s products is yellow pea protein. The article claims that ‘The company has already suffered supply interruptions from this supplier that caused delays in delivery.” They’re apparently taking steps to diversify their supply, but it’s still a major risk factor.
5. They use co-manufacturers for much of their product.
Beyond currently uses two beef manufacturers to manufacture a “significant amount” of their products and apparently “…does not have written contracts with either company…”, a fact I find astounding! Maybe it provides Beyond with flexibility, but certainly isn’t without risks.
I may be paranoid, but what if Tyson, Nestle or another competitor simply bought Beyond’s co-manufacturer(s)!
The Biggest risk?
To me the biggest overall risk is the 800 lb Gorilla conventional meat incumbents ability to enter the plant-based space. As I’ve mentioned they have all the manufacturing, marketing etc. infrastructure Beyond doesn’t.
Would Beyond have been better to have sold themselves to Big Food company? Maybe, but I can see that they would have perceived this as “selling out” their values, although they did accept Tyson Foods as an investor!
If, as has been floated, Tyson offered to buy Beyond, and they refused, will Beyond and their investors come to regret it?
Questions for the future.
When will Beyond become profitable?
Will Impossible Foods now go the IPO route, is there still appetite for another large round of investment in the plant-based space?
Will Big Food like Tyson and Nestle be credible in the plant-based market?
Who will dominate the plant-based market by 2025?
Only time will tell!
