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State of the Plant Protein Business

11/15/2021

The recent releases of the Q3 results by Maple Leaf Farms detailing the performance of their Plant Protein segment and the Q3 results posted by Beyond Meat Inc. raises serious questions as to the financial viability of plant-based substitutes for red meat. 

 

Beyond Meat posted a decline in sales of 12.7 percent and the Plant Protein segment of Maple Leaf Foods was down 6.5 percent from their corresponding quarters in fiscal 2020.  Beyond Meat posted a loss of $54 million on sales of $106 million that exceeded the loss of $19 million for the third quarter of 2020.  The Plant Protein segment of Maple Leaf Foods posted a loss in adjusted earnings of $30 million on sales of $38 million, although a 12.8 percent improvement over Q3 of fiscal 2020.

 

The negative return posted by Maple Leaf Foods for their Plant Protein segment contrasted sharply with profitability from the larger Meat Protein segment attaining adjusted earnings of $85 million, up 32 percent from Q3 2020 on sales of $920 million, and 13 percent higher than for the corresponding quarter of the previous fiscal year.  Michael H. McCain, President and CEO of Maple Leaf Foods implied that his Company is reexamining their investment in plant protein noting, "given current category performance a review is underway that will either affirm or adjust our strategies or investments going forward".

 

It is evident that both companies with relatively similar plant protein products have lost sales.  This is attributed in part to the fact that initial acceptance and growth in demand was attributed to a "curiosity factor" in addition to appealing to the environmentally conscious.  Media reports and especially laudatory articles in vegan-oriented platforms extolled the virtue of plant substitutes frequently deprecating the welfare and sustainability aspects of conventional meat.

 

It is evident that Beyond Meat is committed to retail with a proportion of 71 percent of U.S. sales although down 13.9 percent for the most recent quarter.  This could be due to consumer disaffection with quality including texture, flavor or appearance when cooked.  It is also evident that price is a significant deterrent to inducing consumers to convert from real meat to plant-origin substitutes.  A recent visit to an upscale supermarket showed that a range of plant-based brands including Beyond Meat were priced over a range 80 to 85 cents per ounce compared to high quality grass-fed beef at 70 cents per ounce and USDA prime ground beef in the 50 cent range with ground turkey even less expensive at 35 cents per ounce.  There is obviously a limit to the willingness to pay for intangible attributes including welfare and sustainability, especially in an inflationary food environment where cost is becoming an important factor in willingness to pay.

 

The thesis that there is a curiosity factor driving early acceptance of vegetable-based alternatives to meat is supported by the market strategy apparently demonstrated by Beyond Meat.  During the first week of November, CHICK-NEWS reported on the entry of the Company into the Australia and New Zealand.  The third quarter report of the Company notes that international sales were up 142 percent.  The question arises as to whether the company is forced to consistently find new markets to take advantage of "low-hanging fruit" by appealing to environmentally and welfare conscious consumers and those willing to “try” alternatives.

 

The CEOs of both companies point to the high expenditure in promotion mainly in the form of discounts that detract from profitability.  Given the declines in revenue, promotional expenditure does not appear to be effective driver of sales.

 

An interesting observation is the decline in gross margin posted by Beyond Meat.  It is evident that this Company is unable to capture benefits from economy of scale.  Gross margin declined by 20 percent from a value of 27.0 percent in Q3 of 2020 to 21.6 percent for the most recent quarter.

 

The founder of Beyond Meat evaded the fundamental issues of how the Company will attain future profitability and provide shareholders with a return on equity. In the quarterly investor call Ethan Brown pointed to “weather” and other presumably non-recurring misfortunes, simply expressing hope for a future improvement.  The shareholding of Beyond Meat comprises insiders with approximately 11 percent and institutions below 55 percent, presuming a high proportion of independent retail investors. And then there are the shorts.  Despite hype and promises, financial performance is critical to long-term success.  Beyond Meat has ranged in 52-week share price from a high of $221.00 to $91.95 with a 50-day moving average of $103.60.  After the release on November 10th, BYND fell 18.6 percent after hours and during trading on November 11th fell an additional 13.3 percent followed by what might be regarded as a "dead cat bounce" of four cents in after-hours trading.  The 32 percent of float short as of October 28th and deteriorating profit and operating margins are inconsistent with long-term prospects.

 

At this time, privately held Impossible Foods competes directly with the two publicly traded competitors in plant-based protein.  The profitability of this company will only become apparent following release of a prospectus for an IPO either directly or through a SPAC but there is little to suggest that it is any more financially successful than its major competitors.

 

Casting forward, it is evident that there will have to be rationalization in the plant protein market comprising three main producers and numerous start-ups funded by venture capital. Beyond Meat will probably be taken private by an investment group and then rolled into an existing manufacturer possibly Maple Leaf Foods that has a large but underutilized manufacturing facility.  This scenario is predicated by the fact that during the past quarter Beyond Meat assumed long-term debt presumably to fund ongoing operations.

 

Despite problems of government scrutiny, negative perceptions on welfare and the environment, logistic restraints, labor and transport challenges, the red meat and poultry industries have little to fear from plant-based substitutes

 


 
Copyright © 2021 Simon M. Shane