Why you might want to invest in plant-based brands this Veganuary
The volatility of shares in Beyond Meat suggests that investors haven’t yet made their minds up about the potential of vegan meat
From Greta Thunberg berating world leaders and walking out of the UN climate conference in Glasgow, through to wildfires in Australia and floods in Western Canada, there is now a huge ongoing discussion about what needs to be undertaken to reduce pollution from carbon emissions and protect the planet.
Even the former governor of the central banks of England and Canada, Mark Carney, weighed-in on the debate. Carney, now a vice chair at Brookfield Asset Management, told the BBC that climate change is a serious threat to investments and could render them worthless.
Yet, while governments appear to be slow to react, consumers and some businesses have taken matters into their own hands.
In particular, recent years have seen a surge in the popularity of the vegan diet. To kick off 2021, more than 582,000 people registered to take part in Veganuary, eschewing meat and dairy for the month in a bid to lower their own carbon footprint. Expect it to be bigger in 2022. The organisation behind the campaign ran a survey from 2020, finding more than half of participants took part to prevent animal suffering (37%) or protect the environment (18%), while 38% said they were motivated by improving their own health. More than half of non-vegan participants maintained a fully vegan diet for the entire month (59%) and 72% of them planned to stay vegan. The number of vegans in both the UK and US has rocketed with different surveys putting the figure for the former at anything between 600,000 and 3 million.
From a climate change perspective, there is clearly an issue with the western world’s seemingly never ending desire for meat. A 2018 study by Tulane University and the University of Michigan published in scientific journal Environmental Research Letters found that meat, dairy and egg consumption was responsible for nearly 84% of food-related greenhouse gas emissions in the US.
In 2018, researchers at the University of Oxford posted in the journal Science that cutting meat and dairy products from a person’s diet could reduce an individual’s carbon footprint from food by up to 73%. They claimed that if everyone stopped eating these foods, global farmland use could be reduced by 75% – an area equivalent to the size of the US, China, Australia and the EU combined. This would result in a significant drop in greenhouse gas emissions and help to keep the world in line with the carbon reductions proposed in the 2016 Paris Agreement.
While concerns about climate change have clearly been a significant driver, animal rights issues and the apparent health benefits of a vegan diet have all played a role in its growth. More recently, high-profile sports stars, including Lewis Hamilton, Lionel Messi and Serena Williams, have all championed veganism. They argue that it has helped improve their performance, claims that have inspired many other non-elite sports participants.
All of which has helped to create a massive opportunity for businesses to fill the gaps with products that look, feel and taste like meat, but are actually plant-based. The demand isn’t just from vegans either. The potential market includes the 14% of the UK population (as reported by YouGov in 2019) keen to reduce meat in their diet, the so-called ‘Flexitarians’. Burger King launched a plant-based burger in the UK that isn’t vegan because of the way that it is cooked. The company told the Guardian that its Rebel Whopper was aimed at flexitarians who wanted to reduce their meat consumption. In June 2021, Burger King test-marketed a meatless version of its menu in Cologne, Germany, supplied by the Vegetarian Butcher.
The opportunity for investors
The shift in diet is already causing the financial community to take a stance on the future of food.
Concerns about climate change, coupled with the desire to find meat alternatives, led to one of the most memorable moments in the financial markets in May 2019. US fake meat pioneers, Beyond Meat (BYND), IPO-ed with a share price of $25 that even many cynical bear-ish market analysts felt was a tad undervalued. Within three months investors enjoyed an incredible 840% gain as Beyond Meat’s share price soared to around $235 per share. Since then, the shares have slumped to $75. Significantly down, but still a very reasonable return for initial investors who have held on.
The volatility of the Beyond shares has sparked a series of questions, not just about the future of meat but also about the nature of the companies that will create those foods. Beyond is largely the poster child of the fake meat movement. Yet there are other companies in the space. What factors will influence whether they are good, long investments?
Beyond’s quest to create plant-based alternatives to meat might sound like a very modern innovation. Yet it is something that has been taxing food scientists since the 1960s. Back then, worries about how much protein would be available in the future led to experiments that delivered a mushroom style micro-protein able to replicate the taste and texture (to a degree) of many different types of meat. Now known as Quorn, the company has changed hands several times and in 2015 was sold to Monde Nissin Corporation headquartered in the Philippines for £550m ($840m). This now looks like quite a shrewd move as Quorn’s profile and sales have soared after providing the ‘meat’ for several high-profile vegan launches in the UK, most notably Greggs’ vegan sausage rolls and its vegan-friendly Steak Bakes.
Quorn wasn’t the only company to ride the boom in vegetarianism in the UK in the 1990s. Linda McCartney Foods began offering burgers, sausage rolls and other options based around wheat protein. Now licensed to Hain Celestial Group, its products have been a British supermarket staple for vegetarians and flexitarians for many years.
In the US, companies like Turtle Island Food (brand name Tofurky) have created strong business out of selling largely soya and wheat protein-based, meat-style products.
The rise of veganism
What has arguably sparked the fake meat gold rush however is the rise of veganism and in particular a desire for younger vegans to eat food that is similar to the meat products they grew up with.
A term coined in the UK in the 1940s to describe humans who avoid all meat and dairy products, veganism was for decades a small movement of hardcore environmentalists and animal rights activists. Yet concerns about climate change, in particular the links between dairy farming and the carbon output of cows, changed all that.
A number of silicon valley start-ups – invariably funded by VCs and tech companies (both Google and Bill Gates have investments in this niche) – began to once again experiment with ways of producing fake meat that was more realistic than the existing alternatives.
The two key companies, Beyond Meat, created in California in 2009, and Impossible Foods, which followed in the same state two years later, once again dissected meat and experimented with all kinds of food substances from peas through to dulse, a kind of seaweed, to perfect their products. Beyond Meat even adds beetroot to the mix to replicate the way that meat bleeds.
The growth of Beyond Meat
Beyond Meat’s success has largely been driven by an aggressive partnership policy, which meant that within a few years it was providing authentic meat-style plant-based products for many iconic US fast food chains including KFC, Burger King, McDonald’s and Subway. In late 2018, it expanded to the UK selling Beyond Meat Burgers in Tesco, as well as in restaurants such as Honest Burger and the Lewis Hamilton-co-owned vegan fast food chain Neat Burger. In summer 2021, BYND rolled-out its Beyond Chicken Tenders in Panda Express and A&W Canada.
The big question for Beyond, and indeed its rivals, is how big is the fake meat market?
There are those who think the demand for fake meat is being over inflated. An analyst at D.A. Davidson downgraded Beyond Meat with a price target of $130 in summer 2019. His theory is that while there are people with medical conditions like lactose intolerance who might have to drink plant-based milk alternatives, very few people can’t eat meat. Rather, they choose not to. He surmised this might limit its long-term appeal.
In November 2021, a panel of 13 analysts offered CNN Money a 12-month median target of $74 for BYND, with a high $106.00 and low $54. ‘Hold’ was the consensus of 19 analysts, of which six recommended ‘sell’ and one ‘buy’.
CEO Ethan Brown blamed disappointing third-quarter results in 2021, which included a 16% drop in US sales, on a litany of challenges, including the spread of the delta variant of Covid-19, and supply chain and labour shortages. Credit Suisse reacted by downgrading BYND to a $60 target, believing that consumer interest in the product is reaching its peak. Could salvation be as close as the ‘golden arches’? BYND’s European collaboration with McDonald’s, the McPlant, began test-marketing in eight US locations in early November.
The growth of veganism has also provoked a backlash from the meat and dairy industries, which are becoming more aggressive in disputing some of the key claims of the vegans, which they hope will slow down its adoption. In the EU, farmers have been pushing the commission to ban the use of words like veggie burger and veggie sausage in marketing. They feel that customers may be fooled into buying non-meat products but it could be more likely that they are keen on putting the brakes on sales of meat and dairy alternatives.
The key question though is what is fuelling demand? If demand is driven by perceptions of climate change, as opposed to health, beauty or animal rights concerns, fake meat could have an enormous future. Each time the world suffers a natural disaster, like, for example, the 2020 Australian fires, which are linked to climate changes, it is likely that consumers will want to ‘do their bit for the planet’.
It could be argued that the summer where Beyond Meat’s shares hit their $235 peak coincided with massive media interest in climate change inspired by Swedish activist Greta Thunberg. Beyond Meat continually quotes in its marketing that University of Michigan concluded that 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 than a quarter pound of US beef.
Given its clear potential, why then did Beyond Meat’s share drop so dramatically?
It could be a classic case of being a start-up that was first to market that then inspired a cluster of rivals who found effective ways of competing.
Beyond Meat operates in a very crowded market. First there’s the start-ups which include the Vegetarian Butcher in The Netherlands (which makes the Burger King Rebel Whopper) and Violife from the UK, which has received significant investment and is partnering with supermarkets, restaurants, burger chains and more.
In the US, its main start-up rival is Impossible Foods, which raised another $500m of venture capital in a round led by existing investor Mirae Asset Global Investments (it has raised $2bn overall since 2011) to send its private valuation to about $7bn. It sells the Impossible Burger through numerous restaurant chains, as well as fast food behemoths like Burger King.
Then there are the existing food manufacturers. Nestlé, Tyson Foods, ConAgra and Kellogg also have fake meat products on sale or in development. And as we mentioned earlier, the boom in veganism has given a shot in the arm to older companies like Linda McCartney and Quorn.
Given their economies of scale, many of these companies will be able to bring new products quickly and cheaply to market. This means that Beyond Meat’s share price rests on its perception of quality and authenticity (its similarity to meat) and whether it will continue to be able to persuade consumers to pay a premium for its products in the next few years.
During fall 2021, Beyond Meat was trading at a price-to-sales ratio of 10.2, a fraction of the summer 2019 highs in the 70s. It is going to need to sell an awful lot of burgers to return to that market value.
There is also the risk of events impacting people’s diets, too. Many of the assumptions of the claimed health benefits of veganism are based on very small numbers over a limited period of time. This is because until recently there were fewer vegans. Were there to be evidence that, say, the vegan diet was less healthy than imagined, this might slow down uptake of fake meat.
Lastly, Beyond Meat, Impossible Foods and others run the risk of being overtaken by technology.
A group of start-ups, including Mosa Meat in The Netherlands and Memphis Meats in California, are working on producing real meat (or clean meat as it has come to be known) grown using DNA samples. The companies claim that the meat is identical to existing meat from slaughtered animals, yet is effectively vegan as no animal has been harmed during its production.
Mosa Meat announced a September 2021 investment from actor Leonardo DiCaprio, seven months after completing an $85m investment round.
Even Mosa and Memphis could be seen as old hats soon. Air Protein from California claims to be able to make meat-like products by converting carbon dioxide into nutrients. It will be some time though before burgers made from ‘thin air’ are flipped on the grill, but it got a boost in early 2021 from a $32m funding round led by crop trader ADM.
However, within five years Beyond and Impossible could be working on their own lab-processed meat. Or they could be incorporated into a food multinational.
If the evidence for climate change continues to mount, meat consumption will remain under the spotlight. In the long term, fake meat purveyors will thrive. There is, after all, a global meat market valued at an estimated $2trn, which is up for grabs. The question though is which companies are best placed to capitalise, start-ups or established companies?
FURTHER READING: Breakthrough in race to deliver credible lab-grown meat