Update: Company increased its proposed price range to $23-25/share. Tyson announces the sale of their investment in BYND. They are expected to bring their own competitive products to market. Bears say “tough competition,” Bulls say it “validates the market.”
Beyond Meat (BYND) is marketing their IPO right now. This is a great story to tell and with Goldman Sachs leading the deal you know they are going to do one hell of a job. Remember it’s the job of the roadshow to convey the most exciting, positive version of the company and their growth prospects. Any piece of information that doesn’t contribute to that – like full data on same-store sales growth for example – are simply left out.
Instead you’ll get an example of a retail channel like the Ralph’s division of Kroger, that is performing well. And even then the data has to be presented in a very specific way for it to look impressive. You’ll hear about social media impressions and “brand ambassadors” like Leonardo DiCaprio and Snoop Dogg. And there will always be a representation of large market opportunity.
The company won’t talk much about past and future operational challenges, product disappointments or pending litigation. Finally you will never get a representative view of competition in an IPO roadshow. In this case competition is a major concern. To be fair all this is presented at length in the IPO Prospectus but many investors fail to study it and fully consider the realities presented there. We all love a good story though.
The Story [With Some Annotation]
Management opens with the fact that they understand that meat is a central part of not just our diet, but our culture and traditions. We have burgers and dogs at the Memorial Day BBQ, turkey on thanksgiving, maybe a ham or goat at Easter, a pig at a luau, etc. Nobody is going to want to substitute vegetables or tofu at the “center of their plate.”
But “meat” is just a collection of organic molecules. One doesn’t need an animal to produce and assemble them. It can be done with science.
Beyond has made headlines for years by taking a very scientific “molecular” approach to building “meat” from the ground up. In order to accomplish this the company has a large staff of scientists and spends a double-digit percentage of revenue on R&D. The focus is on innovation in terms of building products that are as satisfying as real meat in terms of texture, aroma, taste, behavior under cooking and the total experience.
Meat is a big market. In the US alone it’s $269B. Management makes the case that plant-based dairy has captured 13% share of the dairy market and it’s not unreasonable to see the meat market go a similar way. In other words a $35B market opportunity in the US alone. [It’s a useful illustration but not quite the same. In the case of plant-based dairy consumers have demanded and embraced it as an alternative to milk. If you believe that Beyond will ultimately supply plant-based meat products that are actually better or preferred generally to the real thing then you might accept this number.]
On the commercial side the company has dramatically expanded their presence in US stores and food service outlets to reach 30,000 points of sale worldwide. [We like to take a minute and do some math on those numbers. With sales of $40M in the most recent quarter that amounts to $433/week in sales per outlet. The distribution is probably very uneven with a few distributors and geographies doing well and many others poorly. We don’t have any real data on same store sales except the one example they provide with Ralph’s.]
When it comes to products this is still a developing story. Most of the revenues come from “The Beyond Burger” with other products failing to gain much traction. Some new products have just been released that may perform better like a “refined burger formulation,” packaged ground Beyond Beef, breakfast sausage patties and poultry nuggets. [It’s worth noting that a number of launched products simply didn’t work in the market which makes one wonder how much valid testing and piloting was completed before release. What’s a good idea in the lab may not be a good idea in the market.]
Where BYND has been able to have better control over retail presentation they seem to do pretty well. Again the Ralph’s example is all we have but positioning the product in the meat section versus other choices is effective. [As a small player Beyond has very little control over product presentation in most outlets. Consumers who actually want to buy them have had a hard time finding them. Some retailers put them with other “veggie burgers” and many have no idea what to do with products like “Beyond Meat Frozen Beef Crumble” and “Beyond Sausage.” Trying to do beef, pork and chicken at the same time creates quite a bit of risk for a company that has had challenges scaling up already.]
One last thing about retail that you’ll only find in the prospectus and customer reviews: The “fresh” Beyond Burger travels frozen to retail and is then “slacked” into the fresh case by allowing it to thaw out slowly. Once that happens the retailer must apply a sell-by date that is just 7 days for burgers and 10 days for the package. Some find the short shelf life under refrigeration surprising. It also begs the question of why Beyond Meat didn’t target the frozen section where brands like Bubba’s Burgers seem to do well.
We’re going to skip over the slides that all talk about how many social media followers Beyond Meat has and their “brand ambassadors” like Snoop Dogg. This is a valid part of any consumer marketing strategy but most brands don’t spend so much time talking about it.
Management did acknowledge their past supply-chain problems and presented a slide on how they have addressed them. They have secured an additional protein supplier which covers their needs for “the next 12 months” which seems rather limited to us. In their own manufacturing plant they are adding extruders but these seem to be going in rather slowly – they have 5 operating now and expect to add 2 more by the end of 2019. Finally they have expanded their contract manufacturing network from 2 to 5.
[Our own summary would be that Beyond has struggled with raw materials and has only secured enough for the current year, has had trouble with scaling their own manufacturing and appears to require quite a bit of lead time to add to capacity and finally relies on third parties for processing and packaging the finished product. The raw material supply challenge isn’t just about meeting demand but also presents an issue in terms of lowering prices as volumes scale up.]
Another little and somewhat shocking tidbit from the risk factors in the prospectus: “We do not currently have written manufacturing contracts with our co-manufacturers, including CLW Foods LLC and FLP Food LLC that co-manufacture our top selling products.” We read that and though huh? wait what? And this after an early exclusive supplier agreement had to be terminated which has resulted in pending litigation. We don’t know if that includes any agreements around quality control or ownership of intellectual property around the packaging and production process.
In terms of a growth strategy and target model the management teams to do more of what they are doing now – more outlets, more customer awareness and greater efficiencies. Gross margins have improved and are now positive. The long-term target model is presented as “mid-30%+” with EBITDA margin as “mid-teens.” For purposes of this note and our quick PFV model we’ll just give them the full benefit of those long-term targets.
The ESG Play is Real
Raising and butchering cattle is an extremely inefficient way to produce food. Given current concerns about our water supply and greenhouse gas emissions it’s an important part of what should be a story of increasing industry and consumer adoption of beef alternatives. In addition to all that plant-based products can help improve human health and reduce the harm done to billions of farm animals that are harvested for food every year.
More and more investment funds are being directed towards “ESG” companies and Beyond Meat will fit well into those portfolios. The power of the Beyond Meat environmental advantages over meat would be even more powerful if beef producers were somehow burdened with the environmental costs of production. Because plain ground beef will be cheap at the point of sale relative to Beyond Beef it forced the consumer to pay up for the more environmentally responsible product.
We see this working fine in affluent markets and stores like Whole Foods and Ralph’s but hard to picture in less urban areas, fast food restaurants and grocery chains like Stop & Shop.
This is the real issue for Beyond Meat and it’s not about other small direct competitors like Impossible Burger. The food business is big and consumer options are abundant. Even against 80/20 ground beef the Beyond Burger doesn’t stack up as well as you might think. It is plant based but it’s close to the same number of calories and fat. And lower-fat beef options are also widely available that are GMO, hormone and antibiotic-free. Modern grocery store options include grass-fed, Kobe beef and very lean 95/5 blends.
Of greater importance to Beyond is the well-established market for substitute products made from meats like chicken. For example Al Fresco has a range of products that have displaced quite a bit of pork eating already – especially in the form of sausage. We know there are many similar products but this is the category leader and we can vouch for how good their products are. At just over 100 calories their sausages are an easy choice over the “real thing” based on their flavor.
Finally there are the big meat producers themselves. While management insists that competitors are “chasing ghosts” because they innovate so rapidly the truth is that these supremely large players have vast resources at their disposal. Beyond touts their very high relative R&D spend as a % of sales but companies like Tyson (NYSE: TSN) and Cargill have sales of over $10B and $100B respectively.
UPDATE: Tyson announced they were selling their investment in Beyond Meat and it’s expected that they will create competitive offerings.
Producers of packaged foods are also massive and have scale that would enable them to launch competing products if the category grows large enough.
It’s not all about innovation either but power at the point of distribution. Large suppliers have a history of being able to put pressure on retailers and distributors to insert their own versions of new products and keep competition at bay. It may not be pretty or even fair but it happens every single day from your favorite bar to your favorite grocery store.
Beyond Meat is coming public quite early which is attributable to the red-hot IPO market right now. We don’t blame them or Goldman Sachs for wanting to take advantage of investor appetites for risk. But their size and scale is quite small compared to the opportunity and also to the competition and scaling challenges they will face.
Valuation & Stock Conclusion
There are a lot of very smart people at Beyond Meat. However they may not be fully suited to building a large-scale operating company in the food business. They have addressed earlier operating issues for the moment and dramatically expanded their points of distribution. How all that translates into operational results over the next few quarters remains unclear. We’d love to see the company succeed but there are quite a few risk factors that will keep us on the sidelines for now.
The good news for the IPO is the $20 mid-point is a fairly reasonable starting point for valuation. Our quick PFV suggests the shares have some good upside from that point if you can assume the 15% EBITDA target and our 20x multiple. Also as a point of reference General Mills purchased Annie’s for $820M back in 2014 and that represented about 4x sales. At the time Annie’s was struggling somewhat with growth and margins so that 4x multiple shouldn’t be viewed as a top multiple.
Another data point is that Hershey (NYSE: HSY) acquired Amplify Snack Brands in late 2017 and they paid about 15x EBITDA. Amplify was the maker of the popular “Skinny Pop” and some other savory snack food aisle products. You can read our note on their IPO here: The Skinny on Amplify Snack Brands.
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