PODCASTS / E96
June 15, 2023
For me, the question was never: can a modern plant-based meat brand scale in American retail? With steady decline beef consumption due to health-driven, occasional substitution with vegetarian meals set the fundamentals in motion years ago.
The question was can plant-based meat now become a meaningful market share of U.S. ‘meat’ consumption or global meat consumption? Can it become a multi-billion sector? Can you have a multi-billion retail brand?
Here’s the rub. I know of no billion-dollar brand that doesn’t have at least 25% household penetration, and that’s because it’s a yogurt brand brand we know well. Most require 40% or more of households and a long trail infrequent annual consumers to generate this kind of revenue.
Yet, current research from the Hartman Group suggests that only 22% of U.S. households are even in play. That’s awfully tight, unless you have a substantial proportion of those folks who eat the products multiple times a week, like fans drink their favorite soft drink.
The problem is that ingredients for cooking rarely meet that frequency hurdle beyond a tiny % of households here or there. Kids under 12 eat chicken nuggets multiple times a week, but, that’s actually a prepared food, practically a heat-n-eat snack.
Beyond Meat, specifically, went in with a strategy to capture light, flexitarian consumption. But how frequent IS that consumption folks? What does ‘occasional’ meat-skipping mean?
I don’t think Ethan Brown had a clue before he started raising capital for either business.
Here’s the landscape of meat aversion in America, courtesy of the talented folks at The Hartman Group, Inc.
The latter three groups form 19% of households and could easily carry Beyond Meat to further growth. Theoretically, this is the absolute maximum additional addressable market. And they do not support their fair share of current meat dollars. Not by any means.
In reality, though, most of these remaining fishy/white-meat/flexitarian folks are priced out of brands like Beyond Meat, probably 80-90% of them at this point. This is before they receive some experience or argument to look past the higher price point. Beyond Meat seems to be working aggressively to position itself as a ‘healthy’ choice in the United States. And, although Ethan keeps waving the fantasy of price parity with ground beef, the current target price reduction is 10% this year. Right now, the Beyond Burger patties sell at Walmart for $7.96 per lb (four patties in two units). At 10% annual price reductions, it would take Beyond Meat a minimum of six years to reach the current U.S. average price per lb of ground beef.
Hmmm…might be possible if the gross margins weren’t so toxic.
But the above data reveals the massive elephant in the room of plant-based meat and a lumbering, snorting elephant that I have publicly warned about since at least 2018. It’s the word ‘occasionally.’ Let’s make this word more concrete. Culturally, when consumers say they eat something “occasionally,” this means they consume “it” less than once a month, often just 2-3 times a year, usually coinciding with some seasonal event not part of your everyday life. This makes the Flexitarians dramatically less productive for Beyond Meat or any other plant-based meat brand.
In my experience, premium-priced consumer brands repeatedly scale with very low household penetrations, on average 2-3% for every hundred million dollars of retail sales. So, Beyond Meat most likely has 8-10% Household penetration with its current U.S. retail business. This leaves only about 9-11% of meat aversives at most. And most of these households are not interested in paying the current premium for Mother Earth or their health. They are OK with Morningstar Farms.
So, What Went Wrong With Beyond Meat, and What Can We Learn From It?
Peaking at $464M globally and $243M in US retail revenue is a wild success to your average food entrepreneur who never sees $1M in annual recurring revenue.
But, when much-hyped brands scale this fast, suddenly, using primarily external capital (not their P&L) and then start declining soon after passing the scale threshold, it almost inevitably means that someone hit the gas way too fast, did not understand their competitive positioning or core consumer and simply lost their patience.
This is when otherwise strong brands lose their way and get lost in a harried series of Hail Mary inorganic growth moves such as:
Most of Beyond Meat structural’ growth’ occurred in just one calendar year, 2019, due to an enormous retail and food service shove. Before that, the brand had been growing exponentially, a best-in-class growth pace for premium-priced brands that need to re-position themselves and re-cast their revenue model to keep growing steadily. The latter adjustments take years and can’t be magically forced when dealing with new ingredient sources like industrial pea protein.
Beyond Meat was riding the Skate Ramp, but it got hasty or weird or both. Investors no doubt saw an easy IPO stock win (in what would become the final days of easy IPOs). Whether they pushed Ethan to go this route so they could cash out quickly or honestly thought they were building the next $1B food brand is something we’ll never know.
The sad irony is that the business had one brilliant idea – get plant-based meat out of the freezer case and right next to the ocean of private-label patties at every supermarket meat department. Go where the meat eyeballs are to capture all households interested in occasional non-meat burgers. My money is on recruiting the white-meat-only folks to a simulated beef experience they honestly don’t remember well. They haven’t had burgers in years and years. And iit’s much easier to claim sensory parity with a distant memory.
Burgers are still the number one ‘sandwich’ Americans consume. So, choosing a patty format was also critical to boosting consumption rates after purchase. The history of Morningstar’s successful frozen veggie burgers showed that the burger form was the best way to capture vegan/vegetarian demand. When I first examined plant-based meat in 2012, the sector was about $400M in scale or roughly $525M in today’s dollars. Morningstar initially focused on harder-core, lifestyle vegetarians and vegans who want to participate in the all-American ‘burger’ rituals of the American summer without the beef. They didn’t want to be excluded. They still bring their frozen patties to their friends’ parties. The original purchase driver here was neither personal health nor methane gas reduction. It prevented animal cruelty, which is still the driver that creates the heaviest usage in the plant-based space overall. Many investors seem to have forgotten this basic fact. I call it the Bambi effect.
Today, the meat substitute market in the U.S. is about $1.5B in size, almost three times its height in 2012. So, clearly, there was room for growth. But, in the end, probably not another $1B.
Beyond Meat created its own hype cycle, which we can safely assume led to a massive amount of curiosity trial. Huge amounts of it. This is not the strategically intended ‘light usage.’ Encouraging too much one-off trial from haters who had no intention of adding veggie burgers to their diet did help the IPO and kept the stock price roaring for about two years (helped in part by the Covid-19 surge in all CPG categories).
There is such a thing as too much PR for a fast-growing brand. Turbo-charging weak purchase intent trial through constant appearances on national news outlets can backfire by creating a tsunami of trial that masks the underlying core demand for the product.
The brand’s topline was doing perfectly in 2018 without all the complexity of additional product lines and servicing 80 international markets. The SG&A today at Beyond Meat is out of all proportion with what an efficient $400M brand should have (56% of net revenue!). Lay’s has a $3.6 billion in sales in the U.S. with only five product formats (from the same base ingredients) and far fewer staff. That’s efficient. By going public in 2019, Beyond Meat found easy money, yes, but it brought on itself enormous pressure to prematurely solve its negative EBITDA situation under quarterly scrutiny. This first yielded a flurry of rushed product launches to mask problems with the core UPCs, and now a furious attempt to use global markets to boost cash flow and service the enormous debt the company took on in 2021.
Ultimately, Beyond Meat’s IPO will be seen as its own path to ruin, and Impossible may survive in retail. IPOs didn’t work for Amplify or Annie’s long-term; they just permitted investor wins/cash outs. This is not how you scale an innovative, low-profit brand. You have to do it the KIND way.