Lots of companies had a pretty forgettable year in 2022. And then there is Beyond Meat (BYND), whose (now former) chief operating officer took a bite out of another man’s nose while stuck in the parking lot after a college football game last October. That actually might have been the highlight of the year, based on the rather soul-crushing earnings call we just listened to live. It included a litany about all of the McPlant burgers that will end up in Happy Meals in Germany and a limited-time only release of the smoked BBQ McPlant burger in Austria. World War I started after the assassination of Archduke Franz Ferdinand of Austria, so we’re in dangerous territory here.
Gut Check for Beyond Meat Stock
About a year ago, we asked, Beyond Meat Stock: Where is the Growth? Well, here we go again, because the company reported on Feb. 23 that revenues were just short of $419 million, a decrease of nearly 10% year-over-year. Ethan Brown, the founder and CEO of Beyond Meat, attributed the disappointing year to a combination of bad press and inflation. The solution, he said, relies on better marketing and better-tasting products. And, of course, it would be nice to reach that holiest of holy grails in the alt meat market – price parity. In his own words:
There’s a lot of distortion in the channel with very high rates of inflation, changing consumer consumption habits, but my belief is that, as we continue to get the taste right, continue to get the health message right, and then reduce that price barrier, it will grow the category.
CEO Ethan Brown
Our thesis with Beyond Meat has always been that plant-based food needs to be cost competitive. Nothing else really matters. We’re not the only ones who have made that argument. Analysts at global management consulting firm Kearney published a report about price parity being on the horizon, with exponential growth to follow. The theory is pretty simple: Drop the price, grab market share:
Admittedly, our enthusiasm has always been somewhat tepid. That’s reflected in our miniscule exposure to Beyond Meat stock, accounting for just 0.23% of our Nanalyze Disruptive Tech Portfolio. As we said in our last article, we’re not the kind of investors who cut bait and run at the first sign of trouble, but this company is giving us some serious heartburn.
The Price is Right?
But maybe because price parity has always been a hard pill to swallow – but maybe we don’t have to. Inflation was (and still is) a real problem, but how big a factor was it? Beyond Meat products are marketed as a healthy, save-the-planet alternative to cows and chickens. It’s a Whole Foods-kind-of-product, so there’s always a premium baked into the price that a certain type of consumer is willing to pay. Consider that Beyond Meat did not raise prices. In fact, gross margin ended in negative territory (about -6% versus nearly 30% in 2021) for the year because the cost to create a pound of faux beef went up – thanks primarily to “higher inventory reserves, materials and logistics” – while revenue per pound went down. In other words, the company has been feeling the pressure to cut consumers’ costs despite other economic pressures.
Let’s look at the price parity problem in a different way. Currently, a random Safeway on the west coast lists a 16-ounce package of Beyond Meat ground “beef” at $5.99, discounted down from $8.99. The regular 80/20 cheap stuff is selling for $3.99 a pound. But is that what the average Beyond Meat consumer is buying? Probably not, since only 5% of consumers identify as strictly veg heads. These Whole Paycheck shoppers are buying the $6.99 100% natural grass-fed Angus ground beef or maybe even the $8.99 organic ground beef. Our educated guess is that Beyond Meat customers are likely going to lean into the ESG story.
In terms of the premium protein market – beef or not – Beyond Meat is already competitive. Less so when it comes to gross margin. If it costs more to produce a product than for what you can sell it for, your business is not sustainable in the long term, let alone capable of sustained revenue growth and profitability in some not-too-distant future. Yet apparently it’s not impossible to run a successful plant-based brand. Purveyor of sugary cereals and salty snacks, Kellogg, had recently been mulling a spin-out of its MorningStar Farms business until recently. As part of the gender reveal party, the food giant claimed the business was profitable as recently as 2021 with reported sales of $340 million. While a fraction of the company’s $15.3 billion in annual revenue, plant-based is one of its fastest-growing segments.
Exposing the Plan
Now let’s talk about management’s plans to fix this thing. One key part of the strategy is to tap the brakes on growth a wee bit and focus on positive cash flow by the second half of this year. It took one step toward that goal in the second half of last year by laying off nearly 20% of its staff. After that? Beyond Meat has a few things cooking. These are direct quotes from Brown:
- “Continue to focus on restoring growth and our core product offerings in the fresh section of grocery by working closely with our retailers on target promotions, bringing innovation to our core fresh product set and clear messaging around the taste, health and planetary benefits of going beyond.”
- “Expanding our brand … in the frozen section, including increasing distribution of our latest award-winning products, Beyond Steak, as well as main new innovation from our poultry platform to this part of the store.”
- “Turning to general food service, we are seeing some early wins and a more narrowly focused set of priority segments and look forward to sharing these with you as the year progresses.”
Not exactly the Gettysburg Address.
International Exposure
Brown goes on to talk about those McPlant burgers and nuggets in Germany, Austria, and other parts of Europe, as well as Beyond Meat products in Pizza Huts from Canada and the UK to Singapore and Sweden. A couple of points here. First, we like-ee the international exposure. Two, international sales had been the one bright spot in 2021. It was a different story in 2022, with sales outside of the United States dragging on the bottom line:
Add unfavorable foreign currency conversions to the list of external forces putting the squeeze on Beyond Meat.
Unwanted Exposure
Brown also took beef (we know, we know) with how plant-based products are getting beat up by some in the media. In fact, he probably spent the biggest part of his prepared remarks remarking on how healthy his fake meats are for people. He cited a study published in the American Journal of Clinical Nutrition involving participants who swapped meat with Beyond Meat products for eight weeks. That Beyond Meat group had a significant drop in bad cholesterol. Incidentally, Beyond Meat funded the study, though it strongly claims that it has nothing to do with the design or outcome. Brown even went so far as to describe the ingredients in the new Beyond Steak and how it is produced using a proprietary process of heating, cooling, and pressure. And then some talk about supporting the American farmer and sustainability for the planet.
The ESG message is strong with this one.
Indecent Exposure
In the meantime, the outlook for 2023 looks pretty lean. Among the headwinds the company expects this year:
Near-term uncertainty related to macroeconomic issues, including inflation and rising interest rates, demand in the plant-based meat category, increasing concerns about the likelihood of a recession, increased competition, supply chain disruptions, challenges related to labor availability and, to a lesser extent, COVID-19 and its potential impact on consumer behavior and demand levels, among other things …
All of that adds up to projected revenues of between $375 million and $415 million, representing a decrease from 2022 revenue of up to 10% at the lower end of the guidance. Gross margin is expected to be in the low double-digit range and management says the company will be cash flow positive by the second half of 2023. Do note that “cash flow positive” is not the same thing as profitable. We usually don’t expect high-growth companies to be profitable, but when the high-growth revenues turn to dust, we kind of have to ask another question.
Should We Keep Beyond Meat Stock?
Not so long ago, the hype out of marketing departments everywhere was that meat was dead and we would all soon be living on a delicious diet of pea protein colored with beet juice. That was probably premature. Last month, a Bloomberg article declared plant-based food as just another fad. Market research firm Information Resources Inc. reported supermarket sales of meatless products were down 14% in 2022. That’s a trend that actually started back in 2021:
So are plant-based foods dead? Well, that’s probably a bit premature and overly provocative as well. The reality is probably somewhere in the middle – most of humanity will continue to consume animals and there will be a solid consumer base for fake meats.
But is Beyond Meat the market leader we can rally behind? There was very little in last week’s investor presentation that made us go, “rah-rah.” Some investors saw reason for hope in the Q4-2022 revenues, which were higher than expected. The company is starting 2023 with more than $1 billion in debt and about $322.5 in cash and assets. That’s about $40 million less than it lost in 2022. In our last article on Beyond Meat stock, we said this could be a make-or-break year for Beyond Meat. It kind of looks like we were right.
Conclusion
The plant-based market is here to stay, but it’s probably never going to have a total addressable market anywhere near comparable to Wagyu beef and fried chicken. While price parity has always seemed important, there’s nothing wrong with playing the premium market because that’s where the moneyed consumers play. You can’t be all things to all people – or you’ll go broke. And that’s where we seem to be headed with Beyond Meat.
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