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Daily Intelligence Briefing

Tuesday, February 2, 2021

Identifying Change-Driven Investment Themes – Five sections, explained here.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Pepsi’s Partnership with Beyond Meat Kicks off Another Year of Big Potential for Plant-Based Foods

Summary: Pepsi and Beyond Meat’s partnership to develop and improve vegan/vegetarian snack foods is just one of many plant-based expansions expected in the year ahead. Competition from more dominant players in the food and beverage industry, including Unilever and Cargill, present significant stumbling blocks for Beyond Meat and similar firms like Impossible Foods – especially on the international stage. Additionally, shares of Tattooed Chef have surged in recent months, now that the company has thrown its own hat into the ring with the top plant-based meat purveyors by launching a line of faux pepperoni and sausage products.

Related Stocks & ETF: Beyond Meat, Inc. (BYND), PepsiCo, Inc. (PEP), Tattooed Chef, Inc. (TTCF), Unilever PLC (UL), Invesco Dynamic Food & Beverage ETF (PBJ)

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PepsiCo and Beyond Meat made waves earlier this month when they announced that they’d formed a joint venture to create, produce and market snacks and drinks with plant-based substitutes.

Beyond Meat controls about 13% of the meat alternatives category in the US, according to estimates from Jefferies. As Barron’s notes, the company’s stock is well known for big pops on news of partnerships with established food brands. In 2020, Beyond was available in restaurants from Subway to Dunkin’ and shares jumped on Beyond’s deal with Yum! Brands’ Taco Bell. The stock soared nearly 10% after the company said it was expanding its distribution with Walmart last September.

Beyond Meat will benefit greatly from access to Pepsi’s distribution system and broad product line. Pepsi, in addition to drinks, makes Fritos, Cheetos and Tostitos, as well as Matador beef jerky. It’s a shot in the arm for Beyond Meat, which is clearly looking to diversify its offerings, struggling to convince investors of its growth opportunities in the face of rising competition.

Impossible Foods, Beyond’s top pure play competitor, recently cut its wholesale prices for the second time in a year for US food-service distributors. As of the beginning of the year, the average price of beef patties was $5.32 per pound, according to the U.S. Department of Agriculture’s national retail report. With the latest round of price cuts, the lowest possible wholesale price for the Impossible Burger is $6.80 per pound, but that price point continues to inch closer to parity with beef. Impossible’s gorund beef substitute and other products are on the menu at several major restaurant chains, including the Cheesecake Factory, Applebee’s, and Qdoba.

Last Summer, Beyond Meat’s limited time value packs of 10 patties managed to bring its suggested retail price per pound down to $6.40.

The Tattooed Chef a fast-growing provider of plant-based foods, went public last November as part of the 2020 SPAC boom. Specializing in frozen meals in the retail market, the company did not directly identify Beyond Meat and Impossible Foods as competitors in their registration documents. However, the company’s products are certainly in the same vein – especially now that they have begun the rollout of their own faux meat substitutes. Tattooed Chef products currently sell in over 4,272 stores with 23,000 points of distribution including Walmart, Sam’s, Costco and Target locations. The company’s 2021 objective is to reach 10,000 stores.

Tattooed Chef’s top line over the 12 months that ended in September came in at $135.7 million, up from $85 million in 2019. Meanwhile, the company’s gross profit rose to $20.6 million in the year that ended in September versus $13.7 million in 2019. For this year, Tattooed Chef expects its revenue to climb to $222 million and predicts that its margins will rise to at least 20%, versus about 15% in 2020.

As MRP noted last year, Beyond Meat, along with other pure play contenders, face their steepest competition from larger food distribution companies that can leverage greater economies of scale. CPG giant Cargill’s plan to produce soy protein or pea protein-based patties and ground products has thrown a wrench into the company’s strategy to dominate grocery shelves. Cargill will distribute the products, but retailers will be able to sell the products under their own private labels. This kind of licensing agreement creates the potential for every major grocer in America to offer their own, cheaper substitute goods for Beyond Meat’s top products.

Similarly, Unilever PLC, owner of Ben & Jerry’s ice cream and Hellmann’s mayonnaise, announced a target to increase its sales of meat-and-dairy alternatives to $1.2 billion over the next five to seven years ― a fivefold increase from current levels. Per The Wall Street Journal, the conglomerate plans to sell more vegan and dairy-free versions of its mayo and ice cream and expand the Vegetarian Butcher, its meat-alternatives brand that supplies soy patties and nuggets to Burger King in Europe.

Just this month, The Vegetarian Butcher launched an expansion of that partnership, bringing the Plant-Based Whopper to Latin America, the Caribbean and China. The latter market has been of particular interest for plant-based food products since the Chinese diet has historically included foods that are now considered meat substitutes like soy and mushroom, consumers are already pretty comfortable with the idea of faux-meats – it also helps that China is home to the most mouths of any country in the world. In 2019, Bloomberg reported that almost three out of four Chinese people said they’d be willing to swap meat for a plant-based substitute, according to one 2018 survey, more than any other country.

In the same year, Euromonitor data showed China’s “free from meat” market, which includes plant-based products meant to replace meat, had grown 33.5% since 2014 to be worth $9.7 billion in 2018. By 2023, that number is expected to grow to $11.9 billion.

While vegan/vegetarian meat and snack replacements have shown strong growth prospects, substitutes for dairy milk have been king of the plant-based transformation.

Market research firm Packaged Facts projects retail sales of plant-based dairy and egg products will rise at an average annual rate of 6.0%, reaching $5.2 billion by 2024. This is up from $4.3 billion in estimated sales in 2020, which is up from $3.9 billion in sales during 2019. Plant-based milk will account for the largest gain in sales over the forecast period, as the category is the biggest by far (estimated sales of $2.4 billion in 2020) and still has prospects for further adoption.

Though Americans have been drinking less fluid cow’s milk on a per-person basis since the 1940s, the rate of decline has risen in recent years, partly the result of plant-based alternatives. Per a new report from the Economic Research Service (ERS) an arm of the US Department of Agriculture, “Sales of plant-based milk alternatives are contributing to ― but not a primary driver of― declining sales of cow’s milk”, which appears to be declining on its own. The increase in sales over 2013 to 2017 of plant-based options is one-fifth the size of the decrease in Americans’ purchases of cow’s milk.

The Washington Post notes that American dairy farmers have seen devastating losses in recent years. More than 3,200 dairy farms shut down in 2019, according to the US Agriculture Department, with two of the biggest, Borden Dairy and Dean Foods, filing high-profile bankruptcies within just 3 months of one another.

At the time, MRP noted that Americans each drank an estimated 146 lb. of fluid milk – a category that includes products from skim to cream – in 2018, according to the USDA’s Economic Research Service. That’s down 26% just since 2000. Per SPINS, plant-based milk is the most developed of all plant-based substitutes, accounting for 13% of all dollar sales of retail milk. For the full-year 2019, plant-based milks brought in about $1.9 billion.


Now, one of the top purveyors of non-dairy milk is reportedly planning an IPO this year – estimated to be several times larger than Beyond Meat’s breakout $240 million raise in 2018.

As one could draw from its name, Oatly sells oat milk, an alternative milk that has taken off with coffee shops and millennials in recent years. Business Insider writes that the Swedish company has seen a surge in business ever since it entered the US market in 2017. Oatly recorded $200 million in sales in 2019, and expected to double that figure to $400 million in 2020 and be profitable by 2021, according to a report from Mergermarket.

According to SPINS data, sales across the entire oat milk category of which Oatly dominates have grown an astounding 294% in enhanced retail channels and 345% in mainstream retailers over the past year. While Oatly benefits from its first-mover advantage in the oat milk market, greenqueen.com notes that major competitors include food business giants like Danone and Nesquik.

MRP first highlighted Oatly’s international expansion in 2019, particularly in the Chinese market. The company already maintains an office in Shanghai and sold through more than 2,200 Chinese coffee shops and retailers. The Swedish company plans to open a factory in Asia―one of three new plants globally―next year to help cover the region.

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