Whatever happened to Beyond Meat?

A lot about 2019 was stupid in ways that seemed obvious at the time. WeWork’s IPO. BaFin’s short-selling ban. Facebook’s digital currency. Green Book’s Oscar for best picture. Abiy Ahmed’s Nobel Peace Prize. Boris Johnson. Lex Greensill. Baby Yoda. Etc.

Even in this crowded field of idiocy, Beyond Meat stands out. Shares in the shamburger maker rose more than eightfold in the weeks after its May 2019 flotation, its market cap topping out at nearly $14bn. By the end of that year the stock had dropped by two-thirds, and by the end of 2022 it was down another four fifths. It last traded above the IPO price in August.

A simple explanation for what went wrong is that people didn’t buy enough stuff. At flotation, the consensus was for Beyond Meat to turn free-cashflow positive by 2022 on compound annual sales growth of approximately 40 per cent. Instead, the company reported a 10 per cent drop in sales last year. That was after just 14 per cent growth in 2021, which had been helped along by keen inventory management.

It gets worse. For the fourth quarter of 2022, sales had slumped 21 per cent year on year. And with growth deteriorating, cash burn has been Promethean in pursuit of a must-have product (jerky has flopped; frozen steak and chicken are works in progress). Management is aiming for one breakeven quarter this year but refuses to talk about liquidity requirements beyond 2023 as it tries to cut retail prices as well as operating costs. Going by the forecasts — the below table is from Bank of America — a cash infusion will be required either soon or slightly later:

All of which explains why about a third of Beyond Meat’s free float is on loan and its convertible debt is trading at 23 cents to the dollar. It’s why short sellers including Jim Chanos have been spitballing about possible bankruptcy. The stock is also notably hated by the sellside, with no buys and eight sells among the 17 analysts who have published over the past year. Among US companies only Upstart Holdings, a smallcap alternative lender, gets a worse prognosis from the Street.

What on earth did people see in the stock in 2019? Mostly, it was was a category error. This is what JPMorgan (one of three lead bookrunners on the IPO) told clients shortly after the float:

We think plant-based meat can exceed $100bn in sales in 15 years, with Beyond taking 5 per cent. We strive to be conservative in this model. We assume, for instance, that a) only 2/3 of meat is addressable by plant-based options and b) plant-based meat’s share maxes out at 10 per cent (versus 13 per cent already for US plant-based dairy, a figure growing each year).

Beyond Meat’s own IPO marketing invited the use of non-dairy milk as a case study. By 2019, milk alternatives were already popular. Plant-based meat looked like the obvious next big thing, US sales having grown by 24 per cent in dollar terms in 2018 while dislodging less than 1 per cent of a much bigger theoretical TAM. These charts are from a 2019 vintage Berenberg note:

And . . . nope. Turns out people don’t want cow milk specifically. A broad mass-market demand for feeding the body and mind with impersonated animals just didn’t follow.

Late-pandemic inflation put a spotlight on the problem, because Beyond Meat is, in theory, a luxury good. The brand over-indexes in high-income households, who ought to care less when balancing budgets about the product’s price premium to real meat. But according to Numerator Insights data it’s this high-income cohort who have been ditching Beyond Burgers. Demand among less wealthy households has been holding steady, albeit at lowly levels, perhaps because ethics or health concerns make their spending decisions less flexible. It adds up to a much smaller market than the one previously imagined.

Fake meat’s other big problem versus milk is accessibility. In short, consumers are more likely to try a substitute when it’s presented as a free upgrade of their cappuccino rather than a costly downgrade to their Big Mac. Here’s a recent note from Barclays:

Within the US the price premium for plant-based meat compared to animal meat is 67 per cent, while plant-based milk sells at an 87 per cent premium to normal milk, on average. This poses a significant adoption barrier currently, as the average US consumer has seen grocery affordability decrease since 2020.

[But] consumers have more touch-points in the food-service channel to experiment and purchase plant-based milk products and at a lower cost. We call this the ‘coffee-hamburger model’, where on average the absolute price of coffee in the out-of-home channel is cheaper than that of a burger and hence the relative cost for consumers to trade up to a plant-based burger is much higher than it is to trade up to plant-based milk in their coffee.

Non-dairy substitutes are now up to 15 per cent of the US retail milk market, thanks to clever marketing and easy access, whereas non-meat meat is still in search of a way to appeal to omnivores . . . 

... because even going by the surveys, a cow’s disintermediation isn’t that important . . . 

And while approximately a quarter of consumers say they want to reduce meat consumption (“flexitarians”, in industry lingo) the great faux-flesh replacement just isn’t happening at scale yet.

So even though the global plant-based category is worth $28bn and has been growing at 7 per cent annually over the past five years (Euromonitor data), the only companies able to make proper money are the sellers of non-dairy substitutes.

Meanwhile, too small to register in the above charts are meatless meat specialists such as Ontario-based Maple Leaf Foods, which in November wrote down the value of its plant protein business by $191mn.

Where does that leave Beyond Meat? With $1.1bn in debt and slightly more than $300mn in cash, per its 2022 results. Long term, the possibilities offered by lab-grown flesh may threaten what little market share it has. Short term, a lot hangs on arresting its sales declines with grocery store promotions and discounting — a strategy that may backfire given the zealous tendencies of its core customer base, says JPMorgan:

There’s a reason why CSD [carbonated soft drink] and tobacco companies have taken prices up, not down — it’s because they know their dedicated customers will pay. [Beyond Meat] says that lower prices will help volumes, which in turn will improve operating leverage, but it’s far better to save a dollar of price than gain a dollar of volume, given that price flows 100 per cent to gross profit but volume comes with variable costs.

Shouldn’t all this have been as obvious in 2019 as it is in 2023? Probably, though the problem was widely misdiagnosed. Most of the initial coverage of Beyond Meat was about low barriers to entry, not about chimeric demand. Then an initial share price spike squeezed out the short sellers, then lockups expired on the nearly 80 per cent of its stock being held by management and early investors.

Bloomberg’s chart of insider open-market buys (green) and sells (red) tells the rest of the story:

Related Links:
— This is nut loaf, will Beyond Meat crash? (FTAV)
— Beyond Meat’s beyond awful quarter (FTAV)