BEYOND MEAT: ON THE ROUTE TO PROFITABILITY?1 Beyond Meat Inc. (Beyond Meat), which was in the business of manufacturing plant-based meat products, was rapidly growing in the US market. The taste and texture of the plant-based meat products the company manufactured resembled those of animal-based meat products while delivering the nutritional benefits of plants. With its flagship product, Beyond Burger, Beyond Meat was expected to disrupt the $1.4 trillion global meat industry, though analysts and restaurant owner raised concerns regarding the high pricing of plant-based meat. Beyond Meat believed that research and development (R&D) and innovation were its competitive advantages. Beyond Meat and its closest rival, Impossible Foods Inc. (Impossible Foods), were the joint winners of the 2018 Champions of the Earth Award, the highest environmental award given by the United Nations. They won in the science and innovation category for creating sustainable alternatives to beef burgers that were environmentally friendly and rivalled the taste of meat.? Ethan Brown, chief executive officer (CEO) and founder of Beyond Meat, stated, “Instead of growing low- value commodity feed for animals, I see a future of farmers growing higher value protein crops for more direct human consumption via plant-based meat.”8 Analysts expected that, with its increasing revenues, Beyond Meat would break even by the end of the 2019 fiscal year. However, several issues faced Brown in his efforts for profitability: The meat-substitute market had become hyper-competitive, with several new and existing brands entering the segment. There were also internal issues with the supply chain, which resulted in production delays for Beyond Meat.” Brown also admitted that there were risks associated with frequent changes to the recipe of Beyond Meat’s bestselling Beyond Burger. 12 Amid these issues, Beyond Meat filed for an initial public offering (IPO) in May 2019. By July 26, 2019, the price of Beyond Meat shares had soared by 840 per cent compared to its launch price of $2513 (see Exhibit 1), making Beyond Meat one of the best IPOs of 2019; however, analysts considered that the company was overvalued. 14 Analysts at the Goldman Sachs Group Inc. (Goldman Sachs) claimed that Beyond Meat’s growth momentum could be impeded due to supply issues and that increasing competition could cause the company to struggle to keep itself differentiated and innovative.’s How could Beyond Meat become profitable and justify its valuation? How could Brown combat competitive threats? Would he be able to disrupt the meat industry? BACKGROUND In 2009, Brown founded Beyond Meat, based in Los Angeles, California as a small commercial kitchen, where he experimented with different recipes. Over the years, retailers such as Whole Foods Market Inc. On the manufacturing front, the issues are all consistent with demand far exceeding management’s own expectations and bottlenecks emerging at different points in the supply chain, specifically around third-party co-packing capacity, internal extrusion capacity [in-house manufacturing) and raw material availability. 56 SUPPLY ISSUES Plant-based meat alternatives, such as pea protein, were expensive. The supply chain for yellow pea protein, a key ingredient of such products, was much less established than traditional supply chains for animal protein. In the past, Beyond Meat had experienced interruptions in its pea protein supply that had resulted in delivery delays. Beyond Meat relied on two suppliers for pea protein and believed that too much reliance on them could adversely affect its business in the future. Furthermore, pea protein suppliers had a limited number of manufacturing facilities. “A natural disaster, fire, power interruption, work stoppage or other calamity affecting any of these facilities” could potentially interrupt Beyond Meat’s business.58 As Goldman Sachs noted in its analysis, “Over the course of 2017 and 2018, Beyond Meat encountered a variety of supply-related problems which inhibited growth and weighed on margins.”S9 Due to heavy demand in 2016, Beyond Meat faced supply issues that were significant enough for several Whole Foods stores to run out of stock.” Beyond Meat sourced some ingredients from countries like France and Canada, but other food producers also relied on these suppliers for ingredients, and this further constrained Beyond Meat’s procurement ability. Only a limited number of competent, high-quality co-manufacturers that operated in the industry could meet the strict quality and control standards established by Beyond Meat.“ MARKETING A package of Beyond Meat ranged from approximately $5.00 to $7.49 for two 113-gram (4-ounce) patties, which was almost three times the price of beef patties from firms like Purdue Farms Inc.62 However, some firms, like Broadleaf Game, sold beef patties priced as high as $5.00 to $6.00 for two 113-gram patties.63 Cultured or lab-based patties from start-ups like Memphis Meats was the most expensive: the average price for two of their 113-gram patties in 2018 was $1,200.64 Brown was confident that, in the future, with improvements in the supply of pea protein and with increased competition, plant-based meat alternatives would cost much less than meat.65 Beyond Meat offered sales discounts and promotions, including rebates, temporary on-shelf price reductions, off-invoice discounts, retailer advertisements, and product coupons, to its customers and consumers. The Beyond Meat marketing team also offered samples of the products at special events. As of March 2019, approximately 400 such events had taken place, and approximately 138,000 samples had been distributed. The company also partnered with “celebrities such as Tia Blanco, Leonardo DiCaprio, Snoop Dogg, Kyrie Irving, DeAndre Hopkins and DeAndre Jordan,” whose interest in organic products and involvement with Beyond Meat helped promote the company’s overall mission. THE ROAD AHEAD According to the Economic Research Service unit of the United States Department of Agriculture, beef and poultry industries were expected to get more expensive, and price was expected to be a key driver in influencing people to switch to plant-based meat.7 Larry Praeger, the CEO of Dr. Praeger’s Purely Sensible Foods, agreed, saying that “price point will play a big role in converting people that are currently eating meat to meat alternatives.” He also mentioned that increased competition in the industry would result in the price of plant-based products going down as most consumers switched to the lowest-priced items.68 Brown (Whole Foods), Target Corporation, the Kroger Co., Del Taco LLC (Del Taco), Carl’s Jr. Restaurants LLC (Carl’s Jr.), and TGI Friday’s Inc. (TGIFridays) became customers. Beyond Meat developed three core plant-based product platforms that aligned with the most common meat categories globally: beef, pork, and poultry. To do so, it used proprietary scientific processes to replicate the architecture of animal-based meat. Its products were free from antibiotics, hormones, genetically modified organisms (GMOs), and gluten.’7 Innovation and R&D were key tenets of Beyond Meat’s competitive strategy and its competitive advantages. 18 The company’s R&D team—which included process engineers, culinary specialists, and scientists from diverse fields such as material science, chemistry, food science, biophysics, and biology- worked on Beyond Meat’s vision of developing plant-based meat in its innovation centre in El Segundo, California.” In March 2019, Beyond Meat had 383 employees, 59 per cent working in operations and 16 per cent working in R&D.20 BEYOND MEAT: FINANCIAL PERFORMANCE AND IPO Beyond Meat’s revenue increased from $16.2 million in 2016 to $87.9 million in 2018 (see Exhibit 2). The Beyond Burger was the company’s flagship product and became the focal point of its marketing efforts. In 2018, the Beyond Burger accounted for 70 per cent of Beyond Meat’s gross revenues. In the same year, retail channel sales contributed 58 per cent of Beyond Meat’s net revenue (see Exhibit 2).21 Beyond Meat filed for an IPO on May 2, 2019. The IPO prospectus pointed to demand for the product: Popular restaurants have approached us directly to carry our branded product, despite already carrying our competitors’ products. This type of demand for our products has been a driving force in building strong ties with customers who have been continuously impressed by the impact our brand can make on their business.22 After the company’s IPO launch, Beyond Meat shares traded for as high as $234.90 per share in July 2019 (see Exhibit 1). Nevertheless, in the same month, Beyond Meat underwriters such as JP Morgan Chase & Co. (JPMorgan) downgraded the stock to “neutral” from “overweight” because the share price was much higher than the price targets of most Wall Street analysts. In July 2019, Beyond Meat announced that it was moving beyond pre-shaped burger patties to introduce 0.45-kilogram (one-pound) packages of “ground beef” plant- based meat substitute suitable for use in meatballs or Bolognese sauces. After this introduction, share prices pushed even higher, reaching $234.90 on July 26, 2019 from the launch price of $25 in May, 2019.24 However, analysts like the Boston-based research and analytics firm Trefis were skeptical about the valuation of Beyond Meat. In July 2019, when Beyond Meat was trading at between 25 and 39 times its estimated fiscal year (FY) 2020 revenue per share (RPS) (see Exhibit 1), Trefis valued the company at only 16 times the projected FY 2020 RPS. Trefis expected Beyond Meat’s RPS to reach a value of $5.95 for FY 2020, against a May 2019 value of $3.55. Trefis’s valuation of Beyond Meat was still higher than the valuations of major competitors such as Tyson Foods Inc. and General Mills Inc., which were trading at less than two times the RPS.25 INDUSTRY OUTLOOK The total available market for plant-based meat was expected to achieve a size of $100 billion by 2034. Out of this, Beyond Meat was expected to generate at least $5 billion in net revenue 26 In the United States alone, according to a Nielsen report, annual sales of “plant-based meat jumped 42 per cent between March 2016 and March 2019 to a total of $888 million, compared to 1 per cent growth of traditional meat. “21 Alex Frederick, an emerging technology analyst at PitchBook Data, stated, “As demand increases, we expect a flood of new entrants chasing an expanding market opportunity.” Although the plant-based meat industry required R&D, with the help of reverse engineering, products were expected to soon become commoditized, or widely available.28 Consumers were driven toward meat substitutes by environmental and sustainability concerns. Concerns about healthy eating also influenced their preference for meat substitutes.29 Major medical organizations had recommended that people reduce their intake of red meat and processed meat, which were linked to colorectal cancer risk. Saturated fat content, responsible for increasing cholesterol and the risk of heart disease, was high in processed meats like bacon, hot dogs, and deli slices.30 As a consequence, the focus of Beyond Meat was not vegetarian consumers, but rather, flexitarians who were trying to increase their weekly plant-based intake to eat in a more healthy and sustainable fashion. While it took an estimated 68,000 litres (18,000 gallons) of water to produce 0.45 kilograms (one pound) of beef, producing the same amount of peas required only 2,800 litres (740 gallons). 2 According to Will Schafer, Beyond Meat’s vice-president of marketing, the company’s customers were mostly meat eaters: more than 90 per cent of consumers who purchased the Beyond Burger also purchased animal protein.33 Business-to-Business Customers In early 2019, Beyond Meat products could be found in “22,652 individual markets, supermarkets, retail stores and chain restaurants in 31 different countries.”34 Beyond Meat products were available in 17,800 stores in the United States and 2,510 stores in Canada. Walmart Inc. stocked Beyond Meat products in almost half of its US stores, while Publix Super Markets, Inc. sold it in approximately 1,000 stores.35 In the restaurant segment, the company sold its “flagship Beyond Burger and Beyond Sausages through approximately 12,000 restaurant and food service outlets—including BurgerFi, Bareburger, Carl’s Jr., Del Taco, TGIFridays and A&W Canada in the United States and Canada.”36 Competition Beyond Meat’s closest competitor, Impossible Foods, based in Redwood City, California, was also in the business of plant-based meat production (see Exhibit 3). Founded in 2012, Impossible Foods supplied products to 7,000 restaurants, as well as to restaurants in theme parks and college campuses. In 2019, it entered into a partnership with Burger King that was expected to double its reach. However, as Impossible Foods failed to increase production, several restaurants experienced delays in delivery.38 Food brands such as Conagra Brands Inc.’s Birds Eye and B&G Foods Inc.’s Green Giant were also interested in the plant-based meat category. In 2019, Irish company Strong Roots launched a burger featuring kale and quinoa in more than 3,000 US stores, and the product received a NEXTY award at the Natural Products Expo West show.39 Several fast-food chains started offering meat-free products, either by collaborating with Beyond Meat or Impossible Foods or by developing their own proprietary offerings.40 For instance, McDonalds sold the vegan burger Big Vegan TS in Germany; Nestle launched its own meat-free burger, called Incredible Burger in Europe and Awesome Burger in the United States; Burger King collaborated with Impossible Foods to launch Impossible Burger; and Del Taco partnered with Beyond Meat to launch Beyond Taco.! Another group of competitors was investing in lab-grown or cultured meat. Technicians developed cultured meat in labs: first, they obtained a sample of animal muscle; next, they obtained stem cells from the animal tissue; finally, through a complex process, they used the stem cells to develop muscle tissues.42 Typically, “one tissue sample from a cow” could “yield enough muscle tissue to make 80,000 quarter-pounders.943 Companies like Finless Foods Inc., a San Francisco-based lab-grown fish producer, in 2017, intended to market a bluefin tuna product by 2019.44 Unlike plant-based meat, cultured meat was not vegetarian, but it addressed consumer concerns related to carbon emissions or the ethical treatment of animals.45 A JPMorgan analyst who believed the Beyond Burger had superior quality and taste compared to its competitors stated, “In our opinion, Beyond Meat’s products arguably are superior to most, if not all, current competitive offerings in terms of taste and/or ingredients (unlike rival Impossible Burger, Beyond Burger has no soy and no GMOs).°46 Bank of America Merrill Lynch was also positive about Beyond Meat’s growth potential but believed that lab-based meat could pose a serious threat to plant-based meat. Commenting on the threat from direct competitors, analysis from this company stated, Beyond Meat’s ingredients are common and accessible. The proprietary aspect of the process is the protein blend that Beyond Meat’s scientists have worked to develop. The accessibility of the equipment and the inputs poses a risk for the company as competitors start to ramp up and the plant- based space becomes more popular in the food industry.47 BEYOND MEAT: R&D INVESTMENT Beyond Meat’s R&D lab in El Segundo, California, had dozens of scientists. The 2,415-square-metre (26,000-square-foot) facility was dedicated to solving a single question: how to “mimic meat°48 in terms of its look, feel, and taste. The team of scientists had only one job, which was to identify ingredients such as peas or fava beans that could substitute for meat from cows and other animals. Brown explained: “Everything here is an investment toward that goal” of making plant-based meat “indistinguishable” from animal-based meat. While developing their product, Beyond Meat’s scientists paid special attention to consumers’ preferences. When Beyond Meat realized that US consumers were increasingly seeking health and wellness in their food, they decided to produce a healthier version of the patty, rather than the fattiest—and tastiest option.49 Scientists in Beyond Meat’s R&D lab came from diverse backgrounds in “biochemistry, biophysics, plant science, health care, tech, and chemistry.” Parker Lee, a macromolecular scientist, had previously manufactured medical devices for cancer patients. At Beyond Meat, he used “his scientific background to replace animal cartilage with garden produce.” Jonny Gordon was Beyond Meat’s colour lab scientist. While he did not possess any prior food-science experience, his sole job at Beyond Meat was to improve the colour of plant-based meat. According to Brown, the heterogeneous background of the research team was key to the success of Beyond Meat.50 The company increased its R&D head count by approximately 24.2 per cent between 2016 and 2017.51 Beyond Meat constantly refined its recipes, including that for its bestselling Beyond Burger, even when testers in the lab preferred the original burger over newer versions. Brown consistently pushed for the newer version, believing that it was better and that something must have gone wrong with the taste test.52 The company intended to release the third iteration of its bestselling Beyond Burger in 2019; Brown insisted on launching newer versions every year because he believed that only innovation could keep competitors at bay.53 MANUFACTURING FACILITY Beyond Meat had approximately 9,290 square metres (100,000 square feet) of production space designed to create woven protein in two manufacturing facilities in Columbia, Missouri. S4 Beyond Meat also had a network of co-manufacturers who converted woven protein into packaged products (see Exhibit 4). Third- party co-manufacturers signed non-disclosure agreements to ensure that the intellectual property and trade secrets of Beyond Meat were protected.55 Analysts at Goldman Sachs, however, recognized a problem in the manufacturing process, stating,
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