“You hit like a vegetarian”: the scoffing words uttered by Arnold Schwarzenegger’s character in the 2013 film Escape Plan. A believable line from ‘the Terminator’, who first made his name as a professional bodybuilder. However, today, Mr Schwarzenegger has rather a different message. “As I got older… I recognised the fact that you really don’t have to get your protein from meat – or from animals,” he explains during The Game Changers; a star-studded documentary recently released on Netflix (US:NFLX), which explores the benefits of ‘plant-based’ eating – focusing particularly on athletic prowess.
Whether or not you accept the findings and ideas presented by the film, it has evidently been a mind-changer for some. World-renowned cyclist Chris Froome announced that he had gone vegan after watching it. Perhaps more surprisingly, so has Roger Whiteside, chief executive of Greggs (GRG), known for its sausage rolls. Lots of families may enjoy a turkey-free Christmas dinner for the first time this year.
Mindful consumption
But Mr Whiteside’s dietary transition seems less strange given that Greggs introduced its first vegan sausage roll in January 2019 – and that this has since become a top-seller. Arguably, the very creation of The Game Changers is symptomatic of just how much attitudes towards food were already shifting – with consumers thinking more carefully about what they eat, where it comes from, and how sustainable it is.
The global meat market is estimated to be worth a whopping $1.4 trillion (£1.2 trillion). And analysts at Barclays note that growth rates here have been attractive in recent years, with animal-based protein consumption expected to rise further. But they note that this is becoming increasingly controversial given concerns around animal welfare, human health and the environment. To the latter point, a 2013 report from the Food and Agricultural Organization of the United Nations found that the livestock sector represents 14.5 per cent of human-induced greenhouse gas emissions, with the majority stemming from beef and cattle milk production.
One consequence of this ‘climate’ – alongside numerous and varied other motivations – is that plant-based goods are no longer deemed niche, nor confined to the specialist aisle of the supermarket. Rather, they are entering the mainstream – helped not only by a growing vegan population (those who eschew animal products) – numbering 600,000 in the UK, according to The Vegan Society – but also by a decent demographic of people who are simply opting to ingest a little less meat.
According to research house Kantar, around 92 per cent of plant-based meals in the UK are consumed by non-vegans. Meanwhile, 23 per cent of people in Great Britain now claim to be eating less red meat. Excluding vegetarians, this figure drops only slightly to 21 per cent.
As we shall explore, this could constitute a significant opportunity for companies in the food industry. And it hasn’t passed them by.
Alternative meat
The rise of meat substitutes has been central to the hype in recent months around plant-based food. Here, disruptive innovators have stepped up to the plate, attempting to win over meat-eating customers with plant-based protein products that aim to look, taste and cook like the real thing.
This arena has garnered an increasing amount of attention, thanks in large part to the initial public offering (IPO) of Beyond Meat (US:BYND) on the US’s Nasdaq exchange in May of this year. The group’s ‘Beyond Burger’ has been designed to mimic traditional ground beef – white marbling and all. In a letter within its IPO registration statement, founder and chief executive Ethan Brown wrote that its methods enable it to “bypass the animal, agriculture’s greatest bottleneck”. Beyond’s main rival is Impossible Foods – a private US entity, which has, like its peer, formed multiple restaurant partnerships, including a tie-up with fast-food chain Burger King to roll out the ‘Impossible Whopper’.
That said, the incumbent meat producers aren’t standing by as newer businesses enter the fray. Be it via internal investment, or M&A activity, some traditional food corporations are branching out into the meatless meat category – or into the broader field of vegan and vegetarian foods. Little wonder, perhaps; Barclays says that the ‘alternative meat’ space alone could be worth $140bn by 2029 (from less than $14bn as of May this year). The proposed merits of plant-based ‘meat’ have not gone unchallenged. And, moreover – as Barclays suggests in its study titled ‘I can’t believe it’s not meat’ – “taste and price will ultimately dictate whether or not alternative meat gains widespread acceptance”.
In any case, this writer couldn’t quite bring herself to try the ‘Merry Veganmas’ sandwich proffered by the office cafeteria – a ‘Tofurky’ treat sporting ‘chik’n style tofu pieces with veganaise’. There’s always next Christmas.
The issues at hand
Around the world, conversations about food security and climate change are growing louder. With questions arising about what we’ll do as the human population proliferates, Agne Rackauskaite, a senior research analyst for the sustainable food strategy at Impax Asset Management (IPX), notes that “one challenge is that we have to diversify where our proteins are going to come from”.
Impax (an IC buy tip) launched this specific strategy around seven years ago, “investing in companies across the whole food and agriculture value chain”, and specifically those that are “helping to mitigate some of the challenges created by food production”. The group recently reported full-year numbers to September, with revenues up 12 per cent to £73.7m and pre-tax profits up 29 per cent to £18.9m.
On the climate front, agriculture can require a lot of water – both for crops and the animals themselves. And while deforestation is another potential consequence of livestock production, there’s also the issue of cows – as ruminant creatures – producing methane emissions. Ms Rackauskaite adds that human health – though a very personal issue – has come into focus. One concern here is that some livestock are fed antibiotics, and while this is becoming more regulated, overuse could contribute to antimicrobial resistance.
Too good to be true?
That’s not to say that faux beef is a perfect alternative. It’s still very early days for such products, and – like any food category – it has complexities and potential challenges of its own. For one thing, there’s an argument that meatless burgers aren’t better for you – as Barclays puts it, “just as artificial doesn’t necessarily mean unhealthy, alternative meats don’t necessarily mean healthy”. Processed food is still processed food – and while their health plus points include zero cholesterol, ‘natural’ patties typically have higher levels of sodium than real meat.
Meanwhile, greater demand for some plant-based products could lead to greater usage of palm oil – a product that has been associated with cutting down trees and destroying wildlife habitats. Ostensibly, the key will be for businesses to be transparent about their contents, while making them as ethical as possible. But product refinery and development takes time.
That said, on the topic of food contents, Ms Rackauskaite notes that there’s an opportunity for ingredients businesses to help these companies reformulate their products and make them more consumer-friendly. She adds that there has also been talk of shortages in the plant-based supply chain, in terms of the technology used to make products, and in ingredients such as the oft-used yellow pea, the price of which has been rising.
Regulation
For Barclays, despite big opportunities, “we see regulation as the main risk, as inconvenient labelling or the restriction of the term ‘meat’ in alternative meat products could deter this sector from growing at its full potential”. Time will tell how rules play out in different geographies and regions. It is easy to understand why other organisations, regulators and, indeed, consumers might not welcome the idea of non-meat items being labelled similarly – or sold alongside – actual meat products.
Beyond Meat
In any case, investors appear to be treading carefully around Beyond Meat – suggesting that sizzling excitement about the stock has since cooled. True, the shares surged by 163 per cent to $65.75 on their first day of trading, and reached a peak of $234 in July. But they have since tailed away, and now change hands for just $76 (see chart above). Their fall was, ostensibly, exacerbated by the lead-up to – and subsequent occurrence of – IPO shares becoming unlocked at the end of October, enabling holders to sell.
Investors may also be growing wary of the competition Beyond faces – and, perhaps, how much money it needs to spend to plough on. While the group reported revenues of $87.9m for 2018 – up by 170 per cent from 2017 – it reported pre-tax losses of $30m. Manufacturing costs remain high, and selling and marketing expenses are expected to increase, as it seeks “to achieve greater brand awareness, attract new customers and increase market penetration”. Still, on 28 October, Beyond reported third-quarter net income of $4.1m compared with a net loss of $9.3m. Over the nine months to September, net losses came in at $12m.
Despite lowering its price target, and sales forecasts for 2025 and beyond, JP Morgan still remains confident about the group’s “near- and medium-term potential”.
Real meat producers
One might venture that longstanding food producers, with extensive track records, are better resourced – and perhaps even better-placed – to capitalise on new market opportunities. Tyson Foods (US:TSN) is just one such group that has ventured into the plant-based sphere. Indeed, Tyson was an investor in Beyond Meat – selling its 6.5 per cent stake before the latter’s IPO. But the story doesn’t end there. In June, Tyson became “the largest US meat producer to enter the growing alternative protein segment with its own products” – unveiling its first plant-based and “blended” foods.
Here in the UK, in January 2019, IC buy tip Hilton Foods (HFG) took a 50 per cent shareholding in Dalco Food BV – a leading vegetarian product manufacturer based in the Netherlands. The group commented that this enabled it “to diversify into a further protein and significantly expand into the fast-growing vegetarian and vegan market, with listings now secured with a number of our retail customers”.
The food packing business also acquired HFR Food Solutions, a sous vide manufacturer based in the West Midlands, in February. It said that this allows it “to enter the fast-growing sous vide market and leverage its expertise in procurement and manufacturing of meat products in a new segment with major retailers and food service customer”. It also “diversifies the proteins supplied by Hilton in the UK as pork and poultry represent a significant proportion of HFR’s output”.
Elsewhere, Cranswick (CWK) bolstered the existing non-meat element of its continental products division with its acquisition of Katsouris Brothers – a processor and supplier of continental and Mediterranean foods – in July.
On the meat front, Cranswick specialises in pork and poultry. Finance director Mark Bottomley told us that “we are very much focused on being an industry leading meat processor and meat producer. We are focused on doing that ethically, sustainably and with the highest levels of animal welfare”. He added that the group is the only meat processor globally to sit in the tier one ranking of the Business Benchmark on Farm Animal Welfare.
In terms of non-meat goods, Cranswick would prefer to focus on plant-based products as opposed to meat substitutes – it’ll keep an eye on the latter, but it constitutes “such a small part of the market at this point”, and “there’s a lot to play out” here.
African Swine Fever: opportunity in China?
In its half-year results to September, Cranswick noted that the outbreak of African Swine Fever (ASF) in its Far Eastern export markets had created an opportunity to lift sales here “on commercially favourable terms”. The disease has dramatically reduced the size of China’s pig herd, leading to higher meat prices overall and greater demand for imports.
But could ASF – and any other scenarios where regions endure livestock shortages – also spell promise for plant-based meats? In November, Seth Goldman, executive chairman of Beyond Meat, told Reuters that the group is aiming to start production in Asia before the end of 2020. Beyond Meat and Impossible Foods are both said to be trying to expand into China. However, there are already existing plant-based companies in the country, and the nation has a history of incorporating vegetable proteins, including tofu, into its dishes.
This takes us back to a key point. Investors should bear in mind that plant-based meats still comprise a nascent area, and the vast majority of people continue to eat animal meat. In China, it seems fair to say that pork will go on as a dietary staple; consumer tastes don’t change overnight. Moreover, it takes time to manufacture and tailor plant-based products for different geographies, cultures and customer bases.
For now, plant-based goods – and their sub-category of alternative meats – constitute an emerging field (no pun intended) worth monitoring. Food and drink products are in constant development, supported by new and changing technologies. Still, we’re equally watchful of changing, improving and more sustainable practices in livestock agriculture.
