Meating Demand – The lean, green money-making machine

Meating Demand – The lean, green money-making machine
Global meat market revenues are expected to almost double over the next 20 years; however, its growth looks set to be driven by the plant- and cell-based meat subsectors. Plant-based products should dominate the meat alternatives space over the next five years, where innovation is creating a credible consumer proposition. Products can now mimic the sensory profile of conventional meat, where tastes and textures offer a meat-like experience. Kearney estimates that revenue for the global plant-based meat market is projected to grow from US$46bn to US$120bn between 2018 and 2025, representing a 15% CAGR. Longer-term growth projections vary greatly, with revenue estimates for the global market in 2030 ranging from $140bn (Barclays) to $252bn (Kearney). The number of companies entering the market is proliferating, including a number of large multinationals that can support significant R&D investment. That said, the plant-based meat market is still in its infancy and faces several headwinds, including the threat of competition and regulatory scrutiny.
Consuming a wholly plant-based diet is not a new concept, nor are the links between animal protein consumption and its impact on the environment, animal welfare and human health. However, the popularity of plant-based foods has accelerated recently, with 29% sales growth for the US plant-based meat market between 2017 and 2019, outperforming the overall US retail food market growth of 4% (Good Food Institute). Initiatives such as Veganuary and the emergence of flexitarianism (to reduce overall meat intake) have encouraged consumers to transition towards plant-based products. Pure-play Beyond Meat is a key innovator in the plant-based meat industry. Refinitiv consensus forecasts anticipate its sales to grow from US$298m in 2019 to US$480m in 2020 (+61%) and to US$1.5bn by 2024 (+38.5% CAGR). Additionally, Greggs’ addition of its vegan sausage roll contributed to outstanding like-for-like sales growth of 9.6% in the first seven weeks of FY19.
Beyond Meat’s debut on the Nasdaq stock market in 2019 represented the first public investment opportunity in plant-based meat; however, with demand rising significantly over the last few years, so too has the number of companies entering the market. Nestlé, Tyson and Tesco have all invested heavily in their own plant-based products and have leveraged their established market positions to compete with the likes of Beyond Meat. Restaurants provide another route for investors, with examples including Burger King (a Restaurant Brand’s company), which uses Beyond Meat in its plant-based range, (which has come under criticism as the plant-based patties are cooked on the same grill as conventional patties) or Greggs, which manufactures its own vegan range (which has come under criticism as the plant-based patties are cooked on the same grill as conventional patties). Alternatively, Science in Sport has a plant-based range of sports supplements, providing an alternative to traditional supplements such as whey protein.
Company mentioned | Ticket | Market Cap (m) | Price ($) |
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Nestle SA | NESN.S | 338,515 | 117.9 |
Merck & Co Inc | MRK | 201,909 | 79.8 |
Mcdonald's Corp | MCD | 170,184 | 228.7 |
Unilever PLC | ULVR.L | 159,723 | 61.2 |
Starbucks Corp | SBUX.O | 106,145 | 90.8 |
Danone SA | DANO.PA | 41,475 | 60.6 |
Yum! Brands Inc | YUM | 30,526 | 101.3 |
Tesco PLC | TSCO.L | 27,428 | 2.8 |
Hormel Foods Corp | HRL | 26,770 | 49.6 |
Restaurant Brands International Inc | QSR.TO | 26,642 | 56.8 |
Tyson Foods Inc | TSN | 21,874 | 60.1 |
Beyond Meat Inc | BYND.O | 10,724 | 171.7 |
J Sainsbury PLC | SBRY.L | 60,71 | 2.7 |
Hain Celestial Group Inc | HAIN.O | 3,543 | 35.1 |
Cranswick PLC | CWK.L | 2,322 | 44 |
Domino's Pizza Group PLC | DOM.L | 1,952 | 4.1 |
Greggs PLC | GRG.L | 1,809 | 17.9 |
Hilton Food Group PLC | HFG.L | 1,286 | 15.7 |
Hotel Chocolat Group PLC | HOTC.L | 616 | 4.9 |
Very Good Food Company Inc | VERY.CD | 165 | 1.9 |
Burcon NutraScience Corp | BU.TO | 158 | 1.6 |
Modern Meat Inc | MEAT.CD | 68 | 2.4 |
Science in Sport PLC | SISS.L | 57 | 0.4 |
Enervit SpA | ENVT.MI | 57 | 3.2 |
Source: Refintiv, Edison Investment Research
Kearney forecasts (Exhibit 1) that the global meat market is projected to grow from c US$1tn in 2018 to US$1.8tn by 2040, which includes conventional meat, novel vegan meat replacement (plant-based meat) and cultured meat. Cultured meat is created from conventional meat by taking cells from an animal and then exponentially growing them in a bioreactor, which involves no animal slaughter and is far more efficient than traditional livestock farming.
There is a developing awareness of the increasing unsustainability of conventional meat as populations grow, providing significant scope for alternatives. Plant-based meat is the only commercially available alternative and is forecast to grow significantly over the next 20 years as conventional meat sales decline. Kearney forecasts that novel vegan meat replacements will have an 18% share of the global meat market by 2030 (US$252bn), up from c 4% currently (US$46bn). That said, 2030 revenue estimates vary, with UBS and Barclays expecting market sales to reach US$85bn (c 6%) and US$140bn (c 10%) respectively.
Exhibit 1: Growth of the total global meat market by type
We see multiple and varied routes to investing in plant-based protein markets. This includes producers, ranging from those with a focused portfolio to companies with broader portfolios that include plant-based alternatives as part of the mix. Secondary to producers, investors can also gain exposure via companies that serve and distribute products containing these alternatives; for example, restaurants, cafés and shops that provide food services and prepared products. More tangentially, investment exposure can be accessed via food packaging and nutritional and health supplements. In Exhibit 3 we present valuations for a range of companies, split into these various categories.
In Exhibit 2 we show the one-year performance of pure-play plant-based meat producers. Three of these have raised funds via IPO within the last two years. Beyond Meat’s 2019 IPO (which raised US$240m) was the first in the sector, followed by the Very Good Food Company (listed 16 June 2020, raised C$4m) and Modern Meat (listed 1 July 2020, raised C$2.5m). Burcon NutraScience, an R&D company focused on plant protein extraction and purification, also offers a pure-play investment opportunity. Some of the key points for this segment are:
Relative to companies focusing on plant-based proteins, other food producers are typically larger, with more diversified portfolios and stronger balance sheets. They offer lower risk but potentially less return if sales in the plant-based market reach the top end of the growth projections detailed in Exhibit 1. Some of the key points for these companies are:
Supermarkets and companies focusing on food packaging and sports supplements have the lowest forward earnings multiples; supermarkets also offer the highest yields, as can be seen in Exhibit 4.
Name | Description | Share price (ccy) | Quoted currency | Market cap (ccym) | Market cap ($m) | |
---|---|---|---|---|---|---|
BYND.O | Beyond Meat | Leading plant-based meat producer | 165 | USD | 10275 | 10275 |
BU.TO | Burcon NS | Plant protein extraction company | 2 | CAD | 150 | 199 |
VERY.CD | Very Good Food | Emerging plant-based food tech | 2 | CAD | 157 | 208 |
MEAT.CD | Modern Meat | Develops plant-based meat | 3 | CAD | 71 | 93 |
We commented on the rapidly accelerating growth in the adoption of plant-based diets above. These include the most significant (and perhaps the easiest) one in the form of flexitarianism (focusing on a plant-based diet with the elimination of processed foods and low or occasional meat consumption). Veganism is increasingly being adopted, although rates of veganism are still low globally. That said, according to the Vegan Society, nearly half the UK is either flexitarian, vegetarian or vegan, providing significant scope for the entry of innovative plant-based products. We identify that ethics, health and climate change mitigation are the main consumer demand drivers, with plant-based products having several advantages versus animal meat. Exhibits 5 to 10 highlight the significant rise in the popularity of veganism since 2017, particularly among 18–34-year olds.
Kitchen Stories’ 2019 survey on food consumption outlines trends in leading world markets (China, the US, the UK and Germany), where the percentage of vegans is still small, ranging from 2% (China) to 7% (Germany). Additionally, when asked what trend they found most interesting, the majority of consumers chose high protein (c 34%) and low carbohydrate diets (c 25%) over the vegan diet, which ranged between 12.4% (China) and 17.5% (Germany). However, the number of innovative plant-based options that allow consumers to eat both a plant-based and high protein diet is increasing, exemplified by plant-based meat, which has a nutritional profile akin to animal meat.
In our view, a completely plant-based diet will never be dominant, but positively for the plant-based market there is a rising trend in new approaches such as flexitarianism, as mentioned above. Below are a few key points from a YouGov study on consumption trends in the UK in 2018:
However, according to Kitchen Stories, almost 15% of its UK polled consumers claimed to be vegetarian as of 2019, significantly higher than the 3% detailed in the YouGov study. Subsequently, this would mean almost 50% of the UK population follows a diet that requires plant-based protein.
Graphic videos and information displaying the links between animal welfare and farming have never been more accessible and we believe it is a principal demand driver for the plant-based market. A study published by the Vegan Trade Journal supports this, demonstrating that in July 2018, 51% of polled UK vegan consumers stated they were vegan for ethical reasons. The World Trade Organization’s free trade legislation is perceived in some instances to be a barrier to better animal welfare; governments with trade bans on imports from countries with crueller farming standards often carry complex terms and may not always be upheld. Consequently, the level of animal welfare is capped when it becomes too costly for domestic farms to compete.
Currently, animal welfare in the UK is among the best globally, with it being one of four countries to receive the highest grade in the Animal Protection Index and the fifth lowest user of on-farm antibiotics across 31 European countries; welfare is also supported by Red Tractor standards. That said, there has been no specific policy on animal welfare in US-UK trade talks, which could see the return of chlorinated chicken and hormone-treated beef imports post Brexit. These headwinds affecting animal welfare could exponentially increase the number of people wanting to try alternative plant-based proteins.
A plant-based diet is widely propagated as a healthier diet versus one with a significant intake of meat, particularly red meat. Indeed, there are a number of studies where life-threatening illnesses, such as cardiovascular and hypertension (high blood pressure), have been diminished through a decline in meat intake. In 2019, the Journal of the American Heart Association showed that in a study of more than 12,000 people those who ate mostly plant-based foods were 32% less likely to die from heart disease. It also highlighted the potential for a plant-based diet to promote weight loss and reduce body fat without restricting calories. So, given the myriad of diet options available, the idea of cutting out meat to improve health is one of the simplest to understand, making it a key demand driver of the plant-based diet.
We believe consumers will choose diets based on simple headline figures without understanding all the relevant variables, primarily due to the complex and ever-changing nature of nutrition research. A common example is limiting red meat intake and replacing it with more plant-based options in the hope of reducing the risk of developing cancer. A study by the World Cancer Research Fund did conclude there was a 17% increased risk of colon cancer from eating 100g of red meat per day; however, this is insignificant when compared to the 1,500–3,000% increased risk of getting lung cancer from smoking. The fact that nutritional advice constantly evolves is also important, as illustrated by the Cochrane Institute, which stated in August 2020 there was no link between saturated fat and the risk of dying of heart disease, contradicting its 2015 report, which showed there was a mortality risk.
It seems that an individual’s experience rather than research will dictate demand and this may change over time. The health impacts of switching to a plant-based diet may take years to definitively prove or disprove. For example, vitamin B12 deficiency, which is common among vegans, takes years to develop and can cause extreme fatigue and immunodeficiency. Conversely, it is not that prevalent among meat eaters as it is one of the main nutrients found in red meat. Therefore, health is a strong short-term demand driver, but its impact may vary over time.
Nutrition | Environmental cost in terms of water use |
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1 pound of beef = 90–100 grams protein | 15 gallons of water per gram protein |
1 gallon of milk = 128 grams of protein | 15 gallons of water per gram protein |
1 pound of tofu = 45–55 grams of protein | 6 gallons of water per gram protein |
1 pound of oats = 75 grams of protein | 3.8 gallons of water per gram protein |
Source: UCLA, Edison Investment Research
Climate change awareness is growing rapidly; in 2020, 76% of UK residents were either very or fairly concerned about climate change (Department for Business, Energy and Industrial Strategy) and investments in clean energy globally have grown by a 15% CAGR over the last 15 years to $302bn in 2019 (2004: US$36.8bn) (Bloomberg). Mitigating climate change is a key reason why consumers choose a plant-based diet; in the UK 32% of respondents to a 2020 government poll said they chose to avoid or eat less meat to help limit the effects of climate change, up from 20% in 2019. Comparatively, in the same study only 26% of respondents walk, cycle, or use public transport instead of using a car, although this is up from 22% in 2019.
The substantial land and water needed for both meat and crop feed production are among the contributing factors towards its impact on the environment. Meat and dairy currently occupy 77% of the world’s agricultural landmass but only contribute 17% of the world’s calorie supply (Our World In Data); this disparity will potentially widen as the global population continues to grow. Further, Exhibit 11 illustrates that animal meat, especially beef, can require over 10x more water than plant-based foods, such as tofu and oats.
Noting the positive link between the environment and plant-based foods is not only key for determining demand drivers, but also for establishing why large conglomerates seek to enter the market. Starbucks, for example, is looking to increase its plant-based menu options as part of the environmental sustainability commitment it announced in January 2020.
However, there are negative environmental factors associated with plant-based foods, mainly caused by the limited number of protein options available. Soy, for example, is one of the principal proteins and its production is one of the leading causes of deforestation. In July 2020, the BBC highlighted that 65% of the world’s soya originates from countries with the highest deforestation rates, with the UK’s annual demand for soy between 2016 and 2018 requiring an area of land similar to the size of Wales (data from WWF and RSPB). That said, most of the soy produced in these regions is used to feed livestock, so switching to a plant-based diet may help reduce overall soy production and subsequently help mitigate associated environmental issues.
Plant-based foods face limited competition from other commercial products that can act as sustainable substitutes to animal meat. That said, cell-based meat is becoming a prominent alternative and has the potential to significantly disrupt the market due to its ability to create animal meat without the environmental impact. The cell-based meat industry is still nascent, where global investments in 2018 totalled US$50m, equivalent to only 6% of the amount invested in plant-based food; however, as cell-based meat becomes revenue generating there will be scope for greater investment (Good Food Institute). This could be as early as 2025, which is when cell-based meat is expected to be produced on an industrial scale and at a price equal to conventional meat.
Crucially, large-cap public meat producers are among those to have already invested, with names including Tyson, Cargill and Merck. Cargill, for example, has chosen cell-based meat over plant-based by electing to invest in Aleph Farms, a cultured meat company focused on growing complex meat varieties such as steak, with some products anticipated to launch in the next three to five years. KFC, a YUM! Brands company, is another important example, where management signed an agreement with Mosa Meat in Q220 to receive its lab-grown chicken once it is commercially available.
The severe impact of COVID-19 on global employment places emphasis on the price of food, where consumers will purchase cheaper alternatives to save more while earning less. Looking at the last 15 years in the UK, the household savings ratio is at a high of 25%, while disposable income has seen the greatest year-on-year fall at 5.6% over the period; both of these metrics are not expected to normalise until mid-2021 (Oxford Economics).
Exhibit 12: Forecast UK savings versus disposable income
There are many global examples where livestock farming is heavily subsidised, helping meat products maintain lower prices than the plant-based alternatives, where the onerous costs of both ingredients and innovation are placed on companies. In the EU, direct payments for the animal farming sector amount to €28–32bn pa, c 18–20% of its total budget. The ability to sell animal meat at low prices potentially inhibits the long-term growth trajectory of plant-based alternatives, eclipsing the importance of ethics, the environment or health for the consumer. Burger King’s Impossible Whopper, for example, costs $1 more than the Whopper and average daily sales per store in Q419 fell to 28 from 32 when it was first introduced in Q319. As illustrated by Exhibit 13, these disparities in pricing are typical across a range of industries.
However, the cost advantage for the meat industry may be short lived, highlighted by the UK announcing it will be breaking from EU farm subsidies following Brexit, where the money will instead be used to benefit the climate, ecosystems and the public. Additionally, a report by environmental research group CE Delft discusses the importance of introducing a ‘sustainability charge’ on meat in the EU to help cover its environmental damage, where the levy would increase the price of a steak by c 25%. Comparatively, the Canadian government announced in June 2020 that it would be providing C$100m in financing for Merit Functional Foods, a JV of Burcon NutraScience that produces plant-based proteins. Further government support initiatives for plant-based producers and rising prices of meat should provide a key tailwind for the plant-based industry, securing long-term growth and diminishing the idea of it being a passing fad.
Company | Meat-based product | Plant-based alternative |
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Burger King | Whopper $4.29 | Impossible Whopper $5.49 |
Ikea | Meat balls 500g $4.50 | Plant balls $5.99 |
Greggs | Sausage roll £1 | Vegan sausage roll £1 |
Steak bake £1.55 | Vegan steak bake £1.55 | |
Hotel Chocolat | Milk chocolate batons £7.00 | Nut milk chocolate batons £7.00 |
Tesco | Southern fried breaded chicken mini fillets £8.20/kg | Plant Chef southern fried fillets £10/kg |
Thin and crispy cheese feast pizza £0.63/100g | Plant Chef margherita pizza £0.93/100g | |
Science in Sport | PROTEIN20 £2.50 | PLANT20 Bar £2.50 |
Source: Edison Investment Research, company websites
Producers of plant-based meat aiming to disrupt the industry face a number of regulatory headwinds, which will only increase as the subsector grows. Soy, a primary protein used in numerous plant-based meats, is a key example. Companies such as Impossible Foods do not use genetically modified organisms (GMO) soy grown in the US due to the severe environmental impact of expanding soybean plantations in Brazil, the world’s largest soy producer. Subsequently, expansion into regions with tighter GMO regulation is limited and is the reason why Impossible Foods’ products have not been approved for sale in the EU. Brexit creates an additional unknown as the UK’s stance on GMO imports once it leaves the EU is still undetermined. Further, ingredients are not the only factor exposed to headwinds; marketing, particularly labelling products as meat, is another area in the regulatory spotlight. Plant-based food companies in France, for example, face a $370,000 fine for using ‘meat’ or any related terms as it has been deemed misleading to customers. A YouGov study also showed this could be a potential problem in the UK, with only 47% of respondents agreeing that it would be acceptable to label plant-based products as meat.
As previously established, the rise in popularity of plant-based products is primarily driven by climate change mitigation, human health and animal welfare considerations. This demand needs to be met by product innovation, which is necessary to create substitutes that can compete with animal products in both taste and texture. That said, plant-based products’ persistent dependence on innovation forms an underlying headwind, as low-margin sales and high R&D expenses during the development stages typically can result in companies remaining loss-making for long periods of time. For example, Beyond Meat, which listed on Nasdaq in 2019 and has been operating since 2012, reported a net loss of US$10.2m in its Q220 results despite achieving record net revenues of US$113.3m (Q219: US$67.3m).
Subsequently, the difficulty in reaching profitability leaves companies exposed to the threat of acquisition; Exhibit 14 shows this has been an accelerating trend in recent years. Acquirers, including typically large and diversified names such as Unilever, Nestlé and Danone, have the economies of scale and the established market presence and balance sheets to grow these new products quickly and generate a profit, leading us to believe there is scope for significant consolidation in the plant-based food market. Additional benefits for acquirers include creating both diversity and ESG in their portfolios, expanding regional capabilities and providing a faster route to market.
Exhibit 14: M&A activity
July 2019 | Cranswick | Katsouris Brothers | Continental and Mediterranean foods business that broadens offering in a number of plant-based, non-meat categories |
March 2019 | Pfeifer & Langen | AMIDORI Food Company | Provides entry into plant-based protein market |
December 2018 | Unilever | The Vegetarian Butcher | Part of its strategy to expand its portfolio into plant-based foods |
October 2018 | Hilton Foods | Dalco Food | 50% JV providing exposure in the vegetarian market |
September 2018 | Nestlé | Terraferti | New investment bolsters Nestlé’s position in the plant-food based segment in the Americas |
July 2018 | KKR & Co | Upfield Foods | Private equity investment into Unilever’s plant-based spreads business |
July 2017 | Nestlé | Sweet Earth Foods | Provided exposure to North America |
June 2016 | Danone SA | WhiteWave Foods | Created DanoneWave plant-based business unit |
Source: Refintiv, Edison Investment Research
COVID-19’s impact on animal meat processing has been well publicised, benefitting alternatives, such as the plant-based meat market, where US sales grew 264% in the nine weeks ending 2 May (Nielsen). Livestock factories, in particular, are typically cold and damp, in some cases creating perfect environments for spreading the virus, exemplified by the US where there have been at least 34,000 positive cases in over 384 meat-packing plants as of 14 August (Midwest Center). In Germany, more than 1,500 slaughterhouse workers tested positive for COVID-19, leading to the quarantine of over 7,000 workers (Financial Times). The full impact of COVID-19 on supply shortages is becoming increasingly apparent; however, African Swine Flu typifies how disease can create supply shortages that lead to significant price increases. As indicated by the National Bureau of Statistics of China, total hog production in 2019 was 544m heads, 21.6% lower than 2018, leading to average price increases of 63.3% y-o-y. COVID-19 presents a similar scenario, where the Guardian reported that over 10m chickens and 10m pigs in the US were likely to be culled by the end of September due to COVID-19 related shutdowns. The article adds that most of the culling was done by water-based foam, a method that animal welfare groups called ‘inhumane’. A report by Mintel highlights the potential tailwinds for the plant-based market, stating that 25% of millennials in the UK now found veganism more appealing as a result of the pandemic.
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