The vegan meat market may be at a critical juncture judging by the sale signs at The Very Good Food Co.
While Very Good Food’s reasons for a strategic review can be seen as unique to the startup, its decision to look for a buyer or partner could be a sign of things to come in a challenging operating environment driven by inflation, compounded by a slowdown. The growth of the vegetarian meat category.
For some operators, differentiation and financial leverage may be key to their survival in an industry filled with burgers, meatballs and veggie chops, whether it’s young companies or well-established food makers entering the category either through acquisitions or separate brands. Others have recognized the potential benefits – from a consumer standpoint – of code-breaking alternatives to chicken or bogus steak, bacon, and ready meals – and the recent launch of Impossible Foods in the US is a case in point.
However, it can be argued that the potential sale of very good food has exposed weaknesses in an equally arguable saturated market. Maple Leaf Foods, also based in Canada, cut its growth forecast, and Kellogg announced the possibility of ditching the US meatless brand MorningStar Farms.
Signs of slowing demand, particularly in the US, have dominated comments about this category recently. Like some of his peers, Nick Cooney, managing partner at US-based alternative protein investor Lever VC, argues that previous growth assumptions have been exaggerated, possibly exacerbated by the emergence, and varying degrees of success, of Beyond Meat and Impossible Foods.
“There have been a lot of companies launched in the last three or four years in the space and some of these companies have a mix of real opportunity, real value and real growth in the category,” says Kony. just food. “If you look at what happened in the early stages of the tech boom, or any category where there is a real opportunity, there will be buzz and things that fail. I think this sector is no different.
“There are definitely companies in this space that aren’t that great, the products aren’t that great, the branding and marketing aren’t that great. There is nothing really unique and special.”
Kony suggests that consolidation in this category is an obvious possibility, although he acknowledges that expectations vary across categories, brands and type of company.
Inflated evaluation of vegetarian meat
However, some companies have edged the curve, says Kony, sticking to the view that plant-based meats are growing steadily, and still are, despite a market correction during the pandemic and inflated assumptions.
They raised money, a large sum of money with great valuations due to public interest in the sector that would collapse and be sold. And it’s starting to happen in line with the continued growth in the sector, and the continued success of other companies that have created more real consumer value.
“It’s a question: Are you continuing to improve the quality of your products? Are you continuing to do well from a sales and marketing perspective? And so on.”
John Baumgartner, managing director of Japanese investment bank Mizuho Securities in the US, is a proponent of the slow-growth hypothesis, which is based largely on expectations of how often plant-based meats are consumed.
His ideas have been confirmed by recent conclusions from Maple Leaf, which is essentially a “real” meat product, as part of an ongoing plant-based review. Maple Leaf said that “the very high growth rates previously expected by many industry experts are unlikely to materialize given existing customer feedback, experience, purchase rates and household penetration,” amid plans to reduce business and “appropriate size” manufacturing.
Meanwhile, Very Good Food has been losing money since its inception in 2016 and faced other challenges with the departure of its founders, who have been associated with “money burning,” despite its launch in 2020 and multiple bouts of fundraising. The most recent was $6.5 million in June following a warning about future viability in May. Under the new management, the company announced in August that it plans to return to the market again in September.
“As markets go down, your valuation is flagged down and interest rates go up,” Baumgartner says on a general note not related to Canadian business. “For most of the past decade, your hurdle rate has been close to nothing. It was basically free cash. The ROI standards were very low. It was an ideal financing environment for an entrepreneur to get started. And we think that is changing.
“To the extent that you will have assets with a volatile or weak market for demand, and at the same time, you may be limited in terms of additional capital growth that you can get, I think it puts a lot of smaller startups in a very difficult position.”
Kony suggests that there are “one or two” other lean protein companies in a similar predicament as Very Good Food that raised cash in inflated valuations compared to sales and then burned for capital. “They are now in a troublesome position,” he says, adding that some privately owned companies are now “looking either to raise a significantly discounted value to the last round, or are looking to sell.”
Differentiation is the key
Potential buyers, if the company generates “meaningful” revenue in the region of 15-20 million [in general terms]They may include “larger or medium-sized” food companies or meat producers, Kony suggests.
“If the companies have lower revenue levels, I think we would probably look more at the private equity firms and the shops. And maybe some of the companies in the sector would be looking to acquire those kinds of companies.”
Baumgartner suspects that “upstream” companies will be more attractive on the buying side with improved capabilities and technologies, for example, those that can “make vegan steaks and not just ground meat products.”
“If there are assets in the market, there is value in the production capacity, especially if it has been brought online recently, with the latest technology and efficiency, there can be value in these assets,” he says.
“If you’re a larger company, or you’re a private equity or financial buyer, and you want to get into that market, you can do it more cost-effectively by buying some of those assets that are out there — companies that are out for review or the company is up for sale. The problem is. In that it’s not really a seller’s market just because the end market is very poor right now.”
However, Kony notes that growth rates in this category are misleading, standing for the view that for many years it has been “steady” in the 10-15% region, despite some optimistic observations.
He says growth jumped in 2019-20, largely due to beyond meat and impossible foods, followed by some distortions during the pandemic.
“I think that has given some people the wrong assumption that the sector is going to grow at 70% per annum over the next seven or eight years. We have been expecting a continuation of the same, maybe a little bit bigger in some years, a little bit less in others, but in the same kind of 10% to 15 %, sometimes 20%.
“If you plot the growth curve, not just over one year but over the past five years, and put a line through 2017, 2018 to 2022, it basically puts the last two years in line with ongoing trends of about 15% to 20%, just with an uneven jump Normal in 2021 and abnormal surface in 2022.”
Kony goes so far as to explain his technical analysis, assuming the market is in a post-Covid-19 correction phase.
“If you look at vegan meat sales and conventional meat sales 2020-21, you’ll see a huge jump in both conventional and non-vegetarian meats dramatically. If you look at vegan meat and conventional meat sales from 2021 to 2022, you’ll see zero growth in plant-based meat and negative growth in annual sales of conventional meat. In the U.S. Does this mean that consumers have an absolute interest in plant-based meat and are in fact less interested in conventional meat?
“Covid transformed things significantly in 2020-21, and then that shift rebounded in the other direction in 2021-22, both in terms of what consumers buy and where they buy, food service versus retail, for example.”
By surveying players in the plant-based meat market, Kony and Baumgartner sought to distinguish the likes of branded manufacturers such as Beyond Meat and Impossible Foods, and broader companies offering so-called secondary offerings, which were acquired through the acquisition.
Hain Celestial in the US with the Linda McCartney Group, UK-based Nomad Foods, Nestlé with Sweet Earth (US) and Garden Gourmet (Europe), Unilever’s The Vegetarian Butcher and Kellogg’s MorningStar Farms are examples of this the last one.
Baumgartner says branded manufacturers are unlikely to be interested in researching an outside brand or company because they are making efforts beyond building “equity” in their “master” lines. However, those with secondary offerings may be more inclined to promote what are still “startups” through acquisitions.
“The question will become: Do brands have enough recognition, do you invest enough in these brands or is innovation good enough over time to be able to scale these brands?” Baumgartner argues. “At this point, there could be options to either separate them, if the market improves, or make other acquisitions that are there to build on the IT and R&D side.”
Coney says MorningStar Farms may be a different kettle of fish as a brand that has been around for years and is number three in the United States. However, he says there is still plenty of interest in the vegan meat market, with deals struck at attractive multiples.
While Kellogg’s spin-offs could be an integral part of a group-wide business reorganization, the sale proposal could be a way to test the waters and potential appetite.
“Product quality hasn’t fundamentally changed over the past 10 to 15 years — they don’t have huge technological advantages or a strong R&D department to drive a lot of growth in the future,” he says. “They probably don’t just want to invest what it takes to put these things in place, but someone else might.”
Coney adds, “You’re probably thinking Kellogg, look, there’s a lot of interest in the market, a lot of people are seeing opportunity. If we’re thinking about selling in the next few years, now is the time to get the highest potential sales multiplier.”
As with a technological boom or any rapidly developing industry, there will be winners and losers in the vegetarian meat market. Kony says there are some private companies working on meat substitutes in the UK that may “run into problems” on the back of high ratings. And those in similar predicaments to MorningStar Farms “from the perspective of the biggest food player.”
“They’ve come up with extended product line extensions and things like that, but they haven’t significantly improved product quality in the last 10 years. The brand doesn’t particularly resonate, and I think it’s going to stagnate and slowly drop in sales as younger companies start with quality products. Better, more robust R&D and better marketing at dumping some of its sales and capitalizing on a significant portion of category growth,” he says.
Check out Just Food’s US analysis here: Is the US vegetarian meat market facing an inflection point or a short-term reversal?