Gauging the appetite for alternative protein

-- | 29/10/2020

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Lex Hall: It's the era of fake news but it's also the era of fake meat. Plant-based meat is an increasingly common site in supermarkets these days. Have you had it? Would you have it? And what's more, would you invest in it? Joining me to discuss that is Josh Gilbert. He's an analyst from eToro.

Josh, I read that 6 per cent of Americans are vegans currently. How big is the market for plant-based meat and what does the growth look like?

Josh Gilbert: Sure. I mean, Lex, where we are at the moment is, sort of, the plant-based meat sector is worth about 14 billion today. It's expected to grow massively. In the next 10 years, we're expecting that to grow to about 140 billion. So, there's a lot of growth potential there in that sector. We look at major Wall Street analysts who are really analyzing that. There's potentially a lot of growth there. The animal free industry could capture about 10 per cent of that 1.4 trillion global meat industry. So, we're really seeing that sort of animal plant-based or the protein-based, I should say, is going to be a really big hit over the next 10 years. And I think the vegan trend, if you like, is something that is going to continue to grow as well over the next few years.

Hall: We were talking about the film, the documentary film, Game Changers, for example, which is only one sort of influencing factor, if you like. What other factors do you think are causing this exponential growth that you're seeing?

Gilbert: I think the (indiscernible) a little bit more things like normalization as well. That's a really big part. I mean, particularly, everywhere you go now, you do tend to see an option on the menu. I actually have a friend who is gluten-free, for example, and we sometimes laugh and say that, actually, he can find more vegan options that he can actually gluten-free. So, it's becoming a real sort of lifestyle trend. Sports stars, like you say, Netflix was obviously a real winner over the pandemic period. People had a lot more time to actually think about what they were doing in their day-to-day lives. So, that can be one. People looked at studying their finances, getting their finance in orders, which was a really big part. We saw a lot of people do that. A lot of people obviously spent a lot of time watching Netflix documentaries where over that time they could have come across things like Game Changes. But then actually what you found as well is that a lot of people had the time to look into it and do that sort of research, whereas before, maybe people have found that they haven't had the time. So, that's really important is that they have taken into account that time to look into it.

Hall: What do you think has been the overall and changing effect of the pandemic on the alternative protein market?

Gilbert: I think obviously what we saw was – I think probably the most famous one here, particularly in Australia was obviously the shutdown of the factory in Melbourne in terms of the meat side of things. That obviously caused a big effect. Also, warehousing, production facilities, processing, a lot of that was closed down across the world over that sort of time. This has obviously given then the opportunity for imitation meat, plant-based meat products, the opportunity to sort of then move in. Particularly somebody like Beyond Meat, for example, have managed to capitalize on this very well. Obviously, they deliver a lot of food to restaurants across the world. They spent millions of dollars over the pandemic period to repackage and then move it into supermarkets whereas actually a lot of the packaging processing plants like meat packaging plants were closed down over that period. So, it really affected them. So, Beyond Meat over that time managed to then move into their own and really step in. So, we saw that from their revenue numbers over that period, which really increased over that time. In terms of net sales in Q2 for Beyond Meat, they were up 69 per cent. So, that's a nice increase in terms of the previous quarter. So, they really have seen the pandemic affect them positively if that makes sense.

Hall: Let's talk about that a little bit more in terms of the risks that potential investors should keep in mind. I suppose competition is one because we're seeing more and more names come along. And I noticed too that conventional meat producers are switching or can switch to protein manufacturing, a bit like, I suppose, looking at the automobile industry, makers of – conventional carmakers, internal combustion engine makers, can switch to making electric vehicles. Is that a fair comparison, do you think?

Gilbert: Yeah, I think one thing you have to remember is, if we're comparing it like apples-to-apples like the electric vehicle sector and then maybe the plant-based meat sector, the way you look at it, it's still a relatively small sector of the industry. Now, we talk about the food industry with that in it, it's still really, really small and then compare that to the EV sector and the car sector, yes, it's absolutely growing, but Tesla have been listed on the market for 10 years whereas Beyond Meat have only been around for a couple of years. So, that portion of the global food market is still small in that regards. There's also a name coming through now which is called Impossible Foods, again, another startup, really trying to test Beyond Meat. But again, it's a startup business. Beyond Meat have obviously done hugely well to get international brands onto their books, names like McDonald's, things like that. They've done really well. But we need to see more growth over a period of time. Particularly as well with Beyond Meat, their bottom line hasn't been great over the last few years. In terms of revenues have increased, but actually profits and things like that actually haven't probably been what investors would have liked. The last earnings report was quite disappointing for a lot of investors. We saw their share price fall down about 11 per cent. Obviously, they had to factor in a lot of price increases from the pandemic, but still it's affecting their bottom line. So. there's risks in that sense.

Hall: Looking at Beyond Meat and talking about R&D, I noticed that they – over the past four years, I think, their spending on R&D has gradually come down, but it's still – I think I read it's about 7 per cent of revenue on R&D, whereas packaged food companies spend about 1 per cent to 2 per cent. So, it's quite a big gap there I should think.

Gilbert: Yeah, absolutely. So, I mean, look, in the last earnings report, 2020 year-to-date, they've managed to bring that down to about 5.8 per cent so far. But obviously, as time goes on, we might see that sort of increase by the time the fiscal year comes back around. So, obviously, they are going to look to try and bring that down as much as possible. But having said that, it's a core of the company, and I think it's unlikely to change. That's the big selling point that – our R&D is so much higher than the next, because that's a really big point for, again, speaking to colleagues in the office who are on that sort of veganism side of things. For them, it's really important about what goes on behind the scenes. I think that is the most important thing. So, obviously, the difference with packaged foods as well is obviously that price point that you find. So, obviously, the R&D is much higher on something like Beyond Meat products. But if you compare that to maybe something like a standard packaged food company, they can obviously retail it for a lot less, but Beyond Meat may also retail it for a lot higher. But also, yes, as I said, compared to that revenue, there is obviously still quite a big difference there compared to what they're seeing.

Hall: Josh Gilbert from eToro, thank you for your insights. We will do a subsequent video where we talk about three top picks in particular. But thanks very much for your insights today.

Gilbert: Thank you. Thanks, Lex.

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