Plant-based meat – good eating but tougher investment
A soy-based marble steak fillet may make an appealing meal. It could also help reduce global greenhouse gases. But with a price of around $100 a kilo, it is an expensive experience for most people, highlighting one of the key issues with investment in this market.
For alternative meat products to achieve widespread adoption by consumers, the price must come down and ultimately be close to parity or below traditionally produced meat products. However should that happen, it is expected demand would pick up significantly.
Plant based alternatives to meat have been around a long time and often feature in discussions about climate change as production of beef, in particular, generates substantial amounts of greenhouse gas emissions as well as contributing to other environmental issues such as pollution and land degradation.
However it is not environmental concerns that are the key drivers of today’s growing interest in the alternative meat products. In this market it is more about consumer behaviour.
Total meat consumption in most advanced economies is relatively stable over time and related to average incomes, but there is a degree of substitution as prices fluctuate. For example, as beef gets more expensive, people will shift to other things like pork and chicken. As alternative meat products get cheaper, they are likely to also benefit from this switching.
Recent demand growth has, however, been driven by a greater focus on the potential health benefits of switching to plant-based products and away from meat, as well as curiosity about a new product range that has begun appearing in shops and restaurants not to mention in the financial press. In the background there is also a growing trend to not eat meat at all.
This has led us to expect that demand for plant-based meat products will keep growing, but they are unlikely to take a large share of the overall market unless and until the price comes down for high quality, tasty, nutritious options.
Market growth steady
In the medium term, we expect plant-based meat products will account for around 10% of the overall market and for the market to continuing growing in line with its historical trend of around 15-20% per annum.
We did see a sudden pickup in demand in 2020 which was driven in part by the Covid outbreak and the demand for frozen foods, and in part by curiosity about all the new products appearing. However, in 2021 these growth rates were not sustained. We think the adoption of plant-based meat products will see steady growth consistent with its trend in recent years.
However there has yet to be any major government regulation affecting traditional meat production by, for example, mandating lower greenhouse gas emissions or imposing penalties on less environmentally sustainable agricultural practices and products. If introduced, these would be likely to increase meat prices and accelerate a shift in consumer demand.
We are seeing a lot of investment from existing players in the food industry as well as the new entrants to expand capacity, which is likely to help bring prices down.
There is also a huge amount of competition in the space and incumbents in the fast-moving consumer goods (FMCG) sector and the traditional meat producers are fighting to protect their shelf space and market share from a multitude of new entrants.
This has led our investment thinking and caused us to be cautious about the prospects for the profitability of some of the companies in this field.
We have considered Los Angeles–based producer of plant-based meat substitutes Beyond Meat (NASDAQ:BYND), which is a prominent name in this space.
Whilst the IPO was attractively priced the stock has traded well above its offer price since then and we have been increasingly cautious about the prospects for Beyond and have expected it to disappoint the market given the lofty expectations for its sales growth over the coming years.
We do have a position in US listed organic foods producer Hain Celestial (NASDAQ:HAIN). Plant-based l meat alternative products make up around 15 percent of its business today but are growing rapidly and the stock trades on a far more reasonable valuation providing attractive upside if this growth can be maintained.
An area of particular interest is the companies that provide the inputs into making alternative meat products. We have invested in US listed International Flavours & Fragrances Inc, a large specialty ingredients manufacturer. It makes products that provide solutions for texture and flavour that help transform soy and pea protein into products that look, feel and taste like meat and should benefit from the ongoing growth in the market without being exposed to the same competitive and pricing pressures.
By Tom King