Are plant-based protein brands a fad, or a consolidation opportunity that will pay off for long-term investors?
The emerging category has displayed incredible, albeit choppy, growth in dealmaking following its first big investments in 2014, according to Dealogic data. Capital-raising and M&A transactions involving North American targets reached a peak of 28 transactions worth USD 2.96bn in 2020 and 37 deals totaling USD 2.5bn in 2021—all before a sharp drop last year when just 15 deals worth USD 312.8m were struck.
The past 10 years in deal-making, however, show a wild yet budding industry that is on a path toward market maturity. Over the next 10 years, Bloomberg Intelligence predicts that faux meat and dairy products could be worth more than USD 162bn and comprise 7.7% of the global protein market. They currently comprise 1.4%, estimates The Plant Based Foods Association.
Staying power
A major endorsement for alternative protein brands came from Kellogg [NYSE:K] on 9 February. The food giant decided to retain (and not sell) its plant-based anchor MorningStar Farms, under strategic reviewsince June 2022. It reasoned the business “offers strong long-term growth prospects." That comes less than a year after CEO Steve Cahillane said there had been an “irrational exuberance” in meat alternatives.
Indeed, record-high valuations in 2019-2021 never really accounted for the millions of dollars market leaders burned each month in R&D and expansion. Today, with valuations fallen off a cliff, category leaders like Beyond Meat [NYSE:BYND] and Oatly [NASDAQ:OTLY] trade roughly 90% below two-year peaks.
But faux meat and dairy products are no passing fad. Long-term growth is being pushed by equally long-term social factors, such as environmental and animal welfare concerns, food insecurity for a growing population, and younger consumers eating less red meat. The desire for alternative protein sources gives the plant-based category staying power.
Growing pains
Jared Hansen, CEO and co-founder of seed-stage startup Thrilling Foods, maker of vegan Bakon Strips, says the hype-and-fall trajectory of alt protein brands mimics the over-hyped valuations of software startups. As market maturity nears, a period of sustainable adoption follows, he adds.
Today's valuations may better reflect companies' financial positions and R&D potential, rather than media hype, he believes.
Additionally, category leaders face market share loss to hundreds of smaller startup brands that have emerged over the past five years—backed by investors attracted to growth and the food industry's generally low barrier-to-entry.
But with high cash burn, a downturn in valuations, and a slowed investment market, many smaller players are facing financial pressure. Very Good Food Company [CSE:VERY] went into receivership last month. Laird Superfood [NYSEAMERICAN: LSF] closed its factory and outsourced production late last year.
Brand equity
Meanwhile, market leaders such as Beyond Meat and Oatly, though unprofitable, still boast valuable name recognition, market share and scale.
Private equity players, such as KKR, Carlyle Group, 3G Capital and Advent International, could find these assets an interesting take-private opportunity in the environmental, social and governance (ESG) space.
These brands could also provide a strong vegan foothold for any food groups with healthy balance sheets—if they can mitigate their monthly burn rates.
“They are very attractive targets for a sponsor given their valuations are down,” says Euan Rellie, managing partner with BDA Partners. “But the natural buy is a white knight global food brand that could make more from the brand value.”
One acquisitive player is Switzerland-based Nestle [SWX:NESN], which bought vegan foods manufacturer Sweet Earth in 2017. The adoption of plant-based foods is growing faster in Europe than in the US.
Other strategics looking to capitalize on long-term growth in alternative proteins could include Cargill, Archer-Daniel-Midlands [NYSE:ADM], Brazil’s JBS [BVMF:JBSS3], Germany’s JAB Holdings, and St. Louis, Missouri-based agribusiness Bunge [NYSE:BG]. Tyson Foods [NYSE:TSN]—a former Beyond Meat investor—is growing in plant-based via its Raised & Rooted brand.
Investors have some (vegan) food for thought.
