Beyond Meat May be Facing Mission Impossible

I wrote about Beyond Meat NASDAQ: BYND about two months ago. At the time, Beyond Meat stock was down about 20% from its high price of $201.88. Since then the stock has dropped further. As of this writing, BYND stock was trading at $148.33. When I wrote about Beyond Meat’s stock at that time, I saw reasons for optimism and reasons for caution. Today, while I think the stock has a good story, I think it may face an impossible task of living up to its current price.

Beyond Meat continues to execute their plan

Beyond Meat just scored a big opportunity with a test program for McDonald’s. For 12 weeks that started on September 30, BYND will be piloting the P.L.T. (plant, lettuce, tomato) burger at 28 locations across Southwestern Ontario. This will be McDonald’s first plant-based burger.

The selection of Ontario was a little surprising to investors who thought McDonald’s would look to test the P.L.T. in the United States. However, Beyond Meat already has partnerships in Canada with A&W (since 2018) and Tim Horton’s. The latter recently discontinued its plant-based options in all provinces except for Ontario and British Columbia.

Michaela Charette, head of consumer insights for McDonald’s said the Canadian market was a logical choice. Charette cited the strong food culture, acceptance of diverse flavors and demand in the market for plant-based foods.

The partnership with McDonald’s builds on previous partnerships the company has made. For example, Subway is testing a Beyond Meatball Marinara sub in select locations in the U.S. and Canada. The company also is partnering with Kentucky Fried Chicken where it is testing a Beyond Chicken Nugget offering in Atlanta. These partnerships demonstrate that the market for a plant-based alternative to traditional meat and poultry is real.

The market is getting crowded

One of the concerns for Beyond Meat is that they are not the only player in this field. And they are facing competition not only in restaurants but also in the retail space. For example, Impossible Foods has a partnership with Burger King to pilot the Impossible Whopper. According to reports from industry analysts, the Impossible Whopper is boosting sales and bringing in new customers.

But this is not where the story stops. As the Impossible Whopper has grown in popularity, Impossible Foods is also conducting a launch of their Impossible Burger product at industry leading grocery chains in select regions. An even larger threat to Beyond Meat is coming from the grocery chains themselves. As the idea of a plant-based burger has moved from a novelty to a “must-have” item, companies are developing their own house brand of plant-based burgers that will take shelf space away from the Beyond Meat product and also be sold at a lower price. Even Costco is entering the space with its own private label brand, the “Better than Beef Burger” that it will source from Don Lee Farms. This is a privately held food company that was one of Beyond Meat’s original contract manufacturers.

Nestle is also entering the field with its Sweet Earth brand. The Sweet Earth Awesome Burger and Sweet Earth Awesome Grounds will be available at retailers across the United States starting in October.

Competition will put pressure on margins

Back in July, I pointed out that analysts were projecting Beyond Meat to have a gross margin of 28% by the end of 2010 and up to 31% by the end of 2020. Longer-term outlooks were suggesting a gross margin of up to 35%. And there’s no doubt that there will be some operating efficiencies as BYND products roll out on a mass scale. However, if the company is forced to discount their product to compete with private label brands, this would put pressure on those margins. And this is coming in an environment where investors are still trying to find a fair valuation for a company that is not yet profitable and has no free cash flow.

Is the market pricing the stock for perfection?

The meat industry is projected to be worth $1.65 trillion in ten years. If 50% of the industry’s products could have a plant-based substitute, the market would be $825 billion. Assuming that 10% of that potential market became actual products, you’re looking at an $82.5 billion market. A company that controlled 10% of that market would have a potential revenue of $8.2 billion. Today, BYND has a market cap that sits just below $9 billion, and that’s down from over $12 billion in July. It seems that analysts may be starting to see the daunting task for Beyond Meat’s growth.