The plant-based meat market may well be at a crucial juncture judging by the up-for-sale signs at Canada’s The Very Good Food Co.

While Very Good Food’s reasonings for a strategic review might be considered unique to the start-up, its decision to seek a buyer or partner could be a sign of things to come in what is a challenging, inflation-led operating environment, compounded by slowing category growth in plant-based meat.

For some operators, differentiation and financial clout may be key to their survival in an industry awash with plant-based burgers, meatballs and mince, whether it be young businesses or established food makers entering the category either through acquisition or spin-off brands. Others have recognised the potential benefits – from a consumer perspective – of cracking the chicken-alternatives code or faux steaks, bacon and ready meals – US-based Impossible Foods’ recent launch being a case in point.

However, the possible sale of Very Good Food has arguably exposed frailties in an equally arguable saturated market. Maple Leaf Foods, also in Canada, has pared back growth expectations and Kellogg has flagged the potential disposal of its figurehead US meat-free brand MorningStar Farms.

Signs of slowing demand, particularly in the US, have dominated commentaries around the category of late. Like some of his peers, Nick Cooney, a managing partner at US-based alternative-protein investor Lever VC, argues previous growth assumptions were overblown, exacerbated perhaps, inflated by the emergence, and the varying degrees of success, of Beyond Meat and Impossible Foods.

“There have been a lot of companies launch in the past three or four years in the space and some of those are companies with a mixture of real opportunity and real value, and real category growth,” Cooney tells Just Food. “If you look at what happened in the early stages of the tech-boom, or any category where there’s real opportunity, there’s going to be hype and stuff that fails. I think this sector is no different.

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“There are certainly companies in the space that aren’t that great, the products aren’t that great, the branding and marketing is not great. There’s nothing really unique and differentiated.”

Cooney suggests consolidation in the category is a distinct possibility, although he acknowledges prospects differ across categories, brands and company type.

Bloated plant-based meat valuations

Nevertheless, some enterprises have got ahead of the curve, Cooney says, holding the view that plant-based meat is, and has been, growing steadily, despite a market correction during the pandemic and notwithstanding bloated assumptions.

“They’ve raised money, a meaningful amount of money at significant valuations because of the general attention to the sector that are going to go bust and be sold. And it’s starting to happen in line with the continued growth in the sector, and continued success of other companies that have created more actual value to the consumer.

“It’s a matter of: are you continuing to improve the quality of the products? Are you continuing to do well from a sales and marketing perspective? And so forth.”

John Baumgartner, a US-based managing director at Japanese investment bank Mizuho Securities, is an advocate of the slowing growth hypothesis, largely based on the expectations of how frequently meat eaters and flexitarians will consume plant-based meat.

His thoughts are borne out by recent conclusions from Maple Leaf, which is mainly a ‘real’ meat producer, as part of an ongoing plant-based review. The “very high category growth rates previously predicted by many industry experts are unlikely to be achieved given current customer feedback, experience, buy rates and household penetration”, Maple Leaf said, amid plans to reduce the size of the business and “right-size” manufacturing.

Very Good Food, meanwhile, has been loss-making since it was set up in 2016 and has faced other challenges with the departure of its founders, who were linked with a “cash-burn”, despite going public in 2020 and multiple bouts of fundraising. The latest was US$6.5m in June following a future viability warning in May. Under new management, the company flagged in August it planned to turn to the markets again in September.

“With the markets going down, your valuation is being marked lower and you’ve got interest rates going up,” Baumgartner says in a general observation not pertaining to the Canadian business. “For much of the past decade, your hurdle rate was next to nothing. It was basically free money. The return-on-investment criteria were very low. It was a pretty ideal financing environment for an entrepreneur to start up. And we think that’s changing.

“To the extent that you’re going to have assets out there with a choppy or weakened market for demand and, at the same time, you may be limited in terms of incremental growth capital that you can get, I think it puts a lot of the smaller start-ups in a very difficult position.”

Cooney suggests there are “one or two” other companies in meat-free proteins in a similar predicament to Very Good Food that have raised cash at inflated valuations relative to sales and then burnt through the capital. “Now they’re in a troublesome situation,” he reflects, adding some privately-held companies are now “looking at either raising at a significantly discounted valuation to the last round, or be looking for a sale”.

Differentiation is key

Potential buyers, should a business be generating “meaningful” revenues in the region of 15 to 20 million [in general terms], might include “larger or mid-size” food companies or meat producers, Cooney suggests.

“If it’s companies with lower revenue levels, I think we’re probably more looking at private-equity firms and turnaround shops. And maybe some existing companies in the sector that could look to acquire those types of companies.”

Baumgartner suspects “upstream” companies would be more attractive on the buy side with enhanced capabilities and technologies, for example, those that can “make plant-based steaks and not just ground meat products”.

“If there’s assets on the market, there’s value in the production capacity, especially if it’s been put online recently, state-of-the-art technologies and efficiency, there can be value in those assets,” he says.

“If you’re a larger company, or you’re a private-equity or a financial buyer, and you want to enter this market, you can do it much more cost-effectively buying some of these assets that are out there – companies that have been put up for review, or the company is up for sale. The problem is that it’s not really a seller’s market just because the end market is so poor right now.”

Pandemic correction

Nonetheless, Cooney suggests growth rates in the category are deceptive, standing by the view they have been “steady” for many years in the region of 10-15%, despite some more bullish observations.

He says growth jumped in 2019-20, largely because of Beyond Meat and Impossible Foods, followed by some abnormalities during the pandemic.

“I think that gave some folks the incorrect assumption that the sector is going to grow at 70% per year for the next seven, eight years. We expected a continuation of the same, maybe slightly larger some years, slightly lower in others, but in that same kind of 10% to 15% range, occasionally 20%.

“If you plot the growth curve, not just over a one year but the last five years, and you put a line through 2017, 2018 to 2022, it basically puts the last two years right in line with the ongoing trends of roughly 15% to 20%, just with an abnormal jump up in 2021 and abnormal flatness in 2022.”

Cooney goes to some length to explain his technical analysis, with the assumption the market is wading through a correction phase after Covid-19.

“If you look at plant-based meat sales and conventional meat sales 2020-21, you see a huge jump in plant-based and atypically large jump in conventional meat. If you look at plant-based meat and conventional meat 2021 to 2022, you see zero growth in plant-based meat and negative growth in conventional meat year-over-year sales in the US. Does that mean consumers have flat interest in plant-based meat and they actually are less interested in conventional meat? No.

“Covid shifted things notably in 2020-21, and then that shift rebounded in the other direction in 2021-22, both in terms of what consumers are buying and where they were buying it, foodservice versus retail, for example.”

Brand evolution

Surveying the players in the plant-based meat market, Cooney and Baumgartner sought to differentiate between the likes of branded manufacturers such as Beyond Meat and Impossible Foods, and broader companies providing so-called secondary offerings, some acquired through acquisition.

Hain Celestial in the US with the Linda McCartney range, UK-headquartered Nomad Foods with Green Cuisine, Nestlé with Sweet Earth (US) and Garden Gourmet (Europe), Unilever’s The Vegetarian Butcher and Kellogg’s MorningStar Farms are examples of the latter.

The branded manufacturers are unlikely to be interested in seeking out a periphery brand or company because they are putting efforts behind building “equity” in their “flagship” lines, Baumgartner says. However, those with secondary offerings might be more inclined to strengthen what are still “fledgling businesses” through acquisitions.

“The question is going to become: do the brands have enough recognition, do they invest enough in these brands or is the innovation good enough over time to be able to scale these brands up?” Baumgartner contends. “At that point, there could be options to either spin them off, if the market gets better, or do other acquisitions that are out there to build on the IT and R&D side.”

Cooney says MorningStar Farms might be a different kettle of fish as a brand that has been around for years and ranks in the top three in the US. However, he says there’s still a lot of interest in the plant-based meat market, with deals struck at attractive multiples.

While Kellogg’s spin-off could simply be part and parcel of the group-wide business reorganisation, the suggestion of a sale might be a way of testing the waters and potential appetite.

“The product quality has been basically unchanged for the past ten to 15 years – they don’t have significant technology advantages or a significantly robust R&D department to drive a lot of future growth,” he says. “Maybe they just don’t want to invest what it would take to have those things in place, but somebody else might.”

Cooney adds: “Maybe Kellogg is thinking, look, there’s a lot of interest in the market, there’s a lot of folks who see the opportunity. If we were thinking about selling in the next few years, now’s the time when we can get the highest likely multiple on sales.”

As with the tech boom or any fast-evolving industry, there will be winners and losers in the plant-based meat market. Cooney says there are some privately-owned meat-alternative businesses in the UK that may “run into issues” on the back of lofty valuations. And, those in a similar predicament to MorningStar Farms “from the larger food player perspective”.

“They’ve come up with extended product line extensions and things like that but they haven’t significantly improved the product quality in the last ten years. The brand’s not particularly resonant, and I think they are going to stagnate and slowly decline in sales as younger companies with better product quality, more robust R&D and better marketing start to take away some of their sales and take in much of the category growth,” he says.

See Just Food's US analysis here: Is US plant-based meat market facing inflection point or short-term blip?