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Can Beyond Meat (BYND) Make the Most of a Conducive Market?

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Beyond Meat (BYND - Free Report) has made waves with solid revenue growth in the March quarter as well as a better-than-expected bottom line of 3 cents a share when analysts were thinking it would be a loss of 7 cents.`

Management provided year-to-date revenue growth numbers wherein US Retail was up 157% (110% in 2019), US Foodservice 156% (167% in 2019), International Retail 4934% (200% in 2019) and International Foodservice 57% (6617% in 2019). So the company is obviously seeing huge traction in both foodservice and retail. But management won’t be breaking out this number (in the next few quarters at least) because Retail is expected to account for substantially all of the sales. And that’s of course because people are expected to be cooking at home more often.

Escalating meat prices, availability, supply chain issues

One of the biggest disadvantages for Beyond Meat has been its inability to compete on price with well-established meat producers.

But the filthy working conditions in slaughter houses where around 40% of the employees are immigrants who also often share accommodation has resulted in a breeding ground for the virus. With large numbers of employees impacted, around 30% of plants were shut down.

The inability to slaughter animals on time leads to excess fat accumulation, which impacts meat quality, particularly in the case of pigs. The longer animals are stored, the more the feeding cost, which also impacts profits.

While employees are still afraid to get back to work, the Trump administration has invoked an old law that makes them essential workers in a war-like situation, making it mandatory for them to return while maintaining social distancing and other safety measures to the extent possible. As a result, production is limping back.

However, the meat shortage and supply chain issues have caused a sharp increase in meat prices. “When you look at beef now, it's $4.10 a pound wholesale assuming retail mark-ups take it up to about $6.80 or so,” says Ethan Brown, Beyond’s founder, President and CEO.

Contrast this scenario to what Beyond Meat management said on the earnings call about the average selling price dropping slightly to $5.83 a pound from $5.88 a year ago. While it isn’t anything too significant, any little bit could be beneficial at this stage when many people are out of jobs and meat prices are on the rise.

Much still depends on how Beyond Meat capitalizes on the situation, so it’s worth keeping an eye on its initiatives for the immediate future-

Messaging with celebs and offering freebies

Ethan Brown said on the conference call:

"I'd like to share some comments on our Feed A Million+ pledge. In late March, we launched a program to provide more than one million Beyond Burgers and nourishing meals at no cost to frontline workers addressing the pandemic as well as to organizations that serve the most economically vulnerable of our society.

"It has been gratifying to see our broader family go beyond ambassadors, as well as friends of the brand spearhead this initiative with us including among others Kyrie Irving, Kevin Hart, Snoop Dogg, Lindsey Vonn, P.K. Subban, Billie Eilish, Karlie Kloss, Jewel, Ludacris, DeAndre Hopkins, Erin Andrews, Ashanti, Todd Gurley, and Kenny Stills each of whom have joined us in giving Beyond Burgers away.”

This is a really good plan because in addition to serving people in a catastrophic situation, it offers the correct messaging about the social and environmental responsibility of the brand. This could persuade more people to eat it at least at times.

Volume packs are coming

While meat packers are getting back in production (although in staggered shifts and with other constraints), they still have a lot of cost to recoup, and prices could remain high, for we don’t know how long. Beyond Meat hasn’t had any sick workers, so it has been lucky thus far. But supply constraints on meat production as we enter the summer grilling season is a really neat entry point for the company. So the decision to make larger packs may be a good idea.

Management said that it has a steady volume of repeat purchasers and as more people try the product, a certain percentage will be willing to buy in bulk, so they don’t run out. The idea is to make the most of the protein shortage with a viable alternative. Other marketing messages about product quality and standards are being shelved for now, as helping meet the protein shortage takes center stage. Looks like a very nice move.

Discounts expected, as and when necessary

Beyond Meat reported some really attractive gross margins of around 38% in the just-concluded quarter. So management wants to reinvest some of that in discounts, enabling it to compete more aggressively with meat products. Management said that discounts would be expediently applied where necessary. But only a few points of margin may need to be sacrificed as a significant amount of other costs can still be squeezed out of the operating model. The company still expects to achieve price parity with animal protein in at least one of its product categories by 2024.

Head start on other meat alternative companies

While not making direct comparisons with Impossible Foods, which recently announced its partnership with Kroger (KR), management indicated that the company had sold more than 6X the volumes of its closest competitor. Other smaller players just haven’t acquired its global manufacturing scale and supply chain. Nor do they compare well with the mindshare captured by its brand. While currently in the doldrums, its partnerships with a large number of restaurant chains like Yum! Brands’ (YUM - Free Report) KFC, McDonalds (MCD - Free Report) , Dunkin', Starbucks (SBUX - Free Report) , Hardee's, Carl's, Jr. and Del Taco has helped it reach a large number of customers and added significantly to its volumes.

China launch with well-perceived Starbucks

Beyond Meat partnered with Starbucks in China, which has already established its brand in the country. So there should be some attractive numbers coming out of that partnership as well. Management said it would soon announce that appointment of a well-known expert. So this part appears to be tracking to plan.

Conclusion

Beyond Meat won in the March quarter because the foodservice impact didn’t kick in until the last two weeks of the quarter and because it was easily able to refocus production to Retail, diverting it away from Foodservice. While nobody can say how a market will actually unravel, the stage seems set for another strong quarter that will however be more significantly impacted by Foodservice declines on the top line plus market share capturing measures on the gross margin line. It appears impossible to recommend the shares at this valuation, but for those who got in early and are still hanging in there; these are wonderful things to chew on.

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