In one hand, a cutlet and a leaf of lettuce, in the other a bowl full of nuts

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: Meat alternatives matter. Given global population growth projections and shrinking available resources(water and arable land), how to feed the world is, arguably, the biggest problem facing the planet. Innovation is therefore accelerating, and plant-based protein is beginning to take parts of the developed world by storm. Almost $20bn of meat substitute product purchases were made last year globally, yet this figure is forecast to grow fivefold by 2030. Even at $100bn, consider that the overall opportunity could be much larger, with the addressable meat market being the biggest segment in the food and beverage industry globally, worth $1.4tr. Furthermore, it’s not just consumers getting on board; it’s businesses too. Beyond category expansion, alt-meat allows companies to improve their environmental and social credentials. Among the plethora of businesses – both private and public – jumping on the bandwagon, our approach is to favour listed ingredient innovators.

When your author is not thinking about the future and working in the world of finance, he is a regular visitor to restaurants and has authored a food blog since 2012. The ‘research’ on the topic of alt-meat (as the category is increasingly becoming known) therefore began at a burger joint in London where a willing colleague and I sampled the offering of a leading player in the field, Beyond Meat. It certainly looked and tasted like a more conventional burger made out of beef, despite the patty comprising pea and lentil (a full review can be found here). Whether consumers are willing, regularly, to pay a ~50% premium relative to a traditional burger, however, remains to be seen. Nonetheless the almost unprecedented mimicry means that these products have a real chance, over time, of being a game-changer for the animal protein industry. Interest from the public, innovators and investors is correspondingly growing.

There is no specific definition of what constitutes alt-meat. Some would argue that it is a broad category comprising both plant-based ‘meat’ and cultured meat. The former is at a relatively more advanced stage of maturity, is more accessible for consumers and is subject to fewer ethical considerations. For now, cultured (or lab-grown) meat remains primarily the preserve of university laboratories with many products still at a prototype stage and so not available for purchase in restaurants or retail outlets. By contrast, plant-based meat (the focus for discussion in this piece) is becoming increasingly ubiquitous. Beyond the burger described above – no pun intended – competition is provided in the form of the Impossible Burger (present in some 9,000 restaurants globally, per its producer), the McVegan range (proprietary to McDonalds, but only available in selected territories for now) and Nestlé’s Incredible Burger (launched in April) among many others. The success of all these, combined with increasing levels of media coverage, has helped to validate the category.

The opportunity is significant, for we do eat a lot of (conventional) meat at present. The average person consumes 57kg annually, equivalent to around 150g per day, per the United Nations. Consumption levels have risen sixfold since 1950 and threefold since 1970. The main reason for this surge is not only because of meat’s higher protein content relative to many plants but because as prosperity increases, so does meat consumption; it constitutes a sign of affluence, especially in countries such as China and Brazil. Against this background, total meat consumption is forecast to increase by a further 75% from current levels by 2050 (per the United Nations).

While it seems unlikely that animal products will ever fully disappear from humans’ plates, alternative protein sources will become increasingly inevitable and necessary. It is rare for an idea or solution to come along that solves a variety of problems facing the world. Plant-based protein is one of these and addresses a confluence of inexorable secular trends: global resource constraints, climate change, health, changing consumer preferences and animal welfare. Embracing alt-meat also helps improve the sustainability image of many food businesses.

Consider global resource constraints. The world’s population is predicted to hit almost 10bn by 2050 at a time when climate change and environmental pollution are causing land degradation and limiting access to water. Such growth implies an extra 220,000 net new people will require feeding every day by the middle of the decade. To meet such demand, the planet will need to produce 70% more food than it did in 2009. Working out how is problematic. Bear in mind that raising livestock takes about 80% of all agricultural land yet produces just 18% of the world’s calories (all data per the United Nations). Put another way, producing one pound of meat protein requires 6-17 times more land, 4-25 times more water and 6-20 times more fossil fuel than an equivalent pound of plant protein (per research from MIT). Beyond Meat says that its ‘burger’ for example, uses 99% less water, 93% less land and produces 90% less greenhouse gas than a traditional US quarter pounder.

From a health perspective, global obesity levels have tripled since 1980 while the number of people with type-2 (diet-related) diabetes has doubled over the same period (per the United Nations). Dietary factors, including the consumption of certain meats, account for around 20-30% of most forms of cancer (per the World Health Organisation, or WHO). Processed meats such as hot dogs, bacon and sausages were added to the WHO’s list of carcinogens in 2004. A similar conclusion was presented by the American Heart Association in recent research. Its study, conducted using a sample of 15,000 adults between 2000 and 2013, highlighted that people who ate a mostly plant-based diet were associated with a 42% reduced risk of developing heart disease relative to traditional meat eaters.

When asked why people are eating more plant-based foods, the number-one reason cited is to improve overall health and nutrition (cited by 83% of respondents), followed by weight management, wanting to ‘eat clean’, save money and protect the environment (data per Nielsen). These responses speak to a broader trend that consumer tastes in the western world are shifting from mass-produced brands towards healthier and more unique products. 91% of consumers surveyed recently said that they are sensitive to animal welfare. The same percentage also said they want more transparency on food products (per Kantar TNS). Veganism is becoming more widely espoused, if not necessarily adhered to. While only 2% of the UK population describes itself as vegan, a further 4% say they are vegetarian and another 14% flexitarian (per the Vegan Society). More broadly, 24% of all consumers say they are trying to cut down their meat intake (per Euromonitor). It is important to see alt-meat products as complementary. Beyond Meat highlights that in Kroger – a large US supermarket chain – 93% of the buyers of its products are also purchasing animal proteins, a finding which has been backed up in other surveys.

Last year, the world made $19.5bn worth of meat substitute purchases, double the level of 2009 (per Euromonitor). Plant-based meat alternatives have been growing at an average of 8% a year since 2010, or 2.5 times the growth rate of processed meat, albeit from a lower level (per Rabobank). Some studies (for example by Nielsen, cited in 13D Research) suggest that plant-based foods are currently outpacing all other food retail categories by a factor of ten. In terms of where demand can get to, the example of the fluid-based milk category may be instructive. Plant-based dairy alternatives now account for 13% of the market, whereas plant-based meat alternatives currently account for less than 1% of the equivalent market.

Admittedly, plant-based milk benefits from a cohort of consumers who cannot drink cow’s milk because of allergies or intolerances, but meat is a far larger category (by a factor of 17; all data per Beyond Meat).

The addressable meat market is the largest category in the food and beverage industry globally, equivalent to $1.4tr. By 2030, plant-based meat could account for $100bn, implying an over fivefold increase in the segment (per JP Morgan). More optimistic assumptions suggest that plant-based protein could represent a third of the overall protein market by 2050 (per Lux Research).

Whether such projections prove correct will ultimately be a function of consumer preferences and basic economics (i.e. cost). Plant-based protein will also likely be only one of several competing categories on offer given the potential of lab-grown meat and what some are describing as ‘pure’ protein, derived from bugs or algae. Many see the current swathe of enticingly named burgers as constituting the ‘second generation’ of meat alternatives (the first being mycoprotein or soy-related products such as Quorn). One food executive with whom we spoke said “there is a push to get [these] products off the shelf, to provide consumers with an experience.” Over time, the expectation is that the quality of plant-based protein products will improve, and the cost come down.

Cost certainly remains a prohibitive factor at present, with the Beyond Burger, for example, retailing at roughly five times the level of a supermarket own-label beef burger and over twice the price of a Quorn vegetarian burger (per data gathered from Tesco). The health claims of meat alternatives also remain a controversial topic. More than a quarter of meat-free burgers, sausages and mince tested exceed maximum government-recommended salt levels (per Public Health England). Meanwhile, at 450 calories, the highly-processed KFC vegan burger – launched this summer in the UK under trial – is only slightly less fattening than the 475-calorie standard chicken burger.

Nonetheless, food that is perceived as healthy will likely continue to win market share at the expense of products which are seen as overly processed and industrialised. Many businesses are also seeking to capitalise on current demand trends since they accord well with the United Nations Sustainable Development Goals and demonstrate an active consideration of environmental and social factors (and so score points from an ESG perspective). Nestlé has said that it aims to generate CHF1bn of revenues from the plant-based category by 2020, while Unilever described plant-based protein as a “game-changer” in its most recent investor presentation. Many food retailers have also expressed a desire to develop private labels for alternative meat as a way of raising differentiation and improving product mix.

Much of the innovation within the category is still being conducted by private firms such as Impossible Foods as well as start-ups such as ChickP, Dao Foods and Gold & Green (based respectively in Israel, China and Finland). However, the success of Beyond Meat (listed in May and currently capitalised at ~$9bn) is likely to act as an incentive for further sector listings and/or deal-making. From an investment perspective, we remain somewhat sceptical about the barriers to entry in terms of product development, while noting that Beyond Meat currently trades on a multiple of over 30x forecast sales (per Bloomberg). Our approach is to favour businesses such as Kerry Group (and, to an extent, Christian Hansen, Givaudan and Symrise). These companies provide outsourced research and development, or integrated innovative solutions, to the food and beverage companies. Kerry says it is “[there] to help companies evolve” within the plant-based category. Watch this space for more.

Alexander Gunz, Fund Manager, Heptagon Capital


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