Venture Bytes #63 - Pandemic Accelerates Wide-Spread Adoption of Plant-Based Meats

Pandemic Accelerates Wide-Spread Adoption of Plant-Based Meats

The growing popularity of plant-based meats is getting a strong boost during the COVID-19 pandemic. The sudden spotlight on animal-borne illnesses, reinforced by the COVID-19 pandemic, on the back of a rising vegan population and increasing awareness of the nutritional benefits of plant-based sources of meat are proving to be strong tailwinds for alternative foods . This bodes well for Impossible Foods which, along with Beyond Meat, is well positioned to ride the secular wave that is expected to sweep across the food industry.

COVID-19 is expected to boost the growth of the global plant meat sector from $3.6 billion in 2020 to $4.2 billion by 2021 by value, according to a report from research company Markets and Markets. Similarly, data from Nielson shows that dollar sales of plant-based meat surged 265% over the eight-week period ending April 18, 2020. This was 6 times the sales of conventional meat. Retail sales of plant-based meat showed a similar trend with an 18% increase in 2019, which was 9 times faster than total U.S. retail food sales (GFI).

More broadly, the plant-based meat market is estimated to reach $85 billion by 2030, growing at a compounded growth rate of around 28% according to UBS. Roughly 30% of the consumers in the United States, according to data from GFI are reportedly reducing conventional meat consumption.

While it is still premature to call plant-based meat substitutes an existential threat for the conventional meat industry, the fact that most of the major meat producing companies are adding their own variant of meat alternatives and/or are investing in both plant-based and cultivated meat companies is a strong validation of the significant market opportunity for the plant-based meat industry.

Perfect Confluence of Events

COVID-19 forced lockdowns led to temporary closure of meat processing plants causing a bottleneck in the supply chain. Accordingly, meat, seafood, and poultry prices have soared in the U.S as well as globally. As per estimates by CoBank economist Will Sawyer, pork and beef production is 35% lower in 2020 than around May last year.

“Closed Meat Plants Today Mean Empty Meat Cases this Summer”—Will Sawyer, CoBank’s lead economist. This could result in pork and beef price inflation of up to 20% vis-à-vis prices in 2019.

The increase in meat prices would help in reducing the price gap between plant-based and conventional meat and could prove to be a strong driver of growth, at least in the short term. As people get more familiar with plant-based meat, the sector could see a more sustained traction.

Additionally, China presents a compelling market opportunity particularly for pork, since the average Chinese person consumes roughly 30 kg pork per year. Pork imports grew from 94 million kg in September 2018 to 161 million, an annual growth rate of 71%. The alternative meat market in China is over $900 million and growing at 14% annually.

“It’s absolutely true that China is a huge focus right now, and we’d like to launch in that market as soon as possible. Reaching China is critical to achieving the mission of Impossible Foods—which is to eliminate the need for animals in the food production system”—Nick Halla, SVP for international at Impossible Foods.

The compelling market opportunity in China is not lost on its competitors. Beyond Meat, Cargill, and Oatly have partnered with food chains including Starbucks and KFC in China to expand their distribution channels which largely comprise supermarkets.

Against this backdrop, Impossible Foods launched a plant-based pork alternative, which it unveiled at the 2020 CES convention. Called Impossible Pork, the man-made pork substitute is designed for kosher and halal certification and can be used in any recipe that calls for ground pork.

More broadly, the company has taken several steps to gain traction in the market. These include getting the regulatory approvals to sell directly to consumers through retail chains, entering strategic partnerships to scale up production, diversifying its product line, and instituting price cuts to make plant-based meat more accessible and affordable to consumers.

• Regulatory Approvals: In July 2019, Impossible Foods got FDA approval for the use of soy leghaemoglobin as a color additive in imitation beef. This cleared the way for Impossible to sell directly to consumers via retail stores thereby giving more access points to the consumers to purchase its range of plant-based meat products.

Additionally, this allowed the company to sell uncooked raw meat which would add more variety to its offering. More importantly, this will help create more demand for its products as consumers will be able to use ground beef analogue products for other cooking recipes at home whereas previously it was limited to cooked patties in the burgers available at restaurants. With Impossible meat products reaching people’s homes, plant-based meat will provide more competition to traditional meat and poultry products that dominate people’s kitchens.

• Ramping Up Production: In addition to increasing distribution channels, the company also took measures to ramp up production to keep up with the increasing demand. It entered partnership with global food producer OSI Group in July 2019.

“OSI has already installed equipment to make the Impossible Burger, and we’ll start seeing new capacity every week”—Sheetal Shah, SVP, Product and Operations, Impossible Foods.

Additionally, to meet the increased demand, Impossible Foods also started three 8-hour work shifts from two 12-hour work shifts around July last year.

• Partnership with Major Food Chains: Impossible Foods formed strategic partnerships with large restaurant chains including McDonald’s, Red Robin, and White Castle. It is also selling its products across 7,300 Burger King outlets in the U.S.

In addition to the novelty and variety that chains get to add to their menus, plant-based meat products also give an exotic feel to a traditional burger or a sausage, which helps drive higher traffic and sales. Impossible Food partners have reported up to a 36% increase in same-store sales after adding Impossible products to their menus.

In 1Q20, Walt Disney signed up with Impossible Foods to offer its burgers at its theme parks, resorts and cruise liners.

• Expanded Product Suite: The company has also expanded its product line up with several more beef-like products including, quarter-pound and third-pound Impossible Burger patties, Impossible Sausage, and pork alternatives.

• Price Cuts: With all its attractions, for plant-based meat to become a viable alternative vis-à-vis conventional meat options, the prices must come down to a comparable level. Impossible Foods cut its prices by 15% in March 2020. Beyond Meat is aiming to reach price parity by 2024 and has announced that it will lower its prices during the summer as prices of animal meat soar due to supply shortage.

“Our goal is to reach price parity and then undercut the price of conventional ground beef.”—Impossible Foods.

It can be argued that even with reduced prices, plant-based meat still appears to be a pricier option. However, the fact that Impossible and Beyond are lowering prices while demand is surging suggests that they have been able to scale up their production and are churning out enough volumes to make price cuts viable.

“Right now, even with the price drop, we’re at about the same price as organic grass fed ground beef, per pound, but it’s important for us to get to the same price as 80:20 conventional beef and this is just the first price cut you’ll be seeing”—Impossible Foods.

Alternate Foods Category Attracting Investors

The systemic shift toward plant-based meat and dairy alternatives has attracted many investors. Nearly $750 million was invested in the sector in 2019. More importantly investment in 1Q20 was around $741 million, which is almost equal to the amount raised in 2019. Investments in 2019 and 2020 are around 45% of the aggregate $2.7 billion raised from 2Q2010 till 1Q20. Impossible Foods has raised $1.31 billion to date including the last round (Series G) of $500 million in March 2020 that raised its post money valuation to $4 billion. **

Investment in India’s Tech Sector is Surging

What is going on in India? There has been a spurt in funding activity for Reliance Jio Platforms, an Indian telecommunications company and subsidiary of Reliance Industries, headquartered in Mumbai. The list of investors includes a virtual Who’s Who of tech and venture capital giants, including Facebook, Microsoft, Silver Lake Partners, Vista Equity, General Atlantic, and KKR. And most recently, Reliance Jio Platforms sold a 1.85% stake for $1.2 billion to Abu Dhabi-based Sovereign Firm Mubadala and stake of 1.16% for $750 million to Abu Dhabi Investment Authority (ADIA), continuing its eye-catching run of investments at the height of a global pandemic.

What’s Driving the Gold Rush?

At stake is the enormous potential of the ecommerce and the broader Jio Platform ecosystem that has helped the parent company Reliance Industries raise over $10 billion in around a month. These investors are betting on Reliance Industries’ shift from petrochemical to technology and digitization. Reliance Jio, for instance, has become the leading wireless carrier in less than four years since inception.

The investments are a bet on (1) Reliance’s ability to disrupt existing markets, (2) the role it could play by providing secure 5G hardware at competitive costs in the U.S., and (3) the large addressable retail market that the company is seeking to digitalize in partnership with Facebook.

Indian Retail Sector

India’s retail sector ranks 5th in the world in terms of size. The sector is driven by secular trends including growing population (1.3 billion people and counting), a growing middle class (600 million people and counting), strong GDP growth, and long runway for smartphone, internet, and ecommerce penetration, which stands at around 2% of total retail sales (Source: Morgan Stanley). Consumption expenditure is expected to reach $3.6 trillion by 2020 growing at a CAGR of over 25% between 2017 and 2020.

The retail sector is set to cross $1 trillion by 2020 and will grow at a CAGR of around 8% between 2018 and 2020. The online retail sales in India are expected to surge to $60 billion by 2020 growing at a CAGR of nearly 36% between 2018 and 2020.

With the retail sector surging in India, it attracted nearly $1 billion from PE funds in 2019. Additionally, Walmart acquired a 77% stake in Flipkart for $16 billion, and Amazon acquired a 49% stake in More, the fourth largest supermarket chain in the country for $585 million.

Huge Untapped Market

The retail sector remains fragmented, with a mere 12% being well organized. That share is expected to grow from 22% to 25% by 2021, or $160 billion. Jio Platforms with its partnership with Facebook could play a major role in taking the large network of neighborhood stores digital, thereby increasing the formal retail sector.

In addition to retail services, the Jio Platform is well positioned to capture a large share of the telecommunications services market, including broadband connectivity, Live TV streaming, music streaming, Ed-tech platform Embibe, and AI-powered virtual assistant Haptik. The collaboration with WhatsApp could help Jio grow into an Indian equivalent of WeChat offering a combination of messaging, payments, and e-commerce. Jio has a 388 million large subscriber base and WhatsApp has over 400 million active users in India. Jio has launched the JioMart ecommerce app in select locations and has started testing an “ordering system” on WhatsApp.

“Jio’s digital new commerce platform and WhatsApp will empower nearly 30 million small Indian Kirana shops to digitally transact with every customer in their neighborhood” Mukesh Ambani, CEO—Reliance Industries Limited.

The investment comes at a crucial time as tensions between the U.S. and China have been growing over a range of issues including trade tariffs, technology theft and invasive technology from Chinese companies, China’s handling of COVID-19 pandemic, and Beijing’s crackdown in Hong Kong. Against that backdrop, India with its huge market, and Reliance with its promise of 5G technology without any Chinese components, have emerged as viable alternatives.

“If you look at the rationale, there are several layers of opportunities: you’ve got strong, foundational infrastructure, high-quality technology infrastructure, and most of the investment (by Jio) has already been made” said Sanjay Nayar, CEO KKR India.

While other major Telcos have partnered with Nokia and Ericsson for 5G trials in India, Reliance has sought permission for trials with its own end-to-end 5G technology. It has also replaced Oracle and Nokia’s 4G voice technology with its own across India. This makes Reliance one of the very few domestic telecom companies that has its own 5G and IoT technology. The company also acquired U.S.-based Radisys which helped it gain rapid innovation and solution development expertise in 5G and IoT globally.

5G-enabled technologies could play a crucial role in telecom and other industries by enabling new disruptive technologies. Accordingly, global investment in the 5G industrial chain over 2020-2035 is likely to reach $3.5 trillion. In house scalable 5G capability could give Reliance access to not only the Indian 5G equipment and network market but also the European and the U.S. market.

While the U.S started looking into security hazards of relying on Huawei in early 2019, globally other countries are also looking to come up with alternatives. In an apparent shift away from China and Huawei, countries including France, Canada, Germany, Japan, Italy, the US, the UK, India, Australia, and South Korea are planning to get into an alliance to create an ‘alternative pool of 5G technologies’. Nokia and Ericsson will of course stand to gain from such a shift but 5G deployment in Europe without Huawei would likely increase the cost by over $6o billion. Accordingly, Reliance, which had previously demonstrated its ability to disrupt new markets with its aggressive pricing in the telecom sector, is well placed to fill the gap with its 5G technology.

More importantly, the U.S. government is looking to create a strong startup environment of 5G technology OEMs. The U.S. recently approved legislation to provide $1 billion in funding to allow companies using Huawei and ZTE technology to replace their legacy technologies with more secure technology. While this could be an opening for companies including Reliance, it could also boost the investment activity in the 5G technology field in the U.S. The field has lately seen a spurt in funding activity. Startups developing 5G hardware by leveraging O-RAN technology are attracting a lot of investor attention. Mavenir Networks, Affirmed Networks, and Altiostar have raised $105.3 million, $155 million, and $357.5 million respectively. Parallel Wireless is another company that is addressing brownfield challenges by building every component of the cellular network through its evolution from 2G, 3G to 4G. The government’s push for a Chinese and Huawei alternative would allow these startups a better market opportunity, which would in turn attract more investors creating a strong network effect. **