Beyond Meat: A Big-Box Expansion
By: Annie Lai & Manuja Weerasinghe
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
From Humble Beginnings to Growing Pains
Founded by Ethan Brown, a vegetarian with a desire to combat climate change and promote animal welfare, Beyond Meat is one of the largest producers of plant-based meat. Brown first contacted two professors at the University of Missouri to license their meatless protein technology and founded Beyond Meat in 2009. Ten years later, in 2019, the company went public, becoming the first plant-based meat alternative company to be listed on a major exchange. Although once benefiting from a first-mover advantage, the alternative meat (alt-meat) producer has recently struggled to maintain its position as the market leader in the vast alternative protein industry. The company recently reported its annual earnings for 2022, revealing that revenues were down 10 percent from the previous year, just short of $419 million; and net losses were $366.1 million, weakening investor sentiment in its stock.
In October 2022, Beyond Meat announced its goal of generating positive cash flows by the end of 2023. Aggressive plans to trim operating costs included cutting 20 percent of their workforce, reducing inventory by 17 percent, and reducing the number of co-packers they work with from eight to three. Despite these cost structure changes, the company has struggled to maintain market share and improve demand for its products.
Alt-Meat Market Prospects
Beyond Meat’s mission is to encourage individuals who are hesitant about plant-based meat products to make the switch. Historically, Millennials and Gen X consumers have been willing to pay a premium for plant-based alternatives for health and sustainability motivations. Beyond Meat targets “flexitarians”, a relatively larger demographic segment that occasionally switches to plant-based diets, given that vegans and vegetarians only comprise 8 percent of all US customers. However, overall plant-based demand is wavering, as flexitarians are typically unloyal to plant-based meats and have strong taste preferences.
Furthermore, grocery inflation has recently spiked to a 15-year high, with food prices rising by 7 percent in January of 2022. Consequently, consumers bought less and cut back on premium items; in the case of flexitarians, that would be plant-based meats. Due to this, Beyond Meat’s gross margins fell to 6 percent compared to 30 percent in 2021, caused by a decline in net revenue per pound of meat and rising material and logistic costs.
Expenses of Meatless Products: A Catch-22 Situation
The alt-meat sector, unlike the traditional meat industry, has not benefited from years of production or economies of scale. The secret ingredient to the Beyond Burger is peas, which are expensive due to their concentrated production in a handful of countries. While there has been a push to increase the global production of peas, Beyond Meat will be unable to bring a product to price parity until 2024. To support economies of scale, the global supply chain of plant protein must be re-examined. In order to reduce prices, Beyond Meat must generate significantly higher demand or produce significantly larger quantities.
Pre-Pandemic Glory
Beyond Meat was the first company to popularize plant-based meats to everyday consumers. In the United States, the Beyond Burger ranked first in all plant-based meat products. Prior to 2020, Beyond Meat benefited tremendously from high media coverage of being the only publicly traded firm in the alt-meat market. Moreover, at this time, the plant-based industry only had one major competitor in Impossible Foods. Beyond Meat appeared poised to capitalize on an extremely profitable duopoly market structure.
Inflection Point From COVID-19
The COVID-19 pandemic greatly impacted the traditional meat industry, shutting down meat-processing plants and slaughterhouses. This temporary lack of supply in traditional meat combined with increased trends towards health and wellness shifted consumers away from previous consumption habits and boosted the sales of meat alternatives by 35 percent in 2020. However, this increased demand as a result of the pandemic drove the commoditization of plant-based meat, leading to the overall decline in brand loyalty in the industry. This has effectively diminished much of the company’s brand equity, as the Beyond Meat publicity is no longer a differentiating factor in the eyes of customers.
The success of plant-based meats has also attracted the attention of major food companies including Tyson, Smithfield, Perdue, Hormel, and Nestle, which have all rolled out their own plant-based meat products. As major meat producers continue to launch their own meat alternatives, it is clear that the plant-based industry is undergoing an industry transformation from niche to mainstream. For the current meat giants, emerging victorious from the alt-meat race is not merely a question of missing out on a growth opportunity, rather, it is a fight for survival. At least, that is what it seemed like at first. Flash forward to three years later and the mood appears to have soured. The biggest US meat company, Tyson Foods, failed at their first attempt at an alt-meat burger and in 2019, the product line was discontinued. Additionally, the Swiss firm Nestle recently decided to withdraw its Garden Gourmet meat-free brands and reassess its positioning in plant-based protein. Canadian meat processor Maple Leaf Foods was one of the earliest to the alt-meat game, acquiring plant-based brands back in 2017. In 2022, however, Maple Leaf Foods' plant protein business posted nearly a 20 percent decline in sales. Subsequently, CEO Michael McCain stated an action plan where Maple Leaf Foods’ remaining resources would be reallocated to the conventional meat. Meanwhile, Brazilian meat company JBS has completely pulled the plug on its dedicated plant-based meat division, Planterra. While legacy meat companies have made major bets on plant-based protein, they have since scaled back these operations as they realize their plant-based products missed the target altogether as it relates to taste and texture. The pullback of meat giants in the category hints that Beyond Meat is doing something correctly by making an alternative to meat that consumers actually desire.
Beyond Current Challenges
In summary, the alt-meat industry is now facing an even bigger challenge, which is price parity. To compete with existing meat products, plant-based meat must reach affordability levels equivalent to its traditional counterpart. Overall, the key issue Beyond Meat is faced with is its profitability, which boils down to both scale and optimization.
As discussed, Beyond Meat’s most pressing issue is its profitability. Given that Beyond Meat has exhausted many traditional profitability mechanisms such as cost-cutting, and has lost its first-mover advantage, what could it do to produce a new sustainable advantage and achieve positive cash flows? Enter Costco, Beyond Meat’s opportunity to pursue private labelling with a massive wholesaler.
Costco’s Current Partnership With Beyond Meat
In January 2023, Costco announced their partnership with Beyond Meat to carry plant-based steaks. Through this partnership, Costco aimed to expand the wide variety of products available to its customers and capitalize on an expected 19.3 percent 7-year CAGR by 2030 for the plant-based meat market. Beyond Meat stands to benefit from Costco's massive reach to over 123 million annual members worldwide and as of today, Costco has rolled out Beyond Meat products into approximately 50 of their North American stores. Although this will contribute to expanding Beyond Meat’s market share and consumer base, a slight pivot in this strategy could be mutually beneficial to both parties. This change entails Costco privately labelling Beyond Meat products under their in-house brand Kirkland.
What is Private Labelling?
‘Private labelling’ refers to products produced by third-party suppliers/distributors but labelled and sold under a retailer/distributor’s own brand. Purposefully, the average consumer is unaware of the brand names attached to products as a direct result of private label producers. This business model requires a manufacturer to ensure a high-quality supply of products to meet demand and control costs, as well as a seller with a built-out distribution network and strong consumer-facing brand name.
Private labelling provides companies with customized quality control from manufacturers and customized pricing control from sellers. This allows private labels to adjust and experiment with prices to maximize profit margins. Additionally, it allows for quick process adjustments, whereas established brands could take years to make changes to product formulas, pricing, or marketing strategies. Private labels benefit from being able to pivot faster as a response to negative reviews, low sales, or various other ad hoc issues.
Why Should Beyond Meat Consider Private Labelling With Costco?
Private labelling with Costco would provide Beyond Meat with a significant increase in sales. Given that Costco is one of the largest retailers in the world, with over 100 million members, Kirkland-branded Beyond Meat products are able to penetrate new consumer bases. Furthermore, Costco’s Kirkland line is highly reputable, which would increase consumers' loyalty when presented with multiple options for plant-based meat. As the plant-based market continues to grow, it will become increasingly saturated with competitors, and an industry key success factor will be the ability to adapt product strategies based on sudden market changes. With Costco’s efficient distribution process, private labelling will allow Beyond Meat to implement changes quicker than competitors, experiment with new products, and optimize prices to maximize profits. Private labelling with Costco will also yield various cost-reduction benefits, such as reduced advertising expenditures. Most importantly, by distributing products under the Kirkland brand, Beyond Meat will be able to benefit from Costco’s wholesale business model, which will allow Beyond Meat to achieve economies of scale to boost its bottom line.
How Does Costco Benefit?
Costco stands to benefit immensely from this strategy. Costco’s current partnership is its first step into plant-based meats. Private labelling would allow the retailer to mass-distribute and offer plant-based meats which would help satisfy various consumers who avoid consuming meat or experience health concerns when consuming meat (e.g. vegetarians). It would also allow them to offer these products at a lower price than most of the market due to the industry’s current razor-thin margins. Additionally, given Costco’s commitment to being a socially responsible company, the partnership with Beyond Meat would continue to push the company in the right direction, both for its reputation and public perception.
One concern to keep in mind about this strategy is Beyond Meat’s ability to stay in control of its products’ market and pricing. However, this could be mitigated by maintaining a close relationship with Costco and ensuring strategic alignment in marketing and pricing strategies that align with Beyond Meat’s current values and goals. Another downside would include the increased competition from other plant-based companies intending to partner with retailers. However, this would work similarly to Beyond Meat’s initial go-to-market. Being the first player in the industry to move to private labelling, especially with the help of Costco, would help Beyond Meat maintain its first-mover advantage and achieve cost-saving synergies. These factors combined with the strong brand equity across both parties would allow them to maintain strong pricing power over competitors, opening up the runway to becoming a market leader once again.
