The vegan food fad is over...
...but does laboratory-grown meat have a brighter future? Alex Rankine reports
“We were promised flying cars and instead we got 140 characters,” quipped Peter Thiel back in 2013. The Silicon Valley entrepreneur’s dig at the banality of Twitter and other modern social media is a reminder that the future rarely turns out in the way we were promised it would – often it is rather more dismal. A 1960s futurist would be astounded to learn that not only do people in 2024 not holiday on the Moon, but also Man hasn’t even been back there since 1972.
It’s a similar story with meat substitutes. Around 2020 there was a boom in companies modestly promising to transform the way that humanity eats. According to their heady predictions, by now a decent chunk of us were supposed to be well on the way to eating mainly plant-based meals. The proposition made commercial sense: UK sales of meat substitutes rose 40% in the five years to 2019. Concerns about carbon emissions from the meat and dairy industry, plus a growing sensitivity to animal welfare, meant that more and more people were identifying as “flexitarians” – those who try to avoid meat, but do indulge in the occasional lamb chop.
As with all good modern market stories, the dish was garnished with a generous dollop of “technology”. The story went that these plant-based food businesses were not merely selling tofu and soybeans in pretty, recyclable packaging, but had instead achieved astounding scientific advances that made plants taste almost like meat. Food reviewers marvelled at American burger business Impossible Foods, whose boffins had found a way to transform soybeans into heme, one of the molecules responsible for making food taste “meaty”. Burgers made by Beyond Meat, the listed business that more than any other came to represent the trend, became known for appearing to “bleed” – the result of a beetroot-juice extract – when they were cut. Beyond Meat listed in 2019 and briefly rocketed to a valuation of over $14bn. It has since crashed 97%. Similarly, shares in Oatly (Nasdaq: OTLY), a Swedish maker of non-dairy milk, are down 95% since listing in 2021.
All sizzle and no steak
The problem, bluntly, is that shoppers don’t seem to like these products very much, at least not enough to pay premium prices – pound for pound, plant-based burgers tend to go for about a 30% premium over regular burgers. In a cost-of-living crisis, that has started to seem like an imprudent luxury. US retail sales of plantbased meat and seafood fell 12% last year. Unit sales of plant-based foods peaked in roughly 2020-2021 and have fallen for the past two years. Not for the first time, consumers have stubbornly refused to follow a trend charted out for them by marketing analysts.
For all investors’ excitement and confident growth projections, plant-based alternatives “still only account for a fraction of a single per cent of the global meat market”, say George Steer and Madeleine Speed in the Financial Times. Unless they start to match meat “on flavour, texture and cost”, plant-based substitutes seem destined to remain niche players. The big winners have instead been the hedge funds that
“The problem, bluntly, is that shoppers didn’t seem to like the products very much”
shorted Beyond Meat’s stock, and that have “raked in more than $1.6bn since January 2021”.
Most of the basic ingredients used for “alt-meat patties” are inexpensive, Saba Fazeli, a former Beyond Meat employee, tells Irina Ivanova in Fortune. Grains, rice, seed oils and soy don’t cost much. What makes the burgers pricey is the “chemical engineering” needed to transform plant fats into something approximating the characteristics of a true animal fat. The result is that the industry ends up “asking people to spend more money for worse-tasting products that aren’t healthier than the real thing”, says Brice Klein, co-founder of Choppy, a start-up that tries to solve the taste problem by supplementing plant-based products with real animal fats. That’s “not a great way to drive repeat purchases”.
Over the last dozen years “alt-meat start-ups raised nearly $15bn in venture-capital funding”, says Ivanova. Their backers saw them as “the answer to humanhealth and climate-change” woes. “But they’ve now flamed out... funding for food-technology start-ups has fallen to the lowest level in nearly a decade.”
The wheel of food-fad fortune
The wheel of food-fad fortune has turned against plantbased meat. One of the reasons alternative meat became trendy in the first place was that red meat was getting a bad press – research had linked it to an increased risk of cancer, says Ed Cumming in The Telegraph. But now the scare is all about “ultra-processed foods” – products that are industrially treated and so loaded with additives that they look nothing like real food. And as it happens, many of these new plant-based products, which must be “treated extensively to mimic their meaty brethren”, are highly processed. As dietitian Renee McGregor puts it, “a vegan hotdog is probably no better for you than a meat one”.
Healthy eating is a durable trend, but increasingly “consumers… want plants to look and taste like plants”, says Eleanor Steafel in the The Telegraph. For processed foods, 2023 was the year that the vegan bubble burst. Nestlé withdrew some vegan ranges from sale in the UK. Sausage maker Heck Food cut the majority of its vegan ranges because of “lack of... appetite” from consumers.
pure, pharmaceutical-grade ingredients” to cheaper “agricultural-grade” ones, says The Economist. But there is a second problem: bioreactors require “a lot of power” to control temperature. One study found that “per kilogram of meat produced, tank-grown meat is likely to use much more energy than farm-grown protein”. Still, with regulators beginning to approve laboratory meat, there are now 160 firms vying to bring it to market, each with their own recipes and methods. Prohibitive costs mean most firms “are now more focused on hybrid meats, which combine cultivated animal protein with that derived from soya or wheat”. Cultivated meats will first appear on supermarket shelves as hot dogs rather than ribeye steak.
Laboratory-grown meat has faced opposition, not least in Europe – Italy banned it last year and the farming lobby is pressuring some other EU member countries to do the same. But it has been sold in Singapore since 2020 and last year was approved for sale in the US, a major milestone. The sector is even attracting state support: the Good Food Institute reports that governments worldwide have cumulatively put $1bn into alternative protein in pursuit of food security.
That cash might help solve the industry’s scalability problem, although there’s a long way to go. For now, production runs remain almost artisanal, with inflated unit costs to match. Eat Just, a San Francisco start-up, sells less than 5,000 pounds of its cultivated chicken annually in Singapore, a drop in the global ocean of the 350 million tonne meat market, say Kristina Peterson and Jesse Newman in The Wall Street Journal.
One industry backer says “it will be the mid-2030s” before laboratory “meat is produced in significant volumes”. Sceptics might note that that is sufficiently far away to sound like there are still significant technical hurdles to overcome – much like the observation that nuclear-fusion power seems to be permanently stuck “30 years in the future”. The day may come when the practice of raising and slaughtering animals for food seems to have been not only cruel, but also inefficient – why not grow only the bits we want to eat? But only time will tell whether a future of laboratory-grown meat disrupts agriculture on a scale comparable to the internet, or whether it turns out to be another flying car.
What to buy
As highly speculative, experimental technologies, cultured-meat start-ups rely on venture-capital funding rather than direct listing on public markets. British investors are able to gain access via investment firm Agronomics (Aim: ANIC). The fund spreads the risk across stakes in more than 20 businesses, including Mosa Meat, the company founded by the Dutch creators of the original laboratory burger. Management took the prescient decision to steer clear of most plant-based meat alternatives and focus instead on cell culture. Yet this is a volatile sector and the shares are off three-quarters since a 2021 high as investors’ enthusiasm diminishes. Chair Jim Mellon argues that, with regulatory approvals coming through in the US, there are better days ahead, says Elliot Gulliver-Needham for City AM. While performance has been disappointing and the risks are high, the shares are still worth a punt as an opportunity to get in on the ground floor of the food of the future.
US meat-packing giant Tyson Foods (NYSE: TSN) has also moved into the sector to hedge its bets. It holds a stake in Upside Foods, one of the two firms so far approved to sell cultured meat in America, and once invested in Beyond Meat.
Beyond Meat may have led the charge for alternative meat stocks, but now this chronic loss-maker is fighting to keep its business model viable. With the market for plant-based meat still contracting, it is one that even bottom fishers should avoid.
Many investors turn their noses up at retailers, thinking that superior returns can’t be found in boring businesses that sell everyday products. They couldn’t be more wrong. Many retailers have had huge share-price rallies at some stage in their trading histories. One market darling is Shoe Zone (Aim: SHOE), which featured in my article in MoneyWeek highlighting “four stocks for 2022” at 110p. It has since reached highs of 290p. But it released a profit warning on 12 March. The stock fell like a stone and currently sells for 200p.
The company blamed an unexpectedly large increase in the national living wage and a rise in container costs owing to the Suez Canal situation. It also cited rising expenses relating to upgrading its property portfolio and noted that sales at the end of the autumn/winter season were slower than anticipated.
The first two factors are not company-specific. However, mounting costs to refurbish units and customers not spending as much are very companyspecific indeed. Many investors may take the view that they are temporary problems and the shares could therefore be a bargain, but I would want to see further clarity on the business first.
Pick this card
Card Factory (LSE: CARD) is another stock in the lowcost niche. It offers cards and gifts such as personalised mugs, confectionery and flowers at competitive prices; it manufactures its own cards. Remarkably, the company managed to get through the pandemic without any additional fundraising.
Profit after tax is forecast to be £47m for the year ending 31 January 2024, putting the business on a price/earnings (p/e) ratio of seven. That seems too low for a growing enterprise – the expansion into gifts has only just begun – although I do accept that growth is pedestrian. Investment management group Teleios Capital Partners, the company’s largest shareholder with an 11% stake, has also been selling down the stock for some time, perhaps creating an artificially low price.
I would favour Card Factory over its rival Moonpig, despite being a customer of the latter, where signing up for £9.99 a year gives you discounts on cards and you can set email alarms for birthdays, which makes life easier. With post-tax profit for 2024 forecast at £35.5m I don’t feel the valuation of almost 17 times earnings at Moonpig leaves much upside, so I’d much prefer Card Factory.
A few weeks ago, I wrote about Currys (LSE: CURY) and the 62p per share offer that had been announced by Elliott Advisors UK. At the time, JD.com also confirmed it was in the preliminary stages of an offer, but without any certainty one would be made. Elliott has now withdrawn its offer, while JD.com hasn’t made one. Yet the price of Currys has remained around 62p.
This is probably because the market has now realised Currys could be in play, and therefore other potential suitors may be running the slide rule over the business. My view, though, is that buying a share in the hope of a takeover is a foolish strategy.
A takeover should be something that occurs because you have picked your stock well, and someone with deep enough pockets to take it out shares the same view. People have been touting Fevertree Drinks as a takeover target for years, but it has yet to announce any approaches.
A big boost for the bottom line?
However, Currys is forecast to deliver £81.6m in posttax profit for the year ending 29 April 2024, and so at a market value of £692m that leaves the stock on a single digit p/e. Granted, it has a weak balance sheet, but we are told that the business will be “in a net cash position” following the disposal of the Greek and Cypriot business, and despite the environment for household spending the business has held firm.
Currys has nearly £9bn in sales so any improvements in its margins would imply a large jump in the bottom line. My view is that there is upside here but anyone holding the stock needs to be comfortable with the thin margins. In the previous financial year Currys made only £165m of operating profit on £9.5bn of revenue.
Two retailers that could be taken over are Boohoo and Asos. These firms were both market darlings in the late 2010s but their stock prices are now shadows of their former selves; they are at nine- and 15-year lows respectively. Will the stocks ever recover?
Both of these companies are facing structural shifts in the market that has significantly altered their business models. Chinese competitor Temu offers heavily discounted clothing, while Singapore-based Shein is taking business away from Boohoo and Asos.
Both companies historically relied on customers ordering and sending much of the basket back with free returns. When interest rates were low, people had plenty of disposable income, and freight was cheap, so this business model made sense. But now there are plenty of rivals who embraced the same approach, and such are the costs of carriage that several businesses in this sector are now charging for returns.
I think they will find that revenue goes down because people don’t like paying for what they used to have for free, much like a new £2 parking charge can stop a family spending hundreds of pounds at a shopping centre. I think these two businesses are not the same as they once were, and so I’d avoid them.
Another retailer in trouble is Superdry. It is a prime example of how brands can lose their magic. Superdry was once cool, and now it’s worn by uncool dads (so perhaps I should be a customer?).
The turnaround has taken far longer than expected since Julian Dunkerton’s return as CEO role in 2019. Capital has been a key concern, with Superdry selling off intellectual property in India for cash; the company is now hoping to negotiate an increase in its lending facilities. Dunkerton also wants to take the company private. Avoid.
However, Marks & Spencer has been a completely different story. It was one of the star performers in 2023, rocketing by 121%. CEO Stuart Machin has pushed a strategy for growth with a focus on food and revamping clothing.
It’s clearly working, as the business has regained its place in the FTSE 100. That said, I think there are better opportunities in terms of risk-reward ratios, though I
“People don’t like paying for what they used to have for free, which is bad news for Asos and Boohoo”
wouldn’t be surprised to see the stock trade higher. M&S’s partner Ocado has been a volatile stock over the years and is currently trading near 450p, having hit highs of 2,900p in September 2020. The business is now Ebitda-positive, yet it has cut back on expanding its distribution centres. It has said it has the capacity to process 700,000 orders per week but has been delivering fewer than 400,000 recently.
Grocery-delivery numbers are on the retreat following a Covid-induced spike, and customers are ordering fewer items, driving average basket value down. A business that isn’t growing and makes a huge loss is unappealing; the stock price is trending downwards too. Ocado is another one to avoid.
The best in the business
At Next (LSE: NXT), it is a different story. Next is widely held up by institutions and private investors alike as the poster child for communication with markets. Its commentary is second to none and management take the time to explain the group’s strategy and evaluate whether it’s working. I’d highly recommend looking at their results announcements to see for yourself.
But of course, good communication isn’t everything and in January the business said it would be raising its guidance for profit before tax for the year ended 31 January 2024 to £905m – a £20m increase. Next also boasts pre-tax profit margins of 19%, showing why it’s clearly the best of breed in its sector. With a p/e of just under 14 Next isn’t cheap, but it has been a market leader for many years now and while that remains true, it’s unlikely it ever will be.
Another stock in the retail sector performing well is Kitwave (Aim: KITW). This is an independent wholesale delivery business specialising in selling things we buy on impulse, such as chocolate, snacks, frozen and chilled foods, tobacco and soft drinks – typical items from your local corner shop. It’s a rival to Booker, and has been growing by acquiring smaller businesses through cash generated by its operations (not throughnissduing
new shares, a tactic often used in buyand-build strategies).
The forecast for post-tax profits for the year ending 31 October 2024 is £21.4m and, with a market capitalisation of £234.2m, this means the firm is trading on a p/e of just below ten. The founder and CEO Paul Young retired last year but still retains 15.7% of the company, which suggests he is satisfied with his replacement and overall progress. Kitwave was one of my three favourite stocks for the second half of 2023. With the shares breaking through all-time highs I see no reason why the price can’t go higher.
Another stock I took a positive view of in the same article was McBride (LSE: MCB) at 30.5p. Given that the current price is 108p I think I have been vindicated. McBride supplies private-label household and personalcare products – for example, items such as bleach, washing-up liquid, powders and aerosols.
McBride had been in danger of breaching its banking covenants. But when it was announced that trading had become more encouraging and net debt was beating investors’ expectations, the share price failed to fully appreciate this.
And even though the stock has tripled since I highlighted the opportunity, I think there is further to go. The company’s targets for the next five years include a return on capital employed (Roce, a key gauge of profitability) of more than 25%.
Should the company achieve anywhere near this, it will get high returns on the money it invests in itself, which could propel the firm’s performance even higher. It’s no longer the bargain opportunity it once was as investors are starting to wise up, but we could still be at the start of the growth story here.
“Since I highlighted the potential of McBride, the shares have more than tripled”
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