Author: Eric Gardner

In Beyond Meat news, the California-based manufacturer of plant-based meat substitutes announced it signed deals with McDonald’s and Yum Brands to provide flagship menu offerings with the fast-food giants in the future. “It is my strong belief,” CEO Ethan Brown told investors, “that partnerships of this nature with partners of this caliber are required to accelerate our flywheel of availability and scale-driven cost reduction.” Taking a step back, there are equal reasons to be excited about Beyond Meat’s future, as there are to be pessimistic.

Why the Beyond Meat news should excite the packaged food industry

In simplest terms, deals with McDonald’s and Yum Brands! all but guarantee a steady stream of volume for plant-based meat substitutes—a new category. That is exciting! The details are still scarce, but Beyond Meat will develop new plant-based items for KFC, Pizza Hut, and Taco Bell under the announced terms. Meanwhile, it is the “preferred supplier” for a plant-based burger for the golden arches—presumably meaning it will develop the burger from a McDonald’s recipe.

From an organizational point of view, Beyond Meat is built around regions and then distribution channels. There are a US and International business that includes retail and foodservice segments. Retail encompasses grocery sales; foodservice includes anything sold from restaurants and other institutional settings. Using 2019 as a baseline (because COVID-19 destroyed “normal”), The US business had about a 65/35 split favoring retail. Meanwhile, in international, the ratio was reversed—it was 84/16 leaning foodservice.

In most companies that I’ve advised, foodservice is often viewed as the simpler business. Unlike retail, which mostly operates on a high-low promotion-based strategy, foodservice is driven largely by volume and price, but that doesn’t mean that it can’t transform a business. Just ask Tyson, one of Beyond Meat’s major category competitors.

How McDonald’s transformed Tyson Foods

Before the rise of Tyson Foods, the chicken industry was not particularly profitable. Like most agricultural commodities, it was subject to boom and bust cycles. Good times would yield large returns, signaling for other farmers to get in on the chicken business. This would inevitably flood the market with chicken—resulting in a bust. One of Tyson’s most profitable realizations was understanding that it’s better to own the slaughterhouse than the farm. By the mid-1940s, the company was entirely reliant on contract farmers—who raised chickens based on Tyson’s specifications—and took on the brunt of the boom/bust risk.

That doesn’t mean that processing was a free ride. Unlike grain or oil, chicken has a short shelf life. In boom years, Tyson had a dilemma—flood the market and destroy operating margins or see inventory rot in a warehouse. A bust cycle meant idle factories, with downed production lines and lost profits. Each era had its own level of uncertainty. Don Tyson, the founder’s son, had an answer.

By the late 1960s, Don Tyson saw that America was changing. With the rise of car culture and fast food, Americans were now on the go. They weren’t looking to sit down at the dinner table for a chicken dinner. They wanted something easy and cheap. They wanted convenience. He realized that a future path to profits was in the drive through.

In The Meat Racket, an indispensable history of the company, Chris Leonard explains what happened next.

The future had just one problem, in Don’s estimation: Chicken wasn’t on the menu. The fast-food industry was built squarely on the hamburger, and for good reason. Hamburger was a malleable meat, easy to shape into patties of various sizes, and to ship and speed-cook in cramped kitchens. Chicken, on the other hand, was still sold by the drumstick and the breast.

If Tyson could solve this problem, it would not only open up new sales volume but allow his company to escape commodity pricing. In the 1970s, the retail price of chicken declined by 11 percent.

Don Tyson hit the road and started pitching any and every fast-food joint in the nation. According to Leonard, “He became an evangelist for chicken and it’s potential as a cornerstone of the fast-food menu.”

Leonard continued:

He also made it clear that Tyson, and only Tyson, could deliver millions of pounds of meat to a national food chain with an around-the-clock distribution system. His pitch was simple: — Look, we’ll dedicate a whole plant to your production. We’ll cost it out, where you give us a reasonable margin. And we’ll just run your product. We can do this cheaper for you. And because it’s a dedicated plant, you can look over our shoulder on quality control all the time.

After 14 years of pitches, McDonald’s agreed. Their food scientists figured out a way to grind chicken and encase it in bite-sized breading. The McNugget was the perfect food for a person on the go.

As Don Tyson promised, his company retrofitted a plant in Nashville, Arkansas, to make nothing but the McNugget. By 1983 Tyson was supplying the McNugget to McDonald’s stores around the country. Don Tyson had finally found a chicken product whose price didn’t fluctuate with the wholesale market for fresh chicken. It freed Tyson, at least in part, from the vicious commodity price cycle that tortured the industry.

As Don Tyson had envisioned, chicken products slowly began to creep onto menus across the country. Eventually, chicken would overtake beef and pork as the most-consumed meat in America.

Within a decade, Tyson was making chicken for both McDonald’s and Burger King. Shortly later it became the most consumed meat in America.

What me, Skeptic?

It’s easy to see why Beyond Meat is excited about the partnership news. The rationale is obvious. Having Beyond Meat products at two of the nation’s most famous fast-food companies makes its products accessible to almost every consumer in the country. Instead of converting people through grocery stores, they’re effectively offering prepared samples across the nation. The mass of orders means that the company should be able to start taking advantage of economies of scale—driving down production costs. Given the optimism, there’s still one big elephant in the room.

Do people like Beyond Meat’s plant-based meat substitutes?

Most analysis I’ve seen on the question points to larger trends in the category. Morning Star’s recent report is a good stand-in:

We expect the global PBM market will grow from $12 billion in 2019 to $74 billion by 2029 (a 19% CAGR), as PBMs grow from 2.5% of the ground meat market to 12%. We model Beyond’s market share increasing from 2.5% in 2019 to nearly 9% in 2029, as PBMs gain a larger share of the overall meat category, and as Beyond’s brand continues to win with consumers, given its strong performance in taste tests and ongoing R&D investments.

What’s driving this growth?

We expect a primary growth driver to be the 20% of consumers willing to adjust their habits to benefit the environment, as Beyond’s products emit 90% less greenhouse gases, require 93% less land, 99% less water, and 46% less energy to produce than their meat equivalents

So it seems to me, that a lot of this overall optimism is built around the assumption that a critical mass of consumers will adjust their consumption habits based on environmental concerns. That logic seems to go against almost all of our lived reality. Tyson leveraged food service contracts to standardize a category that people loved. Beyond Meat is betting on this in a category that no consumers really asked for.

I think the hard reality is that unless Beyond Meat offers a cheaper and healthier product than traditional meat, it will be little more than a curiosity.

Image via Flickr