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Food Disruption Part 2:  To Market, to Market … or Not?

SFA president sees Beyond Meat as case study in delicate balance between food and financial engineering
innovation
Photograph: Shutterstock

The food industry is being transformed from within by consumer-focused, small food companies that have been steadily loosening the lock hold maintained for decades by big food manufacturers. In part one of the series, Specialty Food Association President Phil Kafarakis examined the anatomy of a classic food startup, Beyond Meat. In this second installment, Kafarakis discusses Beyond Meat’s initial public offering (IPO), and the lure and pitfalls of Wall Street, as it struggles to hold a sustainable business position.

Beyond Meat is an instructive case study in the tension that occurs when a great new food idea starts to scale, and what happens if they decide to go public. On the one hand, the entrepreneur at the helm has to execute a plan that will enable the company to rapidly expand, increase distribution, and broaden its product lineup without sacrificing quality. And on the other hand, that same leader has to project confidence that the envisioned financial future will actually come about, so that investors don’t pull the plug too soon.

This can lead to the fracas of short-sellers putting a noose around the neck of the company and pouncing, hyena-like, the moment the subject has been brought to the floor. This delicate balance for Beyond Meat was, debatably, made more precarious when Ethan Brown took a few chips off the table at a psychologically volatile moment. But we’ll get into that in a bit.

Stepping back, once an innovative food startup has hit its stride and starts to gain significant distribution for its product, they need to look at scaling and, particularly, how that’s financed. 

We previously talked about the meteoric rise of Beyond Meat, a highly disruptive, environmentally conscious company built around a product that has broad enough appeal to have attracted some of the country’s leading investors. Beyond Meat’s founder and CEO, Ethan Brown, went through five or six rounds of funding, with investors who have been actively engaged from the start in building a new model of sustainable business.

Food startups have a particular challenge: convincing their shareholders, the marketplace and the consuming public that they are not just a fad and will survive long term. While consumers may opt for a plant-based burger thinking it’s healthier than eating meat, and may even be encouraged by a sense that they might be benefiting the planet, the product itself must be appealing enough to become habit forming—not a one-off. That is the essence of Brown’s premise, and what he has been banking on.

Beyond Meat’s business model of gaining wide distribution through many strategic partnerships has been successful, with $71.8 million in revenue over the past two years and an expectation of $340 million more over the next two. The company has gained wide grocery distribution, far ahead of its direct competitors, as well as partnerships with Dunkin’ Brands, Del Taco, Yum Brands (including KFC) and privately held Carl’s Jr. There’s been a pilot in place with McDonald’s in Canada since the end of September 2019. Yet, the months since Beyond Meat’s IPO in May 2019 have been a wild ride for stock owners, driven partly by market psychology and partly by financial engineering.

Beyond Meat recently announced strong third-quarter earnings: double the earnings per share that were expected, 10% more revenue than anticipated and more than half of sales direct to consumers in grocery stores. In building out their business model, they brought in a whole new team of trained professionals; they’ve invested in new equipment to expand their capacity; they’re introducing a new group of products; and, as above, they’re rapidly expanding their distribution. In short, they’re doing everything right to grow as a company.

So why has the market beaten up on Beyond Meat, and what lesson can we draw out from that to other similar startup situations? The very day after these optimistic third-quarter earnings were announced on Oct. 29, Beyond Meat’s stock tanked. It is still trying to regain its footing. What happened?

Let’s look at this. When Beyond Meat finally took flight, everyone wanted a piece of them. They entered the market seriously overvalued, because, as happened in the Silicon Valley tech bubble, all kinds of investors flooded the market to be part of their success story. And given the overly frothy valuations, it’s inevitable that the naysayers would see this as an opportunity to short sell. And short-sellers there were, if not betting that the venture would fall apart, betting that the company’s valuation was well-beyond what it’s able to deliver. At least for now.

From a low IPO price, Beyond Meat’s stock (BYND) climbed to a meteoric high in July 2019.  Shortly after this peak, however, when Brown announced he was going to take some money off the table by cashing in some of his shares, BYND took a dive. The company’s directors came in and tried to reengineer matters to prevent the stock’s collapse, smartly pricing the new release to let some of the air out of the pent-up short selling. Oct. 29 was a fateful day for this stock, because it marked the moment when the lockup period for early investors expired. Short-sellers forced the price down, making a mint, and Beyond Meat has yet to recover.

The financial engineering of these short-sellers has caused much confusion over how this company is valued, or should be valued. In the case of Beyond Meat, its initial valuation was well-beyond what it could realistically deliver—and that should never have happened. 

Still, I believe that it’s better to grow this business out of the public markets than staying private, as their largest competitor, Impossible Foods, is doing. This company too is getting a lot of press, with people prodding them to spill the beans on their financial strategy. Why hasn’t Impossible had an IPO yet? Lack of capital, says its founder and CEO Patrick Brown (no relation to Ethan).

The story of these rivals is still being written, but for me, here’s the lesson we can draw beyond Beyond Meat: We’re going to find out who is running a better financial model or has a better financial play. They’re both doing the same thing—growing and scaling a business—but only one is doing it in the public markets. I believe that in these delicate emerging industries, if a startup does take public funding, there should be more stringent embargoes placed around financial engineering.

For example, how about putting limits on borrowing stock—on which short-sellers rely—while the company is establishing itself, much the same way that if you’re an insider, there’s an embargo on selling your own stock. By subjecting itself to the high winds of Wall Street, is Beyond Meat perhaps also opening itself up to forging a more solid and sustainable brand base? Time will tell.

A burger is a burger is a burger … or is it? In the next article in this series, Kafarakis will look at the regulatory headwinds that could potentially use the very definition of “burger” against Beyond Meat and its competitors.

Phil Kafarakis is president of the Specialty Food Association, an umbrella organization representing 4,000 member companies in the food and beverage industry. Reach him on pkafarakis@specialtyfood.com and follow him at @PresidentSFA.

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