1 High-Growth Move Solazyme Needs to Make in Food Ingredients

Image source: AlgaVia (Solazyme).

Do you think Solazyme (TVIA) has a great strategy for food ingredients? The company first developed food ingredients several years ago, but the AlgaVia and AlgaWise portfolios have yet to demonstrate much commercial traction. Sure, it will take time to grow demand and capitalize on the opportunity, but perhaps the strategy of pursuing bulk supply is distracting management from a larger, more immediate, and more valuable opportunity. As many food start-ups have demonstrated recently, developing an in-house food brand that is sold directly to end customers can be a less expensive, higher-growth strategy. 

Take Silicon Valley food tech start-up Hampton Creek as an example. It was founded in 2011 to develop plant-based food ingredients, such as its flagship product Just Mayo, followed by Just Cookies and Just Cookie Dough. An ambitious marketing strategy allowed it to generate $30 million in revenue in 2014 -- in "just" its third year of existence. Amazingly, Hampton Creek has raised a grand total of $120 million in its lifetime. Solazyme has more cash in the bank right now.

That begs the question: What is Solazyme waiting for?

Food ingredients: supply vs. direct
The recent performance of Solazyme and other industrial biotechs has made one thing clear to investors: it's incredibly difficult to make a splash supplying bulk chemicals and ingredients. That difficulty has kept manufacturing facilities from running at full capacity, which has kept companies from realizing production cost benefits from economies of scale, which has kept companies producing at losses, which has scared away potential customers already skittish about handing over a piece of their supply chains to a young company with a new technology platform. Although, to be fair, several industrial biotechs built large facilities with the intention of producing chemicals with massive markets (such as fuels and commodity chemicals), then pivoted to producing niche chemicals with much smaller markets, but are still stuck with the same giant facilities! It's a complicated -- and messy -- time for the sector right now.

Despite the troubles, many investors are counting on next-generation industrial biotechs to make good on their potential eventually.

While Solazyme is knocking on the door of a major potential opportunity in the bulk supply of food ingredients with its AlgaVia and AlgaWise brands, it will likely take years to insert itself into the supply chains of major food companies (and displace other suppliers). A food brand sold directly to end customers could overcome those limitations by selling through supermarkets, restaurant chains, convenience stores, and more.

Solazyme has what it needs to get there, too. Consider the three products currently in the AlgaVia and AlgaWise portfolios:

NOTE: GLUTEN-FREE, NON-GMO, AND VEGAN AREN'T WHY THESE INGREDIENTS ARE HEALTHIER. SOURCE: ALGAVIA (SOLAZYME).

More oils and food ingredients, such as butter replacements and cocoa flavors, are in the pipeline -- all of which could contribute to a brand that sells directly to end customers. Other food tech start-ups are already making the boring food sector more exciting and feeding the enthusiasm of investors along the way.

So where's the direct brand of food products? Why can't you buy cookie dough made healthier with microalgae flour (I ate cookies at the company's HQ in 2014 -- delicious!)? Where are the microalgae protein shakes developed, marketed, and sold by Solazyme? A 10-pound bag of high quality microalgae protein powder could easily fetch over $100, which would make AlgaVia Protein worth more than $22,000 per metric ton -- much more valuable than bulk supply.

Things are a bit chaotic at the company right now with ongoing production delays and unexpectedly weak commodity markets, but now is the time for management to make bold moves for the long-term, not to ratchet down production and wait it out with their tails between their legs. The company has nothing to lose by reducing the focus on bulk supply and rallying employees to quickly develop high margin, in-house brands.

Conversely, the company has everything to lose by doing nothing and continuing to pursue industrial biotech business strategies that have failed or have yet to be proven. Almost as quickly as news leaked out that Solazyme microalgae food ingredients were supplied to Silicon Valley food start-up Soylent, the start-up's CEO admitted that his long-term plan was to manufacture microalgae ingredients in-house, which is a nice way of saying that Solazyme will be left behind. 

What does it mean for investors?
There's plenty of evidence to suggest that focusing exclusively on bulk supply has become an outdated business strategy for industrial biotech companies. Others are developing and launching in-house brands for everything from cosmetics to hand cleaners to soaps in an effort to insulate against the long market development timelines and low margins inherent to bulk supply and production.

Considering the broad potential of Solazyme's technology platform, management should consider building in-house brands around more of its renewable oils. It would be a smart way to add value to commodity products (another example: low value, bulk supply surfactants could become high value, direct to consumer soap brands) and would expedite the arrival of profitable operations without needing to ramp production anywhere near full capacity. Investors shouldn't expect Solazyme to replicate Hampton Creek's success with a hypothetical direct-to-consumer food brand of its own, but it demonstrates the opportunity at hand.

If Solazyme isn't already working on a direct-to-consumer food brand, then it needs to start -- yesterday.