All summer I've tried to stay mum on Beyond Meat's (BYND -0.11%) rise to riches and the surrounding debate. It soared from an initial public offering price of $25 all the way to nearly $240 per share. But as of this writing, the food company, which specializes in plant-based meat alternatives, is down to $154, good for a gain of "only" 516% from its May debut.
I'm ready to weigh in -- but not because I want to talk about how overpriced the stock is (that's been done enough); or whether plant-derived protein is really meat or not (that debate may never die). Rather, it's the fact that, in a wild year of hot IPOs, many investors seem to have forgotten how difficult it is to disrupt -- and stay atop -- an industry, especially one that's already a commodity. Food is a commodity, and while food innovation is alive and well and meeting shifting consumer demands, innovation alone isn't a reason to invest.
Beyond Meat's latest rival
Driven by a desire to be more health conscious and thoughtful about environmental issues, many consumers have been increasing their consumption of plant-based foods. Restaurant industry research group Dining Alliance said that sales of meatless alternatives to restaurants have rocketed 268% higher in 2019.
Beyond Meat got a headstart -- its 2018 sales increased 170% to $87.9 million, and through the first half of 2019, sales are up another 257% year over year to $107.5 million.
So far, so good. But with great success comes unwanted attention. Food companies -- many of which are starved for sales growth -- have been lining up to cash in on some of Beyond Meat's surge. It isn't the only start-up offering plant protein (there's also Impossible Foods), and grocery stores are launching new products under their private-label brands, as are other major food companies. The latest entry? None other than the world's largest food conglomerate: Nestle (NSRGY 0.37%).
Through its subsidiary Sweet Earth, which it acquired in 2017 for an undisclosed and likely small sum, the consumer goods giant will launch the Awesome Burger and Awesome Grounds in the U.S. It already has a solid lineup for distribution, including Safeway and various regional chains owned by Kroger, and is reportedly working on getting into Amazon.com's Whole Foods. Nestle has already been selling a similar product under its Garden Gourmet brand in Europe.
Innovation needs to be paired with a competitive edge
But what about Beyond Meat's early-mover status? Surely that's worth something, right? It most certainly is, as evidenced by the company's triple-digit sales growth. Being an early mover is one way to gain the upper hand, but by itself it isn't an enduring advantage. I'm thinking of what's happening to Netflix right now and to a lesser extent, Tesla. Pioneering a new industry got both tech companies a big headstart that has forced competitors to play years of catch-up. As Elon Musk said last year during an earnings call: "What matters is the pace of innovation. That is the fundamental determinant of competitiveness."
The problem as I see it is that while Beyond Meat has a new process for producing meat products, food is not the tech industry. The barriers to entry are too low, and it doesn't take the same amount of large critical mass to reach breakeven as launching a TV streaming service or manufacturing electric cars does. A commodity is a product that has plenty of comparable alternatives, and it's a market in which consumers are sensitive to price. Food is practically the definition of what a commodity is, and thus can be a challenging industry to invest in.
It remains to be seen how commoditized Beyond Meat's plant protein will be, but the speed at which comparable products have popped up and the extent to which they are getting shelf space in stores would indicate its pace of innovation may not be fast enough or happening in enough places.
The one thing it does have going for it? As stated in Beyond Meat's pre-IPO prospectus, the global food industry is valued at $1.4 trillion and highly fragmented. That gives the company plenty of room to maneuver since it's still a small player.
I think Beyond Meat will be around for a long time. Nevertheless, Nestle's entry into the fray -- along with myriad other food companies -- could be significant. Time will tell, and I could be terribly wrong. But 2019 has been particularly frothy when it comes to high-flying IPOs. As has happened in the past, many of them are likely to play out as overhyped, getting disrupted themselves after a quick 15 minutes of glory. It's time for a healthy dose of investor skepticism.