IPO Watch: Oatly

As the largest oat milk company in the world, Oatly has taken the alternative milk world by storm. Now, Oatly is setting its sights on financial markets. In this episode of Industry Focus: Consumer Goods, join Motley Fool analyst Asit Sharma and Industry Focus host Emily Flippen as they breakdown Oatly's F-1 filing and determine if investors would be wise to take a big gulp of this unique consumer goods company. 

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This video was recorded on May 4, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, May 4th, and I'm the host of this consumer goods episode, Emily Flippen. Today, I'm joined by Motley Fool Analyst Asit Sharma, as we take a look Oatly's F-1. Asit, thanks for joining.

Asit Sharma: Emily, thank you for having me. This is something I've been looking forward to because I have a little bit of experience with the product and I think you have a lot.

Flippen: I'm not sure if I'd say I have a lot. I will say I have a very narrow range of experience with Oatly's oat milk, in particular their chocolate oat milk. I'm not sure if anybody listening is a big fan, but I have been through many and alternative milk, chocolate milk in my day and age, and Oatly, in my opinion, it's by far the best. When I'd seen that they had filed their F-1 to go public, I was very excited, just selfishly knowing that I was a fan of their chocolate oat milk.

Sharma: That's as good a reason has any. Sometimes, we noticed that the products that we take a shine to can make really good investments. Now, whether this is a good investment or not, I think we'll probably have to find out over the next 30 minutes or so.

Flippen: Well, I'm clearly not an unbiased party here.

Sharma: I'm going to try to hide my opinion as I sometimes do till the end.

Flippen: I love coming into these episodes with you blind, Asit, because I put my thoughts out into outline because otherwise, I will, by no means, ever remember what it is that I wanted to talk about in the show. But I'd love it whenever you don't put your notes in the outline, mostly just because I have no clue what you're going to say, and that mystery just keeps me on the edge of my seat.

Sharma: Well, one of these days, if we ever record on April Fools, I will have to do that. The way this works is, as you all might guess, Emily is very good and organized and energetic. Oftentimes, we'll just split an outline or I'll put a lot of comments in an outline she's done. Once in a while though, maybe on April 1st of 2020, to be like this, I don't put any notes in and every point Emily makes, I will contradict it and I will have these big huge size when she's talking about the financials. When she says, "I like the margin on this company," you hear audible laughter. I'm waiting for that. You just gave me a great idea. Maybe I've just given away the joke, though. But yeah, we'll see as we go along.

Flippen: You're going to make me an extremely insecure host because your financial background is far superior to that of my own. I'm always already nervous whenever I talk about finances in front of you, because I'm like, "Oh, is Asit going to disagree?" I mean, it's like that would haunt my nightmares.

Sharma: Well, Emily, you'll soon, I'm sure, have your CFA to hang by your name. So then the tables will flip and then I will be really watching everything I say about yours. 

Flippen: Well, I hope you're knocking on wood right now, Asit.

Sharma: I'm knocking on wood. In keeping with a long-standing obsession with all things Turkish that I have, although I'm not Turkish myself, I don't have the time to explain the story. I'm also tugging at my ear for you to wish you good luck on any future sections.

Flippen: Thank you. Well, I guess at some point, we should probably talk about this business. For anybody who's not familiar, Oatly is the largest oat milk company in the world. While that's always fun to say, I will mention, it's not like there's a ton of oat milk companies in the world, but there are certainly more today than there were even five or 10 years ago. In addition to oat milk, Oatly also sells ice cream, yogurt, cooking cream, spreads, ready-made drinks, all of these things formulated from their proprietary process of extruding oats into liquid, which doesn't sound very appetizing but consumers think it tastes pretty good.

Sharma: Yeah. This is a company that reminds me of some others in the space that have come along such as Fairlife Milk, the A2 Milk company. These are all various takes from different angles on a big problem in the world which is lactose intolerance. Interesting in that, and also interesting as we'll get into, Emily, that this is not a U.S.-based company like A2 Milk, which I think is either Australia or New Zealand. This was formed way outside the borders of the U.S. so we get to see it from the perspective of a company that in this case, grew in Europe and landed in the U.S., and we can watch its market evolve in real-time here.

Flippen: Yeah, this company, to many surprise, has actually been around since the 1990s. It was founded by two food scientists in Sweden who wanted to just make better milk, both for people who are lactose intolerant as well as people who needed stuff like fiber. It wasn't an easy ride. I encourage anybody who's interested to dig up some of the interesting stories behind Oatly. They had a lot of legal fights with traditional dairy companies, most of whom are better capitalized than Oatly, over the controversies of what is milk, and should consumers be drinking cow's milk or oat milk? It's an interesting story. But this is all to say that while Oatly was growing since the 1990's, there really has been an undeniable trend especially in Europe and especially in Oatly's home country up Sweden of decreasing milk consumption and increasing alternative beverage consumption. That's a trend that we've seen continue across most markets that have readily available milk alternatives.

Sharma: The thing I want to stress here is that phrase, most markets, because we shouldn't paint it as simply a European or U.S. phenomenon. This is a global phenomenon in both developed and emerging economies. People are second guessing that cow's milk should be a primary source of milk. As we work through this business proposition, I'm going to try to keep in mind that it's a much bigger opportunity than just the U.S. or Europe where I think they are its two biggest markets so far.

Flippen: One of the things that I love about this business, I think it's going to surprise a lot of listeners, is that international aspect. While Oatly sells in more than 20 markets across the world dozens of different products, they actually have a pretty big market in China of all places. They've been selling there since 2018, they have nearly 10,000 locations that are selling Oatly products there. It's a challenging and really unique market to penetrate and I think it's really impressive that Oatly, being a relatively small business, was able to partner with Alibaba, a much bigger business, obviously, in China which has led to a huge rapid expansion of its market share in China. As we're talking about these businesses, while there is a lot of focus on Sweden and the E.U. and the U.S., we can't leave out the China story because China plus a lot of other developing economies that prefer milk alternatives, especially if they have a largely lactose intolerant population. These are untapped and exciting markets for Oatly to try to penetrate in the future.

Sharma: It's so interesting. I think that this shows some of the acumen of Toni Peterson, the CEO, who was brought in after the original founders grew the company to a state where they needed another pair of hands to really steer it forward. This is something, I mentioned the A2 Milk company, which also is closer to the Chinese market physically than most companies. They have a really big investment in China. China, and Emily you've lived there, so for me, this is really reading about the country, but I think you've probably seen this as well. They have such a young population and milk as a nutrient is such a huge emphasis there. It's a massive market with massive potential. This go-to-market strategy that since 2018, they would have hit this many locations in such a short time. I think it's really telling about the company if you're looking at this F-1. Like an S-1, you have to file your statement, your prospectives with the Securities and Exchange Commission. If you're a foreign issuer, then you often are required to file an F-1 instead of an S-1 which is what U.S.-based companies will file. But I think the F-1 reflects the potential of the massive global market and China is such a great example, Emily.

Flippen: Oatly has a really unique process of entering new markets. I like the fact that it's simple, direct, and effective. Their go-to-market strategy is really just the first target specialty food service, in particular, coffee shops. Whenever they're interested in entering a new market, whether it'd be an entirely new country or maybe just an expanded geography of a country in which they already exist, they first go to, say, your local mom-and-pop coffee shop and they'd say, "Hey, are you interested in adding oat milk to your menu?" They convince all of these more niche food service locations to stock and carry Oatly. Then once they have Oatly in those locations and people are consuming the product, they become familiar with the brand and they're able to build up brand awareness, build up brand loyalty, and then they hit the larger shops and then lastly hit retail shelves. 

If you're a U.S. listener in particular, if you only recently started to see Oatly products on your shelf and retail stores, you're actually really far past the wave of Oatly in the U.S. because they first tackled specialty coffee shops and then more recently, shops like Starbucks which has really made a dime for itself because Oatly products which is Starbucks' oat milk offering of choice have had issues becoming so popular just over the last year or so that they actually sold out of this oat milk nationwide. I mean, it has truly been a phenomenon.

Sharma: This is something so interesting to me, Emily, when we were first kicking around this idea, I think I mentioned to you that I first heard of Oatly in relation to a very specific, but important geography in the U.S. when it comes to the coffee market, which was Brooklyn, and the demand that baristas in Brooklyn had for this product. If you've seen us on the store shelves, they've got two products which are essentially differentiated by fat content. They've got their regular brand, which most people buy that's got a 2% fat concentration. Then they have the barista product, it's a test barista on it, and that has a 3% fat component to it. This is what baristas love because with that, instead of having a lactose base product, they can make a cappuccino or an espresso macchiato or name your drink. If you're from South America, there are other names for this. I want to say pingas is a similar type of drink, but you can get the concentration just right, the ratio of milk to coffee with the texture you want. 

The barista product is what drove people crazy, drove them bananas. They loved it so much, and I want to say that that one landing in the U.S. in one borough of New York really just sparked their expansion here and paved the way for them to follow up their strategy. I was so impressed by that. Then I forgot about the brand in terms of a potential investment. Although my wife is a big fan and we have Oatly in our fridge now, I'm still old school, I drink 2% milk, cow's milk. But it really shows in some ways also how savvy the company is. If you've seen their branding, how to describe it, it's hip, it's aimed at the younger generation, it's very composed. These are often very sculpted and put-together shots that can recall any number of things, let's say a hipster drinking a bit of milk. But their branding is very much about a younger generation. I would say even younger than millennial. There is a lot to like in their marketing capability. But Emily, you have some statistics that you wanted to share about them as we work through the other parts of the business proposition. I'll return to branding in just a moment.

Flippen: Yeah, I did mostly because when I was reading through the F-1, this stood out to me as particularly astounding. Mostly because I have this very narrow mindset as somebody who lives in the United States about the demand for oat milk. I didn't quite understand how prevalent it was in the other markets for which Oatly was operating. First, for some numbers, I mentioned their expansion in China. Their sales in China were up 450% over the last year. Crazy expansion there, but they're not just growing quickly in China. Over the last year, they've grown sales 99%, 200%, and 182% in the U.K., Germany, in the U.S. respectively, has huge growth rates. But when you just look at oat milk, those growth rates are wonderfully high numbers. But if you're moving from 1-20, that's very different than here for moving from 200 to 2,000. 

What stood out to me was just how popular oat milk was in Sweden, the U.K., and Germany in comparison to the United States. When you look at the alternative milk segment in the United States, it's by far almond milk being the most dominant player over 60% of all alternatives milk sold is almond milk. Oat is the second at 14%, soy at only 9%. So oat is in the game, but it's by no means as prevalent as almond milk is. My incorrect assumption was that this same trend would play out in Sweden, the U.K., and Germany. I love almond milk, I drink it every morning. I'm horribly wrong there, 72% of the milk alternatives segment in Sweden is oat milk, 42% in the U.K., and 60% in Germany. Oat milk has far surpassed the growth of all almond and soy milk in each of these markets. It is out so far surpassing growth in almond milk in the U.S., which has actually contracted over the past couple of years. People love oat milk. I'm still an almond milk person myself, but don't write off this segment just because of our very American mindset of seeing almond milk all over the shelves, oat milk is here to stay.

Sharma: It is, and this brings up a big picture question which is, to what extent will U.S. consumers see oat milk as a replacement for milk in coffee, which is right now a big component versus an almond milk, which tends to be drunk by the glassful. Emily just said that she'd drink a glass every morning. I would be curious to see how this evolves over time. Part of it is marketing and convincing the consumer that oat milk itself is something that is healthy for you, it's good for you, and I think that Oatly has already survived one round of bad press. I want to say this was 2019, early 2020, where some people were questioning the healthy ingredients and pointing out that if you drink many glassfuls of this, you get a spike in your glycemic index. But then if you think about it, that's true for any beverage that's not water. This can be a result of having to be energy drinks. You could have too much caffeine in your system or too many Coca-Colas that could also cause your blood sugar to rise. 

There's so many arguments around beyond meat, this is the closest analog we have here in the states that's a well-known brand name where there's an initial wave of enthusiasm and then there's a little bit of brand pushback and ingredient pushback as people start to wonder or look how processed is this product. I think you're going to see some cyclical brand perception changing as people grapple with an alternative to almond milk. But I think on the whole, I would guess if you look at the charts in the F-1 which Emily had conveniently provided to me, the trajectory, if it's anything like it was in Europe, oat milk's market share of the future to take away from almond milk as they shift the marketing a little bit away from the coffee oriented product to something that's very drinkable. Toni Peterson, the CEO, of course, is very into that aspect of the marketing. He wants you to have that on your breakfast table every morning.

Flippen: It's funny that you've mentioned the health pushbacks because, in my opinion, this is probably one of the key risks with oat milk as a product, especially aimed at American consumers. If you look at the trends of what%age of oat milk sold is Oatly, in the U.S. it's significantly lower than virtually every other market that Oatly is in right now. I mentioned 14% of the milk alternative market goes to oat milk in the U.S., if you break that down to just Oatly products, it's only 4%. They are only a nominal part of the entire oat milk industry in the U.S. at all. Now, one person may look at that and say, that's a great opportunity. They're going to expand their market share. They don't need oat milk to become bigger than almond milk, they can just expand their market share within the existing oat milk segment. The reason why that I think is going to be challenging in the U.S., in particular, is because of the rules the FDA has around the way that we report nutrition labeling. 

Oatly has a proprietary and patented process of extruding oat milk. Basically, it uses enzymes to break down the oat during the production process, and this harkens back to that 1990s food scientists founders who wanted to create an oat milk that had higher retention of dietary fibers. That was healthier than other oat milk. Now, retaining this dietary fiber through that enzymatic breakdown, it's wonderful, but it also creates a nominal amount of sugar. That's normal, that's sugar that your body would have created that just adjusted it without having those enzymes break it down beforehand. However, that has to be labeled as added sugar under the FDA's guidance in the United States. Somebody picks up a container of Chobani oat milk, which doesn't use the enzymatic breakdown that Oatly does, and they see no added sugar. They pick up Oatly, they see, I think it's seven or eight grams of added sugar and they think to themselves, well, I'm going to make the healthier choice here, and they don't buy Oatly. Even though nutrition labeling is a little bit misleading within itself, that process allows for better dietary fiber retention, but it also leads to a higher reported sugar content despite not having added any sugar, literally added any sugar. It's an interesting conundrum that I think Oatly is up against. I don't see them changing their formula. Maybe I'm wrong, but I don't see them changing that special proprietary formula just for the U.S. market. But that puts the onus on them to educate consumers about, OK, what is this added sugar, why is this added sugar not as bad for you as you may perceive just from this nutrition labeling. That's a challenge. I wonder about their ability to get market share in the U.S. as a result.

Sharma: It may take some more time. Really great explanation, and it's a consequence of enzymatic research being much bigger in Europe in the food market than it is in the U.S.. In fact, we're net purchasers, I believe of enzymatic products from Europe. The companies in the Netherlands that just specialize in this. Germany is a big leader as well. In Europe it's no big deal for the food authorities of the European Union to label this as enzymatic where in the U.S., we're still wrapping our heads around that concept. That might be part of it. Another part of it too, Emily that I was saying, I was trying to figure out also why this curve hasn't been faster. 

When Oatly first came into the market and sparked this craze, there was a run on oat milk, it was in short supply, and their price-point spiked. There were no other real competitors. But in a short amount of time, competition came in. I think Pacific Foods, which is now owned by the Campbell Soup Company, was quick to get a product on the shelves. There is a company based in California called Califia, which I believe this was the beginning of 2020, they received about $225 million worth of investment in venture capital, pushing them to a valuation at that time of about $800 million. In fact, they were supposed to be the first company to come to market with oat milk. It's surprising now, Oatly leapfrogged that. But Califia actually came to market very quickly also, so we had some pretty big hands in the U.S. Then eventually, as you mentioned, Chobani came into the market, stabilizing the prices. I wonder if there's some residual association with price that Oatly is expensive because it was when it led the market. Even if you go to your grocery store shelf now and look at their non-barista product versus any other price points or roughly similar, I think it's maybe four bucks for that slim bottle, I'm not sure if that's a quart exactly how much the volume is of that container. I wonder if there's still some perception of price that actually doesn't exist.

Flippen: That's a really good point. I didn't think about that. I bet to some extent there is, especially because of how competitive the space has become, I wonder if there's a level of price sensitiveness in oat milk consumers that probably isn't working in Chobani's favor.

Sharma: Could be.

Flippen: I see that we already have a question as we tape here on Motley Fool Live. I see we have a question that harkens at the market opportunity here for Oatly which is sustainability. One of the key aspects that has worked against almond milk has been it's extreme land and water usage. It's a healthy product, but it's healthy for humans, maybe less healthy for our environment, and Oatly while not breaking down water consumption does claim that the production of their oat milk uses 80% less greenhouse gases, 79% less land usage, and 60% less energy consumption than traditional milk. Moving away generally from animal-based products to alternative products has been a trend that has helped the environment. While they didn't break down all of that information about how it compares in particular to almond milk, I do think that sustainability and maybe being a little bit more environmentally conscious is certainly a key aspect, when consumers are making their choices in the grocery stores.

Sharma: It matters to a younger consumer. I'm always warning on the show, don't extrapolate from my personal experience, don't take anecdotal evidence as anything, but still, we always talk about it anyway. Let's consider this. Over the last two years, except for fish, I've become a pescatarian, so I haven't had a steak or a hamburger or any kind of chicken now, I think it's like 18 months because of our youngest who for environmental reasons, just one day just stopped cold turkey and became a vegetarian and eventually allowed fish into his diet. Very interesting though, how attuned the younger consumer is to the stats that you just mentioned, Emily. I can totally see those who are younger than the millennial generation choosing oat milk versus almond milk because they're so aware of the environmental impact of everything that they consume. This is arguing for a long term investment in this company. I have one thing to tie to this, which we can talk about toward the end of the show too, but I'll go ahead and mention it here. I really love that Oatly has about 90 patents globally. What do you think about this product, it isn't just a milk product. They have a whole line of products that are in development. Some of those, like oat-based yogurt, may over time catch on more in the United States to a consumer that admittedly still doesn't really care that much if you take the aggregate U.S. consumer, we're OK with the environmental impact of what we eat. We're going to make the choice first to eat what we like versus what we think is good for the environment. 

As I said, that's changing with the younger generation. But counterbalancing that is, I think a lot of product extensions. I've seen that with the company I really like called Vital Farms, which started with pasture raised eggs and has moved onto pasture raised ghee, which has clarified butter made from those same eggs, and I see some potential here over the long term when you take this environmental advantage versus almond milk and certainly versus cow's milk, that's also tremendous environmental advantage. Couple it with a really nice patented process that's locked up. I think they have also, in the U.S., several trademarks that are already secured. You have maybe a really long term path for innovation here, so I'm less worried about the lack of market share vis-a-vis competitors, when I look at this company and more curious about its potential to expand laterally with different product lines.

Flippen: That is an interesting aspect that I don't think I quite focused on mostly because 90% of Oatly sales right now are in the form of oat milk. But to your point, they do have a number of different products. I'm excited to hopefully at some point try their oat ice cream. That sounds right up my alley. I like the idea of them expanding horizontally as well. But when you look at their financial performance, it's still a relatively small business despite its global footprint. Plant-based milk is in the $2.5 billion industry as of 2019. A relatively large industry, although still significantly less than the $600 billion, that is the global dairy industry, and despite having that $2.5 billion of opportunity right now, oat milk only did 3% of the sales that almond milk did within that industry. Looking at the financial performance of Oatly with just over, I think it's $420 million in revenue in 2020, while that was up 100%, this is still a really small and unprofitable business.

Sharma: Sure, it's going to need a lot of scale over the years. Maybe there is a bit of a cautionary tale here as well. When we look at A2 Milk, which I've mentioned a couple of times now. Not really advising investors to go out and find this company and buy it, but just as a good study that it takes years and years to achieve scale in this industry. Part of your competition isn't just the plant-based milk in this industry, but over time, it's going to be the extension of various alternative milk. Some that are based on enzymes as A2 Milk is, it's supposedly a type of milk enzymatically which won't produce the same products as typical milk does from a cow. The kind that predominates here in the U.S. market, A2 Milk is now of course, on the shelves in the U.S. I know I've mentioned this on Live before and have heard from viewers. But then also looking at products like Fairlife, which is owned by Coke, and yet to come products that can penetrate this market. It's a competitive market here for what has been a market that itself is declining. 

The specialty markets are all increasing, low to mid digit, some of them at a slightly higher rate, so specialty milks have a faster growth rate. But overall, the milk market in the U.S., when you include plant-based milk, is stagnant. That's a little bit of a cautionary tale. But I don't want to over-focus on the U.S., because I do think this is a global story, Emily. What do you think about the net losses and let's maybe tackle the gross margin. What are your thoughts on those two in the context of future growth for the company?

Flippen: Well, their gross profit margins are just over 30%, which I don't think is terrible for a business of their size. I was actually impressed while they did produce obviously some hefty net losses. Their operating losses have actually shrunk as a percentage of revenue as they've expanded. This is a type of business where I have no doubt they will continue to raise money to fund growth in the future. They are at that point where they are fighting for market share. They are fighting against competition, and they are fighting for differentiation across the world. Not just in the U.S., not just in the E.U. That's going to be a reality. I guess if you're investing in this business you're not doing so because they're producing a lot of cash, they're not. But what I think when I look at where their growth is coming from, more than 60% of their sales is coming from Europe, Middle East, and Africa. Then the vast majority of their sale is coming out of the actual food retail establishment of our food service. I think that says something about the fact that people associate with the Oatly brand. 

I do think that once people are frequent consumers of Oatly oat milk, they continue to come back time and time again which hopefully over the long-term gives them a bit of pricing power, gives them a bit of opportunity to expand their margins. Really briefly, the one last thing I'll add a little bit more technical is how Oatly has been producing their oat milk which has negatively impacted their financial performance. They simply don't have the facilities; the factories to keep up with demand. Right now they only have four factories, and only about a quarter of all of their sales last year were produced in these owned factories. They're using third party manufacturers to keep up with demand and absence of being able to produce their own. They're going to the process of expanding their factories, but that's a labor-intensive, time-intensive process. It was largely put on hold during the pandemic, so they're a bit backlogged right now. Hopefully, as they stop using third-party manufacturers, bring a lot of their productions in-house, that can also further help expand their margins in the future.

Sharma: So interesting, Emily. This is the ask. There's always an ask in a prospectus. What is the ask here? The ask is for you, the investor, to buy these shares so they can bulk up that balance sheet and expand capacity. I'm fascinated. If you look at how a dollar is used, part of it hits the income statement, part of it hits the balance sheet. In the use of $1 for this company, research and development expenses less than 2% in the most recently concluded year. That's a function of those couple of decades of R&D that have already come through the life cycle of expenses and investment of this company. You have a lot of firepower for every dollar of R&D now because you're just refining something that is already developed, it has been developed over a long period of time. This is an advantage over potential competitors, it's an easy avenue toward product expansion. It means that the biggest part of those dollars that are going to be spent will be in capital investment and marketing. It's clear from their financial statements; you pointed out, they're already seeing some operating leverage but selling, general, and administrative expenses are overhead. It's roughly 40% of revenue last year, and that number is going to probably stay at that really elevated level. Marketing expenses may increase, but those are going to be the two places this company puts its money. I think about beyond need, and I see a parallel here. 

There's another high-quality company that is offering an alternative to a traditional commodity that we consume; meat, and spending a lot of money to build out capacity. Emily, part of that capacity is being built in China. Again, it depends on what you think of Toni Peterson. Don't judge him only by his Wow, No Cow commercial. I urge everyone to go find this, Google it up on YouTube; Wow No Cow. You'll see the CEO giving his very well-thought-out analysis of why you should buy his product. If you believe in the places the company has already put its capacity and where it's landed on the ground, I don't know, there is something here where you could visualize an eventual path to profitability. I really love that the R&D line is not going to be a huge expense on the income statement. They've already put the money into that, now they're extracting revenue and cash flows from that.

Flippen: Well, let's hope they take some of the money from the IPO and put it toward internal controls. Add this business to the list of virtually every new business we talk about on this show that does not seem to be able to get their internal controls and check before going public. This business has always had material weaknesses and virtually every segment of its business, technology issues, no documented procedure for controls which is just comical, inadequate segregation of duties. These are just a few of the many aspects that regulators are probably going to have issues with this business that investors should be aware of before deciding to buy shares when this company does go public. Beyond material weaknesses which are always a key risk for me as an investor, what stands out to you, Asit, as a risk with Oatly?

Sharma: I think for me, maybe it's the competition that's going to only grow globally. Just in the U.S., we've already mentioned Chobani, we've mentioned Califia Farms, Pacific Foods, and that isn't even to talk about a number of smaller players in regional markets. I may have said this before, I'm industry-focused, but I'm fascinated by grocery stores. I used to spend a lot of my time as a rider at fool.com thinking about the different grocery chains and spend most of my free time. It felt like when our kids were young, we're running from grocery store to grocery store. Where I live is probably ground zero on the Atlantic Coast for different grocery chains that are coming from both Florida and New York plus the European invaders like Lidl and Aldi. Then you have small companies which are offering products that are picked up by Whole Foods; by their regional buyers. I've seen a trend where you have a product that seems novel at the time, like a meat alternative or an alternative to cows milk. You will see the leader that has developed its products with a specialty; in this case, it's an enzymatic process. You'll see that's supplanted a little bit on your local grocery shelf by a really cool, funky small brand that doesn't use a very sophisticated product but is selling the same thing; oat milk. I think I've already got one semi-local brand that I've seen in my local Whole Foods. 

I worry too just about the ubiquity of challengers to almond milk in the US. Let's face it, we know that this company already has great penetration in Europe. I give them plaudits for being so into China, but you have to have growth in the U.S. to compete on a global basis. This is still a huge market that every company that is in the alternative plants or alternative meats sphere, has to play in. I'm a little concerned that they haven't captured as much market share as I thought they might have. You've given me a lot to think about today when we think about the reasons; and I'll add in again my thought that maybe there's an incorrect price assumption by consumers. But I think that's a risk to growth here, which is a crucial part of their puzzle. Emily, correct me if I'm not mistaken. They want to build some more capacity out here in the U.S., is that correct?

Flippen: Yes, they're in the process, I believe, of adding another at least one more factory in the U.S. to meet demand.

Sharma: So that would be mine. What about you? What comes to mind when you're thinking about risks that you're paying attention to here?

Flippen: I think you're spot on with your risks, I'll add two more additional ones. One is they have this great relationship with Starbucks. I think that builds up a lot of brand awareness and like Starbucks uses it then when I make my latte's at home or when I make my almond milk products at home, I should use Oatly too. There's no contractual relationship with Starbucks that they have to use Oatly oat milk products. They choose to right now, but they could change their minds regarding their oat milk supplier anytime they want. I think that could be a key risk. I would also add that I think the core consumer, at least as they've outlined it in their F-1, are people who are younger, maybe a bit more environmentally or socially conscious consumers. People who are actively -- maybe not necessarily choosing oat milk because it tastes better than regular milk or because they're lactose intolerant, but because they think they're making the better social and environmental, and health choice for themselves and the world. I think there's some risk with the investors in the leadership at Oatly that could change that perception in the minds of consumers.

They have investors like Blackstone and a lot of relationships with Chinese investors and suppliers as well as they expanded into China. They have these mutual relationships, some investors that are sitting on their board at Oatly I think there's definitely social risks involved with the ownership structure that Oatly has outlined. A lot of their leadership and mainly their directors on their boards that Oatly outlined as independent directors have significant stakes in Oatly's investors. They're not quite independent, and I think those things in general if they aren't able to keep this fun, Toni Peterson singing about cows in a field. That's the atmosphere, that's the marketing angle they've run with. I think if people take a second look, wait, Blackstone's an investor and all these Chinese suppliers are an investor, is this a business that I really want to support? I think that it's probably going to be a more long-term challenge for them maintaining that image.

Sharma: It isn't just an image issue, it's also, I think an issue of influence as well. Blackstone, as you mentioned, being one of the largest asset managers in the world. These companies tend to have some sway in decision-making with boards if they get agitated with the direction a company is going in, so there is that queue to the risk as well. But any others that you want to talk about, or then we can move on to reveal what we think about this company as an investment.

Flippen: I say let's talk about what we think about this business as an investment. I can't say that I know we're going to land on this one Asit, I think you've done a good job of keeping your hand concealed.

Sharma: Here it goes, I am compelled by the company's branding power. I think that they really have their grip on an aesthetic that appeals to a younger consumer. Unfortunately, we can't present you the F-1 here, but I encourage you to look at the F-1 if you get a chance. There's a Rorschach test of their images. When you scroll past the boilerplate of the first page, you just get a series of images. I've scrolled through those very slowly, Emily, because I wanted to understand why they have this pull in the market. I get it after seeing the way they presented their billboards, these composed charts I was talking about, and I'm paying attention to brand power more and more. But for me, I think there may be other more compelling investments in this space, I've mentioned Beyond Meat a couple of times and Possible Foods may go public soon. They probably are onto a bigger market with less impediments to growth, I do like the intellectual property aspect of the story. I do like the global aspect of the story. But for me it would be a wait-and-see on how this Capex originates over the next couple of years. Because at the end of the day you're making one, two year investments to build capacity, and I want to make sure that that demand is going to be there. I surprised myself because when I started reading through the F-1, I was very interested and thinking, maybe we're onto something here. It was just a consumer brand I knew about and I had no idea until you slacked me Emily and said, "Hey, let's take a look." 

Oatly has in F-1 that they have hundreds of millions of dollars in revenue. You have to pay attention to that. At the same time, I feel like it's not my first choice when I look at this whole big picture of where you can invest in alternative plant or alternative meat stories. I like it, but it just did not generate my level of interest that I felt like I wanted to buy this when it comes out, or even I mean, want to buy it after a couple of quarters. This is going to be a one to two year watch list stock for me, but now talk me out of that.

Flippen: I actually completely agree with your opinion. I wish I could talk you out of it, but I'm actually going to reiterate everything you just said. In my opinion, I think my concern comes down with the demand for milk alternatives. Not that the demand isn't there, it clearly is there. Just the excitement around the different -- like, coconut milks, almond milks, oat milks, cashew milk, macadamia milk, I mean, the demand is there. But even with all of those things together, even the most aggressive projections for the alternative meat market globally are only reaching, say, around $20 billion in 2024. It's a small market right now and that can change in the future and I don't want to dismiss that, but I don't have any sense about what Oatly's valuation is going to be coming out the door. If it's anything like Beyond Meat, maybe this will be completely crazy, and that could probably turn me off as an investor, so no. Without having any pricing information, not getting any sense about the size of the business as it's going to be deemed valuable by the market. I tend to think that this is when I'll probably sit back and wait on. I want to see that $20 billion number start to climb. I want to see the projection start to grow exponentially the way that they did for say like electric vehicles. The projections for electric vehicles grossly underestimated the actual growth trend. That's the sort of trends that I want to see eventually happen for alternative milk. Until I start to see that curve start to turn, I'm probably going to be sitting on the sidelines.

Sharma: We have a decision, we're not going to forget about Oatly. But we're going to keep buying the product, not the stock as yet. 

Flippen: Sounds good. This sounds like there's a lot of research I'm going to have to be doing here on Oatly, which is going to involve me spending a lot of money on oat products.

Sharma: Yes, you and my wife so maybe that will figure into their income statement over the next few quarters. 

Flippen: Well, Asit, as always, thank you so much for joining me in chatting today.

Sharma: Great fun, Emily. Thanks so much.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out and say "Hey," feel free to shoot us an email us at [email protected], or tweet us @MFindustryfocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today, for Asit Sharma, I'm Emily Flippen. Thanks for listening and Fool on!