Beef prices are soaring. The USDA recorded a 9.3% increase in prices for beef and veal in 2021, and it expects another 6% to 7% increase this year. Meat processor Tyson Foods reported that its average price for beef rocketed 27.8% higher in the six months that ended on April 2. No matter how you slice it, consumers are seeing much higher price tags on their favorite cuts at the grocery store.
This seems like it should be a fantastic situation for Beyond Meat (BYND -1.46%). Beyond Meat's pea-based beef substitute is pricier than real beef, so it stands to reason that rising beef prices should make Beyond Burgers and other fake-meat products more attractive to consumers.
That's not what's happening.
Image source: Beyond Meat.
A crowded fake-meat aisle
Beyond Meat's first-quarter report was surprising in a lot of ways. Total revenue was up just 1.2%, gross margin essentially vanished, and the company posted a massive loss. The details don't paint a pretty picture.
Beyond Meat managed to grow its product volumes by 12.4% year over year, but that comes with two big caveats. First, net revenue per pound plunged 10%. As prices of real meat are soaring, Beyond Meat is suffering from declines in pricing.
Second, the first quarter included the launch of Beyond Meat Jerky. Sales of non-jerky products in the U.S. retail channel declined. U.S. retail sales were up 6.9% overall thanks to the launch, but U.S. foodservice sales dropped 7.5%. In international markets, sales were down across the board. Volumes were up internationally, but prices were way down.
The big question about Beyond Meat is whether consumers will treat its products like a commodity. Demand for meat ebbs and flows with pricing, with consumers choosing cheaper cuts or reducing consumption when prices are high. Commodity meat producers have no real pricing power.
It's now becoming clear that Beyond Meat doesn't have any pricing power either. In an inflationary environment, Beyond Meat has been unable to pass off rising costs to consumers. Here's CEO Ethan Brown's explanation from the earnings call: "But what's happening in the sector overall in grocery is you see all these new entrants coming in, and many of them are using price as a way to try to capture early market share. ... While the animal protein industry has been able to substantially increase pricing to essentially offset significant reductions in volume, in our sector, we have not had the opportunity to do that."
Beyond Meat's brand apparently means little when lower-cost fake meat alternatives are available. Brown thinks this competitive price environment is unsustainable, but I'm not so sure. If fake meat behaves like real meat, Beyond Meat's pricing will be largely out of its hands. That's not a recipe for exceptional profit margins.
An ugly bottom line
Speaking of profits: There were none. Beyond Meat posted a net loss of $100.5 million on $109.5 million of revenue. Yes, you read that right. Even worse: Gross margin was a paltry 0.2%.
One big problem was the launch of Beyond Meat Jerky. The launch was expensive. Beyond Meat pushed the new product out to 56,000 stores and used multiple production facilities, leading to elevated production costs. Jerky alone knocked down gross margin by 9.4 percentage points.
The rest of the gross margin decline was due to lower revenue per pound, higher manufacturing costs per pound, and higher logistics costs. Because competition is so fierce, Beyond Meat couldn't pass any of this off to its customers without risking a significant decline in volumes.
Beyond Meat has built up quite a bit of inventory, which is putting a strain on its balance sheet. Inventory has doubled over the past year despite flattish sales, while the cash balance has dropped from $1.13 billion to $548 million. Free cash flow was negative $187 million in the first quarter alone.
Stay away from this fake meat pioneer
No matter what you believe about fake meat and its long-term potential, it's hard to draw any real positives from Beyond Meat's first-quarter report. Competition is forcing lower prices as inflation raises costs, and the expensive jerky launch seems to me like an attempt to boost sales in the short term to offset weak demand for other products.
Beyond Meat maintained its full-year guidance, calling for revenue between $560 million and $620 or growth between 21% and 33%. I don't buy that for a second. When asked about this guidance on the earnings call, Brown said: "We feel good about that, and that has to do with where we see some of the core business going and the opportunities that we're pursuing today. ... I just think there's a need for people to take a step back here, when I talk about long term, there's also some immediate or intermediate performance coming up that I think is pretty promising."
This reads like, "Trust me, everything will be fine." After that first-quarter performance, I'll take a hard pass on extending that trust.
