In 2022, Beyond Meat (BYND -1.98%) went through one of the hardest challenges possible: It had a gross loss of almost $24 million. For those unfamiliar with the lingo, this means it cost more to make its plant-based products than what it sold them for. And this profitability metric doesn't even include other operating expenses like outbound shipping to stores, advertising, or the cost to develop new products.
The most logical solution to Beyond Meat's gross profit problem is to raise its prices. After all, grocery stores and restaurants are generally raising prices and passing on higher costs to consumers now because of inflation. But in this case, this is the one thing that Beyond Meat can't do.
Beyond Meat's true north
Since going public, Beyond Meat lowered the prices for its products, leading some to claim that increased competition is creating a pricing war. While competition is indeed heating up, few realize that lowering prices was the company's true north from the get-go.
Consider that Beyond Meat doesn't primarily hope to convert vegetarians and vegans into customers, since these are very small subsets of the population. Rather, it hopes to win over the much larger segment of the population that still eats meat. It's the right strategy. But for these potential customers, price can be a deterrent.
In its annual report for 2020, Beyond Meat's management wrote that its goal was to "achieve price parity with animal protein in at least one of our product categories by 2024." After all, imagine the power of having Beyond Meat products side by side with animal protein in the grocery store at the same price (or even someday cheaper). It's something that could send sales skyrocketing -- especially during times like right now when consumer budgets are stretched to the max.
Pricing could make or break the investment thesis for Beyond Meat stock. It needs to attract as many customers as possible so that it can achieve profitability through efficiencies of scale.
If the company's prices are too high, it will undoubtedly drive people away regardless of other selling points. Conversely, underpricing animal protein could make meat eaters buy plant-based products from Beyond Meat at least some of the time -- and "some of time" from a large percentage of the population would have a profoundly positive impact on its business.
Caught between a rock and a hard place
I purchased shares of Beyond Meat in 2020 because I saw signs that the aforementioned investment thesis was playing out.
Consider that in the fourth quarter of 2020, the net price per pound for Beyond Meat's products was $5.59, which was down 3% year over year. But net revenue for the company was up 3.5% in Q4 2020 and its gross margin was a stellar 24.9%.
For perspective, Beyond Meat lowered prices while having better growth and better gross margin than the companies it's trying to dethrone, including Tyson Foods and Pilgrims Pride, as the chart below shows.
BYND Revenue (Quarterly YOY Growth) data by YCharts
As Beyond Meat lowered prices and largely maintained its gross margin, it seemed like the company was inching closer to an inflection point. Reaching price parity would unlock market-beating business results, in my opinion.
However, the company's gross margin recently fell off a cliff, as the chart below shows. And from a cost perspective, the solution isn't easy. Its costs are up across the board, including ingredients, manufacturing, labor, shipping, and more.
BYND Gross Profit Margin (Quarterly) data by YCharts
Typically, the solution would be to raise prices and pass these costs on to the consumer. But if Beyond Meat does that, investors could reasonably expect its revenue to plunge as it pushes price-conscious buyers away.
However, without raising prices, Beyond Meat's bottom line will be extremely challenged. In 2022, the company had a net loss of $366 million -- a whopping 87% of revenue. And based on management's guidance, it could lose somewhere in the neighborhood of $200 million in 2023.
In other words, the company can choose to lose a lot of money in 2023 and hopefully keep customers, or it can try to make more money but risk revenue plunging as consumers buy animal protein instead of buying plant-based protein, which would also likely lead to large net losses.
It's possible that the investment thesis for Beyond Meat gets back on track in time. However, right now, I can't argue that things are playing out well or even trending in the right direction. And for this reason, I'm considering selling my shares of Beyond Meat.
