Beyond Meat's (BYND 1.75%) stock has fallen 65% from its 52-week high, deeply underperforming the S&P 500 index during a time of broad market weakness. There's a big-picture story about alternative meat that's important and, perhaps, exciting. But there's also a smaller tale that investors shouldn't ignore as they consider whether this is a good time to buy Beyond Meat.
New(ish) and exciting
The truth is that alternative meat products have been around for quite some time. Kellogg, for example, owns the Morningstar Farms brand, which has long offered up protein alternatives. And then there's Quorn, which makes meat alternatives from cultured fungus. So the products from Beyond Meat aren't really new, but the company did manage to attach itself to a larger cultural trend in a way that earlier product offerings hadn't.
The hype around Beyond Meat's products resulted in an equal, if not greater, amount of excitement around the stock. It rose dramatically as investors believed alternative meat would be a massive growth opportunity. That may still be true, but there are other food makers, and the opportunity is open to all of them.
Indeed, the consumer staples sector is highly competitive, so it was only a matter of time before other brands with similar products started to arrive in larger numbers. Hormel, for example, which has a material position in the branded protein space, quickly added an alternative meat product following the hype around Beyond Meat.
In other words, the perceived first-mover advantage that some attributed to Beyond Meat may not be all that beneficial given the financial strength and industry reach of competitors like Kellogg and Hormel, among others. Which is likely one of the reasons investors would like to see Beyond Meat focus less on growth at any cost and more on profitability. The biggest indicator of this is the stock price decline amid ongoing, and worsening, red ink.
Management has seen the writing on the wall and is working to get its fiscal house in order. Right now that includes cutting costs, reducing inventory, and focusing on actions that will lead to near-term improvement as it looks to turn cash-flow positive in the second half of 2023. All of that's fine, but there's an important business trend that should worry investors.
What if demand isn't as big as expected?
Consumers are fickle, and tastes, broadly speaking, can change quickly. When Beyond Meat first introduced its meat alternatives, it appeared to have the attributes of a fad. That's not to suggest that alternative meat is going to fade away into obscurity like the pet rock, but that Beyond Meat was seen as something bigger than just another food company.
After huge demand, rapid sales growth, and an increase in competition, it may not seem quite so special anymore.
Some numbers may help. In 2022, the pounds of product Beyond Meat sold was essentially flat year over year (up 0.4%). That's not particularly impressive growth by any stretch of the imagination. Worse, the third quarter witnessed a year-over-year decline of nearly 13%, and the fourth quarter showed a drop of nearly 17%.
But here's the interesting thing. The total number of distribution points for the company's alternative meat products has been rising steadily. At the end of 2021, Beyond Meat had 130,000 distribution points and was able to expand that to 190,000 by the end of 2022. That seems at odds with the pounds sold, since more distribution would normally be associated with more volume being sold.
Like most companies today, Beyond Meat is dealing with inflation. The normal move in the consumer staples space is to increase prices to protect margins. But Beyond Meat has been cutting prices. Increasing prices usually leads to volume declines, while decreasing prices would, logically, support volumes. However, as the pounds-sold number shows, that hasn't been the case with Beyond Meat's offerings.
These are troubling signs that deserve close attention. Indeed, the company's goal of turning cash-flow positive will be much harder to achieve if demand for its product is fading.
All in all, the issues that Beyond Meat faces, given the pounds-sold declines, might not be easily addressable. Investors will probably be better off watching this story from the sidelines until management has proven it can turn a consistent profit -- a level of performance that it has yet to achieve. It may get there, but at this point, the risk/reward profile seems skewed in the wrong direction.