When I first bought shares of plant-based meat company Beyond Meat (BYND 0.95%) in 2020, two words were on my mind: price parity.
I believed that Beyond Meat would have an explosive growth opportunity if it could reduce the prices of its products until they cost the same as (or even less than) animal-based protein. In that scenario, its products could go mainstream as ordinary consumers switched to plant-based meat to save money. This would drive sales volume growth, allowing Beyond Meat to gain scale and give it a competitive advantage on the cost of manufacturing.
That was my investment thesis for Beyond Meat, but unfortunately, I've been dead wrong. And what happened in 2023 is proof that I need to go back to the drawing board.
Here's what happened to Beyond Meat this year
On the third-quarter earnings call, Beyond Meat founder and CEO Ethan Brown said, "Over the last year, we've used pricing in an effort to bring new consumers into the category." In other words, the company lowered prices hoping that people would give its products a try for the first time.
There are plenty of downsides to this price-cutting strategy, the most prominent of which is what it does to profitability. But give Beyond Meat a lot of credit: To support that plan, it lowered its cost of goods sold by 18% year over year in Q3. That's enormous.
Unfortunately, it wasn't enough. The company reported a gross loss on its revenue that quarter.
Data by YCharts.
One could argue that Beyond Meat's current situation is acceptable. After all, if lowering prices brings new consumers to the category, then near-term gross losses would simply be the path to higher future revenues and eventually better profits as it gains efficiencies of scale.
Unfortunately, this glass-half-full assessment wasn't Beyond Meat's reality in 2023. On the Q3 earnings call, Brown went on to say, "While these pricing programs are effective in generating cash and inventory, they did not help us move from early adopters to mainstream consumers."
And that's the problem: Beyond Meat hasn't been gaining enough new customers.
Its major problem is most visible within its U.S. retail business. In Q3, the company's products were available at 79,000 retail points of distribution domestically, which was slightly more than in the prior-year period. However, its sales volume (measured in pounds) via U.S. retail fell 30% year over year.
For clarification, I'm focusing on Beyond Meat's U.S. retail business because that's its biggest segment. There are a few promising signs internationally and with its foodservice partnerships, but U.S. retail has accounted for 46% of its revenue year to date and 43% of the volume, so it's the most important part of the company for investors to focus on.
Beyond Meat is changing strategies for 2024
Beyond Meat's 2023 price cuts decimated its bottom line and failed to win it new customers or boost sales volume. Since the strategy clearly didn't work, management will take a different approach in 2024.
The details of Beyond Meat's plans are still being worked out, but Brown said, "As we look to 2024, we expect to implement a more nuanced pricing strategy, keeping certain programs and pricing in place while adjusting others in support of gross margin expansion."
In other words, it appears Beyond Meat will raise its prices for certain products in an effort to return the company to gross profitability. I'm not sure what other choices it has at this point, but that doesn't necessarily mean I believe its revised strategy will work.
Beyond Meat is stuck between a rock and a hard place. It can keep lowering prices and exacerbate its losses in hopes of gaining new customers -- a strategy that hasn't worked so far -- or it can raise prices to improve its profitability at the risk of losing some of its early adopters by increasing prices beyond what they're willing to pay.
The company can't turn itself into a winning investment simply by adjusting its pricing model. To be a winning investment, it needs to grow its customer base. That hasn't happened lately, and I'm not sure it will happen in the coming year, leaving me with no choice but to considering selling my shares.
