Thread by @jwmares

1/ In my last thread (below), I talked about the health drawbacks of Beyond Meat ($BYND) and Impossible foods.

Now let’s talk about the health of their businesses.

https://twitter.com/jwmares/status/1133449746792767488

2/ Spoiler alert - I am incredibly skeptical, and am short $BYND (as 44% of $BYND shareholders appear to also be).

seekingalpha.com/news/3465691-b…

3/ Let’s talk about why, starting with $BYND.

$BYND’s revenue growth has been strong:
2016 - $16mm
2017 - $33mm
2018 - $88mm

4/ Their losses are also increasing, though their reported gross margin is improving and currently in the low 20%.

For comparison, Tyson Foods (a major meat producer) had a 11% gross margin last quarter.

5/ There’s the standard talk about why $BYND is likely overvalued (trading at ~46x price to sales when Tyson is <1x, stock up 3x since IPO), but I want to hit on other factors.

Namely, I expect their growth to meaningfully slow in the next 12 months.

seekingalpha.com/article/426532…

6/ *Note* - I’m the founder of @kettleandfire, a bone broth brand that sells in 7000+ stores. As such, I have some insight as to how the retail game works.

7/ $BYND is already in 15,000 grocery stores, which drives 56% of its revenue. These distribution gains alone account for nearly all of $BYND’s revenue growth, as they’ve all come in the last 3 years.

8/ However, there are only 40k grocers in the US, and $BYND is already in the most forward-thinking. As you scale your brand, you move into retailers that sell fewer products per door.

@kettleandfire, some Whole Foods sell 10x more than another conventional store.

9/ Thus, as BYND expands I’d expect to see their revenue per store decrease. Given most growth has come from distribution gains, once that goes (my 2c - Q3 2019) the only lever they have to pull is velocity... ie make more $$ per door sold.

10/ As a CPG brand, you can only pull a few levers to increase sales:
1. Grow distribution
2. Grow number of products
3. Grow sales per store

11/ BYND has done 1 + 2 quite well. #3 is notoriously hard (and expensive) to do. Requires big mktg spend, huge customer demand, and a unique product.

12/ I don’t believe BYND has any of the above to sustain 100%+ annual growth rates. And that it will shortly move from a growth stock into the 5-15% annual growth rates of most scaled CPG brands beginning in Q3 / Q4.

13/ Secondly, the market for plant-based meat isn’t that big. According to Plant Based Foods Assn , 2018 sales = $670 million.

Yes, that means that BYND is trading at nearly 7x the size of the ENTIRE plant-based meat category. And means they don’t have much headroom to grow.

14/ This matters when it comes to retailers. Each retailer will allot a set amount of shelf space to plant-based meat alternatives, based on category demand. If the category doesn’t grow, that set doesn’t get more shelf space.

15/ This quickly becomes competitors fighting over limited shelf space. And these brands are forced to spend more on mktg and trade (ie $$ to retailers for mandatory mktg promos) just to stay on shelf.

This drives down gross margin, which gets worse with more competition.

16/ And boy is competition coming. Tyson, Impossible, JBS (world’s largest meat producer), Nestle.. All launching plant-based burger alternatives in 2019.

17/ $BYND sells a pea isolate + vegetable oil burger and has 0 patents or protectable IP. I’d expect these major brands to launch their own + allow retailers to create private-label versions of a plant patty.

18/ Pretty soon, competitors will undercut $BYND price point, hurting sales and growth. And as soon as that happens, BYND’s stock price will normalize to those of other meat companies selling a near-commodity product.

19/ Remember, $BYND trades at 46x price to sales while their biggest competitor trades at less than 1x. That’s where this thing is headed.

20/ Net net, $BYND will soon be in a battle with massive commodity food players for shelf space, at the exact time when they need to continue growing to prop up their share price. Not a good combination.

21/ Ultimately, I expect $BYND to lose 50-60% of its current value by Q1 2020, and plan to trade accordingly.

22/ Now let’s look at Impossible Foods.

23/ To date, Impossible is in roughly 7300 locations nationwide (restaurants, cafeterias, etc), and will apparently have a national Burger King rollout towards the end of 2019, bringing their end of year 2019 total to roughly 15k locations.

24/ They’ve also raised $750mm since founding in 2011, their most recent round valuing them at nearly $2b.

Crazy.

25/ This is a HUGE bet - investors are essentially saying they believe Impossible can become a $4b+ brand, and THE leader in the emerging meatless meat space.

26/ I doubt this is going to happen.

I may very well be missing something, but I think Impossible is playing a high-tech fundraising game while operating in a commodity industry (foodservice). And I doubt they’ll come out ahead when it’s all said and done.

27/ Impossible has raised $750mm in equity financing, the latest a $300mm round at a $2b valuation.

techcrunch.com/2019/05/13/cro…

28/ With very few restaurants actually selling the Impossible burger (~7000), most of this funding is NOT going towards inventory or working capital needs.

29/ Doing some simple math, if they sell 50 burgers a day at each of their 7k restaurants (a generous assumption), they’re moving roughly 127mm burgers a year.

30/ To service a 125mm/revenue business likely requires 10-15mm tied up in inventory at a given time, a pittance relative to Impossible’s funding treasure chest.

So where is all this money going?

31/ My guess is it’s going towards building out their 68,000 sqft production facility in Oakland, CA.

This is a very small factory, one that’s already can’t meet the demand of ~7000 restaurants. And if even 1/2 of funds have gone to the facility, hugely expensive buildout.

32/ For context, a few years back Chobani built a 1mm sqft production facility in Idaho for roughly $700mm, or roughly $700/sqft.

Assuming Impossible has invested $300mm into their facility, they’re looking at a buildout cost of $4,411/sqft.

33/ Not only that, but because they have invested in their own manufacturing, it’ll be extremely capital-intensive for Impossible to keep scaling. If they have to spend $300mm building another production facility every time they want to double their capacity, they’re in trouble.

34/ And right now, they have no other way to scale.

35/ Now, I’m sure that much of that has gone to R&D. However, the only thing Impossible has developed is their GMO heme, and they have a single product. I find it unlikely they’ve invested anywhere near $300mm into heme R&D.

36/ In addition to investing in their facility, Impossible has sure invested a lot into branding and PR.

37/ My guess is that Impossible realized they can do the below:

38/ Rinse and repeat.

I believe Impossible is losing money like crazy to show demand, and hoping to god they can make the economics work on the manufacturing side.

39/ And boy are those economics tough. The average restaurant buys a hamburger patty for roughly $1.

forbes.com/sites/priceono…

40/ I’ve heard from those working with Impossible that it costs them roughly $3 to make a patty.

Even if it’s half that, Impossible has a LONG way to get to the land of 40% margin that are considered strong in the branded food world.

41/ So, they’re losing money hand over fist (hence the huge raises), using press and restaurant partners to show demand (at meat’s price point), and selling investors the dream of driving down manufacturing cost + proprietary manufacturing process.

42/ But… that manufacturing process is about to get a lot less proprietary. The 800lb gorilla in the genetic-modification space, Ginko Bioworks, is stepping into the ring.

fooddive.com/news/gingko-bi…

43/ Ginko is spinning off Motif, a company specifically geared to create plant-based proteins. And these guys know what they’re doing, and will sell their ingredients to any existing or new burger company that comes along.

44/ Putting this all together, Impossible is raising money as if it’s a high-flying tech startup entering a huge category with incredible gross margins and proprietary IP.

It’s not.

45/ I believe Impossible is a highly capital-intensive business with challenging gross margins and a manufacturing IP that will soon experience intense competition from large CPG incumbents.

I do not expect it to succeed or raise any further money at higher valuations.

46/ I wish I could short Impossible, but instead I expect to see it struggle next time they go to raise at a $2.5b+ valuation.

/fin I’d love to hear pushback and other thoughts, as I could certainly be wrong here. Strong opinions, weakly held and all that good stuff :)