Seeds of change - the emergence of plant-based proteins

In the second of a three-part series on the rise of alternatives to animal proteins, we examine why plant-based protein is emerging as an investment trend.

Our first blog focused on the global scarcity crunch that underscores the challenge and changes required, and the final blog will examine how companies are formulating strategies for plant-based nutrition and the questions investors must ask.

Demand: Strong sales growth and shifting consumer needs

Consumers are the most powerful driver of plant-based nutrition. Interest in alternatives is consistent across regions, with sales growth in excess of baseline food sales. Nielsen reported a 17% growth in plant-based food retailing in 2017 and GlobalData found that 70% of the world’s population is reducing or stopping meat consumption in some way. A confluence of trends is driving demand:

• Generational shifts in eating habits for millennials aged 16-34 – the highest-value consumer for many food businesses – is one of the strongest drivers of reduced meat consumption due to a combination of concerns cited below.
• Health and wellness from plant-based diets, given the increasing consumer recognition of correlations between meat consumption, antimicrobial resistance (AMR), disease, and poor health outcomes.
• Interest in ‘flexitarian’ diets, as a broad base of consumers embrace a range of options for reducing, rather than eliminating, animal-based foods.
• Provenance, as consumers increasingly want to understand what is in their food, where it comes from, how it is made, and if social and sustainability standards were in place.
• Environmental concerns, as some grasp the consequences of livestock agriculture, abetted by media attention and wider societal understanding of the impacts.
• Changing social dynamics - a subset of consumers increasingly questions the ethics of animal proteins and the impact on animal welfare. For example, GlobalData found a 600% increase in people identifying as vegan in the United States from 2015 to 2018, albeit from a low base of 1%.
• Cost - since animal proteins are often the largest share of food bills,  consumers may be attracted to lower-cost plant-based alternatives.

However, it is impossible to ignore the global growth in animal protein sales, with record high beef and chicken consumption levels in the US and elsewhere in 2018. Animal proteins are set to play a role in nutritious, moderate-protein diets for years to come. But recent trends in some food categories signal that the dynamics of protein demand could decisively shift.

This has already happened in dairy. US milk prices were the lowest in a decade in 2018, with overall sales down 15% since 2012, alongside 61% growth in non-dairy, plant-based alternatives. In 2018 alone, cow milk sales declined another 6%, while plant-based milk grew by 9%. Cargill reported that global dairy sales fell 22% between 2006 and 2016, while plant-based milk sales tripled over the same period.

Broader animal protein sales could face similar, significant disruption in the years ahead, with potentially serious consequences for companies and supply chains heavily exposed to this risk.

Supply: disruptive innovation and powerful incumbents  

Food producers are innovating to meet the global demand for alternatives, with a hive of start-up activity focusing on market disruption. For example, Silicon Valley-based Impossible Foods has raised $388 million to date and invested in factories to produce 2.5 million pounds of ‘meat’ monthly, for a customer base spread over 5,000 locations. Beyond Meat has raised $122 million in venture capital, already serves 32,000 restaurants and supermarkets, and filed for an IPO with an initial offering of $100 million.

For their part, some incumbents are making strategic bets and allocating capital to plant-based opportunities via acquisitions and in-house investment. In 2017, global dairy buyer Danone acquired WhiteWave Foods for $12.5 billion, its largest acquisition in a decade, shifting toward a plant-based sales mix overnight. Tyson Foods, which sells one of every five pounds of meat in the US, is taking a stake in Beyond Meat alongside General Mills, providing funding for Future Meat, and investing in start-up Memphis Meats with Cargill. Tyson has also invested $150 million in its sustainable food technology fund.

Unilever is following a similar M&A path, acquiring the 4,000-outlet Vegetarian Butcher in December 2018, after lauded in-house launches including dairy-free Ben & Jerry’s and egg-free Hellmann’s mayonnaise. And as of January 2019, McDonald’s has launched a vegan Happy Meal for the first time in its 63-year history, across multiple markets and beyond its regional forays into vegan and vegetarian burgers and sandwiches.

Rules of the game 

Public policy will further influence the acceptance and growth of plant-based nutrition on several fronts: public health, climate change, agriculture and land use. It is impossible to summarise the policy landscape here, but some examples provide important directional clues.

The Netherlands now advises the Dutch to follow a plant-based diet as it seeks to improve health outcomes and land use management, and has proposed a national target of 40% animal content in total protein intake. Similarly, the Swedish and Canadian governments and the UN Food & Agriculture Organisation advocate mostly plant-based diets, based on updated guidelines which consider sustainable nutrition and agricultural systems.

Action on climate change and land use may increase pressure on the sector. At the UN COP23 talks, livestock emissions began to be prioritised as contributions to greenhouse gas (GHG) emissions. However, the investor coalition behind FAIRR (For Farm Animal Investment Risk and Return) pointed out that no countries have national plans for tackling livestock emissions. Given farming's contribution to global emissions, it would be reasonable to predict greater regulatory action to better align agriculture with the Paris Agreement.

In January 2019, the EAT-Lancet Commission, a group of 37 scientists from 16 countries, reached a scientific consensus on targets for healthy diets and sustainable food production to feed 10 billion people by 2050 within planetary boundaries. This significant and practical body of work is likely to influence national regulators and climate change negotiators alike.

In our final blog in this series, we will look at how companies are forming strategies to capture plant-based growth, and the serious questions investors need to be asking about the opportunities and risks.

Plant-based nutrition definitions

For simplification, we include several terms and growth segments in what we broadly define as plant-based nutrition. 

• Alternative proteins, which use non-animal crops such as soya, pea, rice, gluten, hemp or nuts to provide a finished ingredient or product such as tofu or protein powder.
• ‘Meat’ alternatives, which tend to simulate animal proteins more closely, such as Tofurkey, manufactured from soya products, or Impossible Burger, using wheat, soy, heme and potato proteins.
• Emerging cellular agriculture, which grows protein, such as meat, from cell cultures in a lab instead of from livestock. For example, cellular start-up Memphis Meats aims to grow cultured meat that is effectively the same as livestock-derived meat.