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Plant-based proteins – what investors need to ask

In the final part of our three-part blog series on the rise of plant-based proteins, we examine a range of strategies that companies are pursuing to capture this opportunity and propose key questions for them.   

Part one in the series examined the resource and population challenges facing global agriculture and part two looked at why plant-based alternatives have emerged so quickly.

Strategies for growth 

Investors need to recognise the growth that could result from plant-based investments in large companies and start-ups – particularly those embracing comprehensive product strategies. Some notable recent examples include:

  • Danone is prioritising the plant-based brands it acquired through WhiteWave Foods to triple sales to $5.7 billion by 2025. This implies a compound annual growth rate (CAGR) of about 14% from 2018 to 2025, while the whole company is projected to grow sales by an average of 4-5% to 2020.
  • DowDuPont launched a soy protein isolate designed to improve the profitability of beverages by offering a plant-based option to help manufacturers manage protein costs – taking advantage of a projected 7% CAGR for plant proteins to 2023 in Europe.
  • Wal-Mart does not disclose plant-based food sales figures, but in 2017, it advised its suppliers to source vegan options and “get their plant-based options to the baskets of consumers – regardless of their dietary stance”.
  • After supplying plant-based products to 20,000 grocery stores, including US retailers Kroger, Wal-Mart and Target, Beyond Meat delayed its 2018 launch in 350 Tesco stores due to unexpected North American demand and a lack of production capacity for a UK launch.
  • In the hyper-competitive UK grocery sector, Marks & Spencer, Sainsbury’s, Waitrose and Tesco have launched bespoke plant-based products; all emphasise innovative plant-based ingredients and recipes, rather than sustainability or veganism. Tesco reported a 25% growth in chilled vegan food 2018 sales, reportedly breaking the company’s internal record for product launch success.
  • Quorn, a long-running UK plant-based protein producer, enjoyed 12% growth in 2018 and is on track to become a billion-dollar business within 10 years. The company is investing £7 million in a vegan research hub and has doubled production capacity as part of a £150 million capital investment.

Our approach to engagement  

Hermes EOS will engage companies across the agricultural value chain on their approach to consumer demand for plant-based nutrition, and the commercial success and positive sustainability outcomes that could result.

For companies that are shifting strategies to address plant-based growth, we want to see that these successfully manage relevant risks in development, production, marketing, customer satisfaction, quality and safety. We seek to understand how companies are addressing customer needs, scaling production safely and effectively, and disclosing how plant-based strategies address sustainability and natural resource scarcity challenges material to their business.

For companies that are not exploring the opportunity, we ask why. We challenge the validity of existing strategies by asking what might happen if demand for plant-based alternatives accelerates, or if the cost structures of animal protein production are eroded by regulatory or environmental pressures and price increases cannot be passed on. We question whether companies have considered the impact on reputation, brand value and licence-to-operate that could result from a lack of sustainable or plant-based protein products or ingredients.

Key questions to ask

1. What role will plant-based nutrition play in the company’s long-term strategy, and how does this impact capital allocation for animal-based nutrition?

2. Has the company conducted scenario analyses to determine the impact on business-as-usual from rapid increases in plant-based demand?

3. How will R&D and capital allocation be impacted by plant-based foods compared with other strategic priorities?

4. What longer-term advantages or disadvantages do cost structures offer if plant-based foods scale to a significant proportion of sales?

5. By investing in plant-based opportunities, how will the company’s value proposition be differentiated and enhanced for target customers?

6. What consumer quality, safety and consumer acceptance risks has the company identified? How will these be managed or mitigated?   

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EOS Client Service and Business Development

Amy D’Eugenio,
Head of Client Service and Business Development, Hermes EOS