World Reimagined

World Reimagined: The Future of Plant-Based Foods

Beyond Meat - Andrei / stock.adobe.com
Credit: Andrei / stock.adobe.com

Plant-based alternatives have enjoyed an explosion in demand as consumers embrace healthier lifestyles amid growing concerns over environmental repercussions from animal-based proteins. This consumer shift coupled with the continued increase in the global population, inefficient production of animal proteins and shrinking arable lands are also prompting the move to plant-based protein alternatives. By 2024, the global plant-based meat market is forecasted to reach $24.11 billion and some forecast that market reaching $85 billion by 2030. Newer companies such as Beyond Meat (BYND) and Impossible Foods were early players in this market, but growth prospects have attracted the attention of larger food and meat companies, including Tyson Foods (TSN) and Hormel (HRL).

Background

According to data published by Statista, the size of the global food market, spanning 13 categories from pet and baby food to meat, fish, and seafood, reached $7.5 trillion in 2020 and is expected to grow at a compound annual rate of 3.6% through 2025. On a per capita basis, that equates to average food revenue per person reaching $1,148 by 2025 compared to $1,006 in 2020 and roughly $823 in 2012. There are several factors at work driving those food statics upward, including population growth, rising household income, and increasing consumer spending.

By 2050, the global population is expected to reach 9.1 billion compared to 7.7 billion near the end of 2020, according to data published by U.S. Census Bureau’s U.S. and World Population Clock. Given those consumer and population growth vectors, it should come as little surprise that the four largest geographic markets for food – China, India, the U.S., and Japan – accounted for 42% of total food revenue in 2020.

Long-term consumer spending trends in most geographic markets show declining expenditure share for staples (such as rice and wheat) and increasing shares for higher value food items (such as meat, dairy, fruits, and vegetables) as disposable incomes rise. These shifts in food preferences toward the protein complex, a primal energy source for the body and its health. Food suppliers and retailers have responded by modifying their products and retail products. Additionally, multinational retailers have expanded into developing countries to meet the evolving preferences of consumers, who are increasingly demanding a wider variety of higher quality products.

At the same time, other factors are having a negative impact on not only food production but on food security. These include growing concerns over the loss of fertile soil due to deforestation, overgrazing and mismanagement; climate change; low agricultural productivity and increasing urbanization as well as environmental impacts. However, to adequately feed the growing global population, food production will need to expand by at least 70%. The ability to meet that challenge will be handicapped by climate change, urbanization, pollution, and soil degradation that has shrunk available arable land.

To date, one of the key protein sources has been animal protein, and by 2028 global meat consumption per capita is expected to reach 35.1 kg retail weigh equivalent. Much like overall food spending, demand for protein globally is driven by both socio-economic changes and population growth. However, according to the OECD-FAO Agricultural Outlook, “growth in demand for animal protein in the next decade is projected to slow down.”

A portion of that slowdown is due to changing consumer preferences due to a variety factors from increasing obesity and related diseases that are forcing consumers to be more health-conscious, to environmental concerns associated with greenhouse gas emissions. Roughly 387 million people are living with diabetes, and according to the International Diabetes Federation, and that number is expected to soar to nearly 600 million by 2035. The United Nations Food and Agriculture Organization (FAO) estimates that livestock production is responsible for 14.5% of global greenhouse gas emissions, while other organizations like the World Watch Institute have estimated it could be as high as 51%.

Regardless of those varying forecasts, it is accepted that the production of animal-based protein has a negative environmental impact, generating greenhouse gas emissions, requiring more water and more land. More specifically, beef and milk production represent 41% and 20% of the emissions from livestock, respectively. Livestock also requires substantial energy for multiple activities such as the production of feed, breeding activities, production and spread of fertilizers, electricity use, and operating costs of farm buildings. For example, a kilogram of beef is about 30-times more demanding on the environment than a kilogram of plant protein. Greenhouse gas emissions per gram of protein for beef and lamb are about 250 times those of legumes and twenty servings of vegetables have fewer greenhouse gas emissions than one serving of beef. One gallon of cow’s milk requires 1950 gallons of water. Intensive livestock production is also responsible for a large part of the loss in biodiversity due to important land use for grass and feed crops.

The combined result is a sea change in the food industry as consumers vote with their wallets for natural and non-genetically modified organisms (GMOs) food and beverage products as well as plant-based foods and spur the development of alternative proteins that are more environmentally friendly. Studies have found that a whole-food, plant-based diet can prevent and even reverse a litany of food and lifestyle-induced illnesses, including heart disease and type 2 diabetes. In the United States, 39% of consumers are now trying to eat more plant-based food.

What makes a food or beverage plant-based?

According to the Plant-based Foods Association certification, a plant-based food is defined as a finished product (traditionally produced from animal ingredients) consisting of ingredients derived from plants that include vegetables, fruits, whole grains, nuts, seeds, and/or legumes. Additionally, plant-based ingredients that are used as a primary ingredient in a product that meets the above criteria are eligible for certification under this protocol.

These shifts in consumer preferences have been easily observable in our everyday lives. Roughly a decade ago, most coffee shops had at most, one non-dairy milk alternative, usually soy. Today you are likely to find an abundance of options including rice, oat, almond or coconut milks, and if you’re lucky enough, several blended formulations of those plant-based alternatives. Even Dunkin’ (DNKN), the American “everyman” donut and coffee shop, offers almond milk.

In the U.S., the “milk” section of grocery stores has evolved to such a degree than the non-dairy options often take up more shelf space than the traditional dairy offerings. In fact, U.S. retail sales of plant-based foods grew 29% over 2018 through 2019 and 11.4% in 2019 alone. In the U.S. today plant-based milks make up 14% of the entire milk category and this trend is expanding globally.

Plant-based proteins are also seeing a surge in consumer demand. The European meat substitute market almost doubled in size between 2014 and 2019, according to Euromonitor. U.S. retail sales of plant-based foods grew 11.4% in 2019, bringing the total plant-based market value to $5 billion. Even with the COVID-19 pandemic, sales haven’t slowed down. According to data released from PBFA and SPINS, the growth of U.S. retail sales of plant-based foods has outpaced the growth of total food sales during the pandemic, demonstrating that more consumers are turning to plant-based foods amid the crisis. By 2024, the global plant-based meat market is forecasted to reach $24.11 billion and some forecast that market reaching $85 billion by 2030.

From an everyday perspective, in addition to grocery and at home consumption, Starbucks (SBUX), Red Robin Gourmet Burgers (RRGB), Burger King (QSR), Subway, Denny’s (DEN), Del Taco (TACO) and a growing list of other restaurants are offering products incorporating plant-based proteins from either Beyond Meat or privately held Impossible Foods. In a bid to increase its presence in China, a market that consumes roughly a third of the world’s meat, Beyond Meat announced it would build the first foreign company specializing in plant-based meat to build production facilities in the country. We’ve seen a number of restaurant companies from Jack in the Box (JACK) and Papa Johns (PZZA) introduce plant-based alternatives on their menus and in 2021 McDonald’s (MCD) is slated to join their ranks with the “McPlant” Burger.

That groundswell to meet shifting consumer preferences and capture a portion of the growing market for has prompted larger food companies, such as Tyson Food, Smithfield, Perdue, Hormel to enter the meat alternative market. Nestlé recently announced a plant-based tuna alternative, Vuna, while MorningStar Farms’ line of Incogmeato plant-based proteins uses soy protein in its burger patties, bratwurst, and Italian sausage alternatives. Smithfield started a line of soy-based burgers, meatballs and sausages, and Hormel began offering plant-based ground meat. Other plant-based sources are on the rise, including rice, canola, and hemp protein.

With companies looking to expand the scope of plant-based alternatives beyond meat, egg and dairy, companies raised a record $824 million from investors in 2019 and another $930 million during the first quarter of 2020, the industry raised $930 million.

It has to taste good

Here’s the thing: In order to drive consumer adoption for those and other plant-based protein products they will need to taste great and smell appetizing. According to the Plant-based Foods Association, the number one driver of all food purchases is taste. As more food becomes plant-based, there will be greater demand for the colors, flavors and scents that consumers have grown accustomed to and these products will become a larger part of the science of food. Consumers are also increasingly seeking colors, flavors, fragrances, and other ingredients that are organic, contain less sodium, are gluten-free, and are non-GMO (genetically modified organisms).

The hard realization is that consumers are not willing to trade off taste for health and nutrition. In 2017, 57% of consumers agreed that nutrition is more important than taste, but only 48% of consumers in 2019 agreed. Furthermore, with consumer wanting less sugar and sodium in food and beverages or the addition of functional ingredients to boost nutritional benefits, the need to build back or balance taste expectations will continue to be key. The confluence of these factors is expected push the global natural and organic flavors market to $11.3 billion by 2026. A positive driver for companies like International Flavors & Fragrances (IFF), Givaudan SA (GIVN:SW), Sensient Technologies (SXT) and Symrise AG (SY1:GR).

We are in the early innings of a pronounced shift in the kinds of food people consume. Similar to other structural changes, there will be numerous implications that will be felt across the food ecosystem, creating new opportunities, products and in some cases food materials. This will drive further changes for existing food companies, give rise to new ventures, and more than likely result in a wave of M&A activity as laggards look to reposition their business.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

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Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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Mark Abssy

Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.

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