Plant-based investment interest is high among large CPG players, but valuations, deal sizes are dropping
“I think companies are becoming smarter about chasing assets. What I am seeing a lot more of across the entire landscape of consumer staples is more of these programmatic M&A type situations where you’re taking successive smaller stakes over time,” Nic Modi, managing director at RBC Capital Markets, explained during a webinar hosted by The Food Institute yesterday.
He explained that while large companies are still eager to develop their plant-based portfolios through mergers and acquisitions, they’ve learned some hard lessons over the past few years about realistic returns on investments. And as such are less willing to buy an entire company or new brand in the plant-based space in one swoop – preferring instead to take minority stakes at first and potentially buy the rest later depending on performance.
“One thing that has happened is companies that buy these high-flying assets don’t realize that there are real issues or their product quality may not be as good as perceived based on the current flow … There’s not a lot of due diligence being done, based on what I see, and I think this programmatic approach allows companies that are buying others to really understand what is happening with the business over the course of time,” Modi said.
“So,” he added, “when they actually acquire it and bring it in house, they know exactly what they need to do.”
Examples of this strategy include investments in Memphis Meats by Cargill and Tyson Foods, Danone’s investment in Forager Project and Tyson Food’s 5% investment in Beyond Meat before its exit in 2019.
Valuations are coming down
The shape of deals in the plant-based space is not the only thing changing – so too are the valuations, said Modi.
He explained that while the valuation of a company depends on the segment, its brands, whether it is locked in the US or has an opportunity for global expansion, they are in general coming down.
“We’ve seen valuations come off quite a bit for many of these companies. So, they’re not as inflated as they were in the last 12 to 18 months. I think there is some value out there, but again, I think companies are approaching with caution because they don’t want to get blown up and buy something at peak, because that’s certainly something that we’ve seen happen pretty consistently the last couple of years,” he said.
Strong growth predicted for brands that deliver on taste, function and texture
This more conservative approach to investing in plant-based companies and brands by no means signals a cooling of interest in the space, said Modi, who noted disclosed investments in plant-based grew to $3.1bn in 2020 from $1bn the previous year and $694mm in 2018.
He said RBC expects long-term growth in the global plant-based meat category, excluding the Asia Pacific region, to hover around 10% through 2029, at which points Modi expects growth to slow slightly to 8% to 6% through 2039 – a rate that he notes is still very strong.
To seize this full potential, though, Modi says plant-based players will need to overcome significant barriers, including lingering negative perceptions about taste, expense and the level of ‘processing.’
He explained that RBC Capital Markets research found the top reasons that people did not buy plant-based meat alternatives is they “prefer to eat the real thing” (55%), they are “too expensive” (50%), others in their household won’t eat them (34%) and they are too processed (31%).
RBC Capital Markets founds similar results for why people did not buy plant-based dairy alternatives with 64% saying they prefer to eat the real thing, 49% saying they are too expensive and 47% noting they don’t like the taste.
This is important, Modi explains, because while health concerns, curiosity and a desire to improve environmental impact may be the top three reasons that people try meat alternatives, the key to repeat purchases is taste, function and texture.