The plant-based foods sector witnessed significant growth in recent years, driven by rising consumer concerns around health and sustainability. This was evident from the expanding shelf space dedicated to plant-based stocking keeping units (SKUs) across the major UK supermarkets, as well as the number of emerging new brands.
During the COVID-19 pandemic, consumers had little option to visit restaurants and therefore bought most of their meals from the supermarkets. The category grew by 16% in both value and unit volume in the first year of lockdowns, according to Kantar data (August 2021)1, and many brands attracted meat-eaters and vegetarians alike to the category by introducing innovative new SKUs. However, we have seen something of a U-turn in the last year, with big brands axing non-core lines.
While the plant-based category has received much press attention over the past few years, and statistics like those above are quoted regularly, we must be mindful that this great market growth was from a very small base. The size of the UK plant-based meat market remains a fraction of the traditional meat industry, and just 13.5% of adults in the UK follow a meat-free diet (3.1 mn vegetarians, 3.0 mn pescatarians, 2.5 mn vegans)2. Moreover, the economic landscape in the UK means that much of the more recent value growth is from inflation-led price increases, rather than greater unit sales.
Health Concerns
The latest pressure is the growing concerns around the nutritional values of plant-based alternatives. Much of the initial success could be attributed to environmentally savvy, health-conscious consumers who moved away from meat for environmental and nutritional reasons. However, last year saw the industry criticized for high-sodium content in plant-based meat, and a widely read Bloomberg article from January 2023 claimed that plant-based meat was “a fad”3.
The latest report from the EIT Food Consumer Observatory states that two-thirds of nearly 10,000 people surveyed believe that ultra-processed foods, as many plant-based meat alternatives are categorized, contribute to obesity, diabetes and other lifestyle-related health issues4.
While consumer education is ongoing, many are becoming more informed about the processing of their food and are moving towards natural protein alternatives, such as chickpeas and lentils.
Costs Pressures
There is no denying that plant-based alternatives carry a high price point, and in some cases cost the consumer more than meat itself, often due to low economies of scale, expensive ingredients, complex manufacturing processes and high development costs. While consumers in the meat-free category aren’t typically price sensitive, the inflationary increases we witnessed throughout 2023 meant that some consumers have been priced out.
Amid rising costs associated with supply chain, energy, packaging and high-interest rates, manufacturers are having to be more efficient than ever before. Many major retailers continue to demand margins in excess of 35%, consumers will not accept further price rises, and there is no longer sufficient margin for the manufacturer to allow for long production line changeovers and the idle time of operators. In a time where food and drink manufacturers have to be hyper aware of allergens and cross contamination, there can be no cutting corners with the cleaning down of lines. A single changeover can take several hours, and if the next production run is for a new, niche SKU in low distribution, the cost of the downtime simply cannot be absorbed.
As a consequence of these cost pressures, coupled with reduced consumer demand leading to retailers rationalizing their ranges, manufacturers are opting to remove SKUs with smaller demand.
The research and development of each new plant-based product is time-consuming, expensive, and technologically complex so the funding of ongoing innovation requires investment. The recent economic downturn, high-interest rates and decline in investor appetite has created an insurmountable barrier for new entrants to the market. An article in the Financial Times in June 2023 stated that venture capital funding for plant-based meat startups had slumped to its lowest level since 2018, before the launch of industry leader, Beyond Meat5.
In recent months, we have witnessed several high-profile failures of plant-based alternative brands, including the administration of VBites in December 2023, as well as Beyond Meat’s staff restructure and implementation of cost cutting measures. In June 2023, Kroll was appointed as administrators of Meatless Farm and was able to secure the successful sale of its assets to VFC Foods.
The plant-based meat sector may be the latest example of an industry that experienced growth when venture capitalists clambered to fund the “next big thing,” but now find themselves in the next phase, where some funders seek to exit amid market decline. Some businesses will no doubt struggle to find a second, or third round of funding, and it seems likely that only the strongest will survive.
We foresee further, wide-spread consolidation in the market, and expect to see larger organizations looking for value and synergies within the sector. Consequently, we expect more transactional activity in the short- to medium-term and instances of accelerated M&A activity to rescue distressed businesses.
Kroll is well-placed to assist in its capacity as a specialist provider of advisory services, supporting clients and their stakeholders throughout the business cycle, including financial assessments, working capital management and optimization, debt raising and exit/contingency planning.
Sources:
1 https://www.thegrocer.co.uk/category-reports/is-there-still-an-appetite-for-plant-based-meat/682428.article
2 https://vegankind.com/mag/how-many-people-in-the-uk-follow-a-meat-free-diet
3 https://www.bloomberg.com/news/features/2023-01-19/beyond-meat-bynd-impossible-foods-burgers-are-just-another-food-fad?leadSource=uverify%20wall
4 https://www.eitfood.eu/news/consumers-fear-health-risks-of-ultra-processed-foods
5 https://www.ft.com/content/b868021a-0ee7-4681-b9aa-b1adb57f43fa
