Investors were pleased after McDonald's (MCD, Financial) announced that it is expanding the rollout of its plant-based McPlant burgers, particularly in the United Kingdom and Ireland. "Double McPlant" features two juicy Beyond Meat (BYND, Financial) patties and has answered fans' calls for more vegan menu items.
The fast food chain attributed the response to early trials and an increased appetite for plant-based products, with investors taking to the stock by bidding up shares of Beyond Meat.
It's been a big year for Beyond Meat, though mostly not for positive reasons. The popular vegan "fake meat" company was forced to recall several of its products earlier this year, causing the stock to fall and public favor to wane. However, despite the rough start, Beyond Meat investors have taken heart thanks to the McDonald's news, an unprecedented milestone for the company and a huge leap forward for plant-based meat alternatives.
However, Beyond Meat has deeper problems it needs to solve before I'm convinced. Though Beyond Meat seemed like a revolutionary company when it first rose to prominence, upon taking a step back and gaining some perspective, it's clear that it has some significant issues. Looking at Beyond Meat's financials, it is difficult to miss the red flags. The company has yet to become profitable, and it's uncertain if that situation will change anytime soon.
Although it may have found success in the past, Beyond Meat has recently struggled to keep up with the competition. In addition, the current economic climate doesn't seem to be working in its favor; too many factors beyond the company's control could impact its future performance. Despite all of this, bulls still hold out hope for the future of this innovative startup, but those hopes might be misplaced until significant changes occur within Beyond Meat's business model and management structure.
Why the McDonald's news is a temporary blip
McDonald's is rolling out yet another 'double' to the menu – the Double McPlant. It took three years of meticulous testing and collaboration with Beyond Meat. Still, it was finally released in September 2021 and has proven popular enough for a sequel to be launched this January – adding to the ever-growing list of Big Mac doubles.
The news proved to be a short-term catalyst for Beyond Meat. However, it should not distract investors from the larger issues surrounding the company.
Beyond Meat's stock was initially seen as a high-growth play when it went public in 2019, with the company subsequently enjoying rapid revenue growth of 275% that same year. However, these days the outlook is much more uncertain; the past quarter showed Beyond Meat's net revenue had dropped 23% to $82.5 million, which hints at a downtrend in consumer preferences and other current market conditions, making it difficult for the once-promising firm. Though early investors were expecting potentially outsized returns, this downturn presents an interesting new challenge for Beyond Meat moving forward as it navigates its way through such headwinds.
The revenue stagnation that Beyond Meat has been experiencing is a massive issue for the younger, unprofitable company. With an operating loss of $89 million in the third quarter and a small moat in a highly competitive industry, it won't be easy to transition into profitability. It must begin to find ways to differentiate itself from the competition, or it might not be able to make up for the revenue losses. As one of the pioneers in this sector, the ball is in Beyond Meat's court; this company has the influence and capabilities to drive change. However, the issues it is facing are systemic.
Narrow moat and intense competition
Beyond Meat has certainly had a meteoric rise to success, but it has an incredibly narrow economic moat. The market for meat alternatives is crowded with more than 60 rival brands, so it has very little in terms of long-term protection against competitors.
Beyond Meat has not only been competing against the multitude of alternative meats on the market, but it is up against the more familiar, often more affordable and arguably more tasty conventional real meat. This challenge was recently highlighted by reports that plant-based beef can cost up to twice as much as regular beef. So, besides developing its product to level up with its competition, Beyond Meat must also seriously consider how to close this price gap and make its product more accessible to a wide range of consumers if it wants to stay afloat long-term. This is no small feat for sure, and it will largely determine how far alt-meat companies can go in their mission for replacing meat consumption.
In other words, Beyond Meat is in a difficult bind. On the one hand, its prices are already uncompetitive with traditional meat, so it will continue to lose market share if it chooses to raise them. But if products remain at current prices, the company may be unable to remain financially viable due to high operational costs and current cash reserves. The company nearly burned $90 million in the third quarter alone and currently has limited cash and equivalents. To continue funding operations and business projects, Beyond Meat may need external capital from debt or equity markets, which won't bode well for investors down the line as it could limit their claim on earnings.
Takeaway
Beyond Meat investors no doubt welcomed recent news that McDonald's plans to start offering a new Double McPlant option. However, this will not alleviate the long-term issues facing the company. Whether it be cost savings initiatives or fresh marketing strategies, the company needs to find a way to get a moat to protect against competitors and get its costs under control.
The bottom line is, Beyond Meat needs to focus on profitability and improve its competitive advantage so that positive momentum from good news can generate a stronger and more sustained stock rally.
