10 min read

The Very Good Food Company: Ready To Grow In 2021

While VERY faces sophisticated competitors and challenges in the near term, it has the product portfolio and brand to effectively compete.
The Very Good Food Company: Ready To Grow In 2021
This is an article I wrote a couple of years ago, back in 2020. 

Summary

  • VERY's experiencing explosive growth in 2020 and plans to significantly expand operations in 2021.
  • While VERY faces sophisticated competitors and challenges in the near term, it has the product portfolio and brand to effectively compete.
  • There's plenty of room for VERY in the plant-based protein market and I believe there's upside for its stock.

The Very Good Food Company (OTCQB:VRYYF) has achieved strong revenue growth throughout 2020 with Q3 revenue up 26.6% over the prior quarter and annual revenue up 322% YoY. On December 10, 2020, VERY announced record-breaking sales of $782,790 in November 2020, up 582% over November 2019. With an infusion of capital, aggressive expansion plans, and Daiya Foods Veteran Ana Silva joining VERY as its new president in 2021, it seems likely VERY will continue its strong growth trajectory in 2021 and beyond.

The plant-based protein market is still in its infancy and there's plenty of space for VERY, given its superior suite of products, strong brand, and smart marketing. If VERY's successful at scaling its business in 2021 and replicating its local success on a global scale, I believe there's significant upside for its stock.

About The Very Good Food Company

As a resident of Victoria, British Columbia (B.C.), I've watched VERY and its brand, The Very Good Butchers, gain traction in the local economy over the past three years as producers of plant-based foods of the highest quality.

An emerging plant-based food technology company VERY invents, develops, manufactures, and sells bean and vegetable-based products through wholesale, retail, and DTC channels. Experiencing rapid growth over the past two years VERY is shifting its strategic focus to growing its wholesale channel, both domestically and internationally.

CEO, Mitchell Scott has stated that VERY intends to become a large, international company. To that end, VERY issued stock on the Canadian Securities Exchange in June 2020, raising $8.5 million. On December 4, VERY announced the closing of a previously bought deal prospectus which raised an additional $13.2 million. VERY plans to use this capital to aggressively ramp up production in 2021 with the opening of two new major production facilities - the Rupert location in Vancouver, B.C., and the Patterson facility in California.

The Plant-Based Meat Market: Super Competitive and Just Getting Started

The global plant-based protein market is approximately $10B USD in size and is expected to balloon to $35B by 2027 - this is a conservative estimate. Annual global sales of plant-based meat alternatives have grown on average 8% a year since 2010, with projections forecasting that in 25 years, 20% of meat will consist of plant-based meat. In comparison, the global meat market could be worth as much as $2.7T by 2040; however, a growing body of research suggests that most of the meat we consume by 2040 won't come from animals.

In Canada, more than 40% of the population (15 million) are actively incorporating more plant-based food into their diets, and sales of plant-based protein products rose 7% to more than 1.5B in the 2016/2017 fiscal year. The Government of Canada estimates that plant-based protein will contribute more than $4.5B to GDP in the coming years. In my opinion, as governments realize the economic benefits of plant-based diets to their healthcare systems, we can expect them to incentivize the consumption of plant-based meats, further stimulating consumer demand.

VERY's been successful at capitalizing on the above trends, capturing a small share of the market at the local level. However, expanding internationally means VERY will be going head-to-head with firms such as Beyond Meat (BYND) and Impossible Foods, both with strong brand recognition and the resources to employ strategies to deter market entry, such as:

  • Product proliferation;
  • Limit pricing; and,
  • Strategic commitment.

Competition in the plant-based meat market is plentiful and fierce and market leaders continue to invest heavily in R&D to out-innovate emerging startups; for example, Impossible Foods raised $700 million in 2020 to fund new R&D initiatives and is in the process of doubling the size of their R&D team. Furthermore, major CPG competitors enjoy competitive advantages, such as:

  • Highly visible shelf space;
  • Production and distribution economies of scale;
  • Marketing and advertising capacity; and,
  • Strong brands.

While these are significant barriers to VERY's expansion plans, by aggressively pursuing expansion, optimizing their supply chains, and continuing to invest in R&D, the company is taking the right steps to set itself up for success. As McKinsey research points out: "While there is significant headroom for consumer-packaged goods companies and food manufacturers in the alternative-proteins market, many don't have the necessary production capabilities to capture this market opportunity, nor do they know where to focus their efforts."

VERY has proven it knows exactly where to focus its efforts, demonstrated by the growth of key marketing metrics; for example, email newsletter subscribers grew 98% in June 2020 to 28,000 members, and both Facebook and Instagram accounts experienced growth of 627% and 498% respectively - both platforms have surpassed 30,000 followers. What's yet to be seen, is if VERY can continue this momentum more broadly, domestically and on an international scale.

Catching up with Demand: Signs VERY's Ready to Grow

Several factors suggest VERY's ready to compete with market leaders:

1. Market demand is consistently exceeding production capacity

Throughout 2020, product orders across North America have increased. During Q2, VERY reported record quarterly revenue of $1.1 million, up 225% quarter-over-quarter from $338,552 and up 400% YoY.

Revenues continued to climb in Q3, up 26.6% over Q2. What's more, DTC orders for VERY's vegan holiday products grew to record levels with presales for both Thanksgiving and Christmas at maximum capacity - these presales represent a greater than 300% annual increase in comparison to units sold during the 2019 holiday season.

Additionally, e-commerce metrics reveal increasing demand from DTC business in Q2:

  • Website visits increased by 447,169 (+1,591%)
  • The average order value increased by 108% and the number of orders increased by 986%
  • An e-commerce conversion rate of 155%

In Q3, weekly production volume increased to 11,000 lbs per week, an increase of nearly 50% over August numbers. Because of increased demand, VERY's Victoria production facility aims to increase production to 19,000 lbs per week in early 2021.

Heavy demand and production bottlenecks mean VERY's had to waitlist 50+ wholesalers. As production ramps up in Victoria and VERY opens its new 45,000 sq. ft. Rupert facility in Vancouver, the company will be able to produce over 37,000,000 lbs of annualized product. Currently, its Victoria location can produce 1,375,000 lbs per year.

VERY's products are sold in 275 B.C. retail outlets, representing 6% of the total number of retail stores of both smaller independent grocers and national grocery store chains. As production catches up to demand, I believe it's reasonable to conclude VERY will see a moderate increase in revenues in fiscal 2021. VERY intends to open a retail location in Vancouver, B.C., which will provide an additional lift in demand in 2021.

Looking several years into the future, if very captures 1% of the total plant-based meat market in Canada, this equates to roughly $34M in annual revenue.

2. A strategic shift away from DTC towards wholesale to aggressively pursue market share

DTC's been an important channel for VERY but it's not going to make them a household name - evidence suggests major growth will be driven by its wholesale channel.

VERY's new 25,000 sq. ft. California-based Patterson facility will enable VERY to gain a foothold in America's third most vegetarian state. Strategically located on the same property as its logistics provider and close to key shipping routes, the Patterson facility can produce up to 98,500,000 lbs of annualized product. These are some serious numbers; for comparison, in 2019, Beyond Meat produced around 51M lbs of product.

It's unlikely VERY will reach even 50% production capacity at the Patterson facility any time soon, still, the bandwidth available supports long-term growth in the US market, enabling VERY to match production as demand increases in years to come.

November 10, 2020 sales and revenue results demonstrate growing demand from the US market:

  • VERY achieved record monthly sales of $782,790, an increase of 582% over November 2019 sales, largely attributable to American Thanksgiving and Black Friday; furthermore,
  • American Thanksgiving contributed $384,045 to e-commerce sales in November 2020 representing 4,287 orders - a 1686% increase in the number of orders compared to November 2019.

While VERY intends to shift its focus away from its DTC channel, the company must ensure it doesn't neglect this channel as it's been a major driver of growth. In August 2020, Beyond Meat announced it would begin to sell directly to consumers through its website, indicating market leaders see opportunity in the DTC channel.

3. Competitive margins, pricing, and unique brand positioning

VERY boasts an industry-leading gross margin of 42% - 13% higher than Beyond Meat's gross margin, suggesting a durable competitive advantage. Furthermore, VERY's gross margins may confer other advantages, such as providing a buffer against rising raw material prices and flexibility to drive new growth through R&D and marketing.

Large plant-based meat producers compete primarily on price and continue to slash prices as start-ups compete with them for slices of this rapidly expanding market. Beyond Meat aspires to match the price of traditional meat with at least one of its products by 2024.

Below, is an example of how VERY's prices compare to Beyond Meat's prices (all figures are in Canadian dollars and sourced from a B.C. retailer):

Product (VERY)Retail Price (VERY)Product (BEYOND)Retail Price (BEYOND)
British Banger (4 pack, 396.8 grams)$9.50Italian Sausage (400 grams)$9.99
Burger (4 pack, 432 grams)$11.50Burger (2 pack, 226 grams)$8.49
Taco stuffer (368 grams)$9.00Sausage crumble (360 grams)$11.99

As we can see, VERY's price competitive, though it's important to note that Canadian retailers often sell Beyond Meat products at a discount.

VERY may be successful in charging a premium for its products because of its brand position of quality. What's more, VERY's been careful about ensuring its customers continue to perceive its brand as premium by not entering the fast food space.

Still, with so many alternative meat products coming to market, substitutes are plentiful, and I'd hazard a guess that consumer demand is fairly elastic. As VERY ramps up production and scales, it's reasonable to assume they may achieve economies of scale and be able to further increase gross margins and potentially reduce prices on certain products to attract price-conscious customers.

Valuation

VERY is not yet profitable, nor is it generating positive cash flow. Moreover, except for its Victoria location, its production targets are unknown, making 2021 revenue predictions, and therefore valuation, challenging.

Assuming VERY reaches its production goal of 19,000 lbs per week for its Victoria facility by February 1, 2021 and maintains an average selling price per pound of $11 dollars for 47 weeks, we can expect roughly $9.8M in revenue from the Victoria facility in 2021.

Additionally, assuming the Rupert facility commences production by February 1, 2021, and has a conservative weekly production volume of 10% of the Victoria facility (~1,900 lbs per week), this results in $982,300 in revenue in 2021.

Lastly, if VERY's able to get the Patterson facility up and running by April 1, 2021, this leaves 39 weeks of production time remaining in 2021. While we don't know VERY's production targets for this facility and how quickly they plan to scale; if we adopt the same conservative weekly production volume of 10% of the Victoria facility, this results in $815,100 in revenue in 2021.

Therefore, a conservative, forward-looking revenue projection for 2021 is $11.6 million (CAD). As of December 10, 2020, VERY's market cap is $669.37M; therefore, its forward P/S is 57.7.

Given the company's uncertain future, this is a high valuation. For comparison, Beyond Meat's P/S (TTM) is 21.3. Notably, Morningstar has a fair value target of $10.86 CAD for VERY, as of December 8, 2020.

This is a quick and dirty approach to valuation. Obviously, there is a high degree of uncertainly regarding the above revenue forecasts and the company's ability to achieve scale. Investors should exercise caution and take into consideration VERY's shares are up ~536% from June 2020.

Risks

VERY may be poised for growth, but they've got their work cut out for them -key risks include:

No economic moat - it's difficult to determine if VERY has a long-term, competitive advantage - there's not enough company data and information available. Large firms, such as Beyond Meat, have been unsuccessful in establishing moats - this doesn't bode well for the smaller, less sophisticated VERY.

Expanding too quickly - opening two major production facilities in different geographic locations is challenging for any company, let alone a small start-up with limited capital and resources. VERY must continue to allocate capital efficiently, at home and in the US, or they could continue to see production challenges and bottlenecks. Furthermore, VERY's management team is inexperienced which could slow scaling efforts; however, they've recently onboarded former Daiya Foods president, Ana Silva, who is experienced in managing large-scale growth initiatives.

COVID-19 - sales for the plant-based food category have exploded during the pandemic. The Good Food Institute announced plant-based meat sales were 454% higher than the previous year in March 2019. The pandemic likely bolstered VERY's 2020 sales and investors should be cautious of declining revenue as the pandemic winds down.

Brand differentiation - Victorians are known for supporting local businesses and being receptive to homegrown products. Subtle differences in branding and positioning that may be noticed by Victorians and Vancouverites may make little difference to price-conscious consumers in international markets with a plethora of substitute products at their fingertips.

Takeaway

Despite the challenges and risks outlined in this article, I'm bullish on VERY. There are two key strengths VERY can leverage to effectively compete with market leaders:

  • Product quality/taste; and,
  • Brand trust

VERY's products are exceptionally tasty and their recipes superior to their competitors' product offerings. While this is a subjective assertion, if you're serious about investing in this company, spend some time reading VERY's google reviews (better yet, try their products) for evidence of their product quality.

More importantly, will smart consumers trust Nestle or large CPG companies to produce their plant-based protein when they can choose a company like VERY?

VERY's been successful at establishing brand trust locally and I believe the company's brand promise of high quality, non-processed plant-based foods will resonate with their target audience on a mass scale in the US. We're already seeing evidence of this in VERY's November sales and revenue report.

At $9.00 per share and a forward P/S of 57.7, VERY's shares are expensive. The high degree of risk associated with this opportunity isn't well aligned with my investment approach. However, on a substantial price pull-back (~25%-30%), I'd consider opening up a speculative position to catch some of the potential upside.