“Ours is the age of substitutes: instead of language, we have jargon; instead of principles, slogans; and, instead of genuine ideas, bright ideas.” — Eric Bentley
Have you noticed how many substitutes encroach on our daily lives? Long before work from home and Zoom learning won pandemic-enforced acceptance, we had fruits and vegetables delivered in pill form, tofu turkey Thanksgiving dinners and pizza-delivery traffic jams — all evidence of how virtual experiences and synthetic products increasingly dominate our lives. This column looks at the consequences of this phenomenon, and some of the new opportunities it brings.
Beyond Meat ( BYND ) — a company that claims to produce “meat made from plants” — has been on a roll, so to speak. Founded in 2009, it hit some inflation-related headwinds earlier this year. But in the innovative burger alternatives market, its relationship with McDonald’s (MCD) has set it apart. Among other things, the two companies tested (less than successfully) a non-meat burger called McPlant — which was served, cautious observers will note, with decidedly real condiments, including slivered onions, tangy pickles, crisp shredded lettuce, sliced Roma tomatoes and a slice of melty American cheese … on a toasted sesame seed bun.
Beyond Meat says its protein derives from peas, mung beans, fava beans and brown rice. Fat comes from cocoa butter, coconut oil and expeller-pressed canola oil. McDonald’s, the company that solved a problem of earlier generations — making all hamburgers the same, no more big ones, little ones, well done next to raw — is now embracing fake meat, but made with “real” additives!
With annual revenue of about $500M, Beyond Meat has a market cap of $2 billion, nowhere near the scale of McDonald’s (revenue: $23.6 billion; market cap: $190 billion) or the privately held Burger King (revenue: $2.3B). But investors should of course not see Beyond Meat as a true substitute for the burger giants. Only a vegan might make such a claim. Even so, Beyond Meat’s progress has been impressive and they are expanding outside the U.S. The company also deserves credit for creating a better beef alternative than beefalo or lamb burgers: Their product seems to do well in the all-important taste category. If it tastes good, who cares what’s in it?
The Rise of Vaping
In some ways, the shift to synthetics began with people’s worries over traditional favorites — anything from cigarettes to sugar — that may make you sick. Corn syrup and other substitutes fill the gap left by sugar. States such as Louisiana, Mississippi and Texas have lost the cane sugar industry. Cuba hangs on but with few buyers. And, according to lung.org, cigarette use by American adults fell from more than 40 percent in 1965 to less than 14 percent in 2018 — leaving an opening for innovators.
While cigarette use has declined among American adults, the “cigarette” industry thrives. In addition to roaring sales outside the U.S. for Phillip Morris (PM) and Altria Group (MO), the industry has been leaning into synthetics. Among the most dramatic enhancements, Puff Bar (privately held), a vaping product that appeals strongly to teenagers, relies on synthetic nicotine. That highly successful product is quite interesting because synthetic nicotine, which appears to deliver a similar experience to the real thing, escapes the oversight of the Food and Drug Administration (FDA). This ploy lets Puff Bar grab market share, while the government scrambles to plug a loophole, and Philip Morris and Altria scratch their heads over how and whether they can profitably compete.
Investors may recall the recent federal appeals court decision granting Juul Labs (privately held) a temporary stay from the FDA’s order to pull its e-cigarettes off the market. Along with its competitors Reynolds American Inc. (RAI) and NJOY Holdings Inc. (ENJY), Juul remains under FDA jurisdiction. Heated tobacco – a product believed to hold great promise – likewise falls under the FDA’s hostile scrutiny.
Meanwhile, vitamin pills have morphed into vegetable and fruit pills. Their big producers – Nature Made (NATR), Kirkland Signature (KIRK), Klean Athlete (owned by Nestle, NESN) and Life Extension (LIFE) – stay busy. And how about driving ranges or golf kits where you swing indoors as you stroll a virtual fairway? Or composite baseball bats fabricated from reinforced carbon fiber polymer and costing around $200? Heck, even dude ranches offer the semblance of cowboy life.
Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.