Is Tyson Foods showing how potential disruption should be managed?

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In today’s Rad.Daily, we initiate our coverage of Meat and Fish Replication startups and add the sector to our Disrupting Food playlist.

The driving thesis behind this sector is fairly straightforward. As with other related sectors like the Insect-Based Protein Snacks sector and the Dairy Substitutes sector, the purpose is:

  • to think twice about how humans access protein and key vitamins,
  • to challenge the impact that consumption has on the environment and on people’s health, and…
  • to identify ways to make the system more sustainable.

In some cases, that sustainability comes with an inherent consumer behavior change: i.e. in much of the world, eating insects is not the status quo. But in other cases, including today’s sector du jour, the goal is actually to mimic an existing behavior as much as possible but use inputs that are significantly more sustainable.

A read of our sector analysis yields a few potential angles…

  1. This is a huge potential addressable market. The average American household spends approximately $543 on beef, poultry and seafood ingredients each year ($126 on seafood, $172 on chicken and $245 on beef). But… evidence suggests that high volumes of meat consumption (in particular) are harmful to the environment and unhealthy. According to the Washington Post, “global livestock” contributes to 14.5% of annual greenhouse gas emissions. Moreover, research from the University of Oxford estimates that the world could save $730b in health care costs annually by reducing meat consumption to United Nations, WHO and World Cancer Research Fund guidelines.
  2. Beef first? Impossible Foods, Memphis Meats and Beyond Meat (the three best funded startups in the category with ~$300m in aggregate disclosed financing) all have a beef offering. And Impossible Foods and Beyond Meat are dedicated almost entirely to taking the battle with “traditional” beef head on. They both offer burger equivalents as their headline product. There is no attempt to attack from the sides and build a wedge into the spending habit. Smaller companies are focused on fish. And Memphis Meats has started with chicken tenders. But Impossible Foods and Beyond Meat are taking the fight head on.

The battle lines are being drawn along a few interesting planes.

  1. Plant Grown vs. Lab Cultivated: Impossible Foods and Beyond Meat both offer products comprised of plant-grown inputs. Memphis Meats (as well as smaller startups SuperMeat, Finless Foods and Mosa Meat) all use animal cell inputs cultivated in a lab to make their products. A Radicle survey included in our coverage indicated that consumers were willing to try, and in some cases were inclined to favor, meat and fish replications. But they strongly leaned towards the concept of “plant-based meat” over “lab-grown meat”. More of a marketing commentary than anything else probably, but worth noting.
  2. Route to Market: Of the 7 startups we’ve included in our coverage, only Impossible Foods and Beyond Meat are in market. And Impossible Foods is only very recently in market. While early, therefore, it’s noteworthy that both are selling through traditional food retailers (i.e. they are not attempting business model innovation in parallel with significant product innovation). But the two companies have selected different paths: Impossible is attempting to build brand awareness and social acceptance by selling its products to restaurants first. Beyond Meat meanwhile has gone the path of selling into the Whole Foods and Safeways of the world.
Source: Radicle Surveys

And then of course there’s the question of the incumbency.

  1. Incumbents: The companies that process and sell meat, poultry and seafood currently are enormous titans of the old economy. And the industry is fairly consolidated: four producers account for 80% of all beef processing in the U.S. That includes Tyson Foods (TSN), which is also the largest U.S. chicken producer. You would think this story would all set up for a classic disruption story. Except…
  2. Acquirers: Tyson participated in Beyond Meats’ latest funding round. As did General Mills. For Tyson and other legacy producers in the category, an acquisition is not a “TAM expander” (it does not grow what one would consider Tyson’s total addressable market) but rather a “SAM defender” (if and when consumer preferences shift, it may help Tyson defend the size of its serviceable addressable market). And at multiples where “comps” have traded (<5x revenue), an acquisition is completely in the realm of reasonable for the $25b-market-cap, stock-close-to-5-year-highs Tyson.

What it could mean for…

  • Venture Capitalists: The fish side of the equation remains less developed but similarly sized.
  • Corporate Development Pros: Acquisitions in this sector will start to materialize in 2018 (by our hot take).
  • Entrepreneurs and Innovators: The go-to-market part of this analysis is particularly interesting. The big companies in the sector seem clear about what element of the chain they’re innovating and where they are going to maintain status quo. Specifically, they are investing science into the creation of a product that would completely upend a legacy industry. But they are selling it through existing channels rather compounding the degree of difficulty of their act by also trying to explore a new distribution channel.

You can read our full report here.

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