How to profit as the world goes vegan

This article was first published in MoneyWeek magazine issue no 986 on 14 February 2020. To make sure you don't miss out in future, and get to read all our articles as soon as they're published, sign up to MoneyWeek here and get your first six issues free.

It’s obviously sensible to be careful about what we take into our bodies – the numbers we consume in our daily news, for one. What, for example, are we to make of the titbit from the “Veganuary” campaign that 400,000 people worldwide signed up to its pledge to abstain from eating any animal products for the whole of January, a rise from 250,000 last year?

Be careful of leaping to the obvious conclusion. In the month that has become known in this country as the one to dedicate to vegan and sober living, a chef revealed that a customer had asked for her steak to be well done because she was a “vegetarian”, says Alice Thomson in The Times. Perhaps the rising numbers of people saying they are vegan have little real idea of what that entails and are merely signing up to make a fashion statement that seems less burdensome than “dry January”.

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Indeed, despite the rising popularity of plant-based diets, British slaughterhouses are still killing more animals for meat every year to supply the overseas market, reports The Independent. Government figures show that almost 28.8 million farm animals were killed for meat in 2019, a 5.4% increase in two years.

The trouble with veganism, as Benedict Spence in City AM points out, is that it is “an effort to normalise and promote” an extremist ideology. The effort is doomed to failure. The idea that we should restrain our appetites in the pursuit of ethical goals, including that of living in a sustainable way that does minimal harm to the planet and to the other animals that live on it, is a noble one. Veganism, however, doesn’t preach restraint, but the “permanent” denial of a “healthy, pleasure-inducing facet of life” in a move towards “puritan control”. “Normal people” will see the whole Veganuary fad and the attempts by food companies to launch new vegan products to “cash in on this social movement for what they are: marketing gimmicks”.

Exhibit A: Greggs. The high-street purveyor of greasy snacks with more than 2,000 shops nationwide saw year-on-year sales rise by 13.5% after it launched its vegan sausage roll early in 2019. This was the result of a “savvy PR” campaign to cash in on the rising popularity of Veganuary, says Christine Ro of the BBC. Greggs knew its new product would make a splash if launched in January, so its PR team wrapped the snack in faux iPhone packaging, invited journalists to taste it and created a “comically over-the-top promotional film”.

Chat-show host Piers Morgan tweeted his outrage at the “PC-ravaged clowns” who had come up with the idea, but the social-media backlash, including a “cheeky counter-attack” by Greggs’ PR team, only provided yet more good advertising for the chain. Indeed, conspiracy theorists claimed that Morgan had teamed up with the company with the intention of drumming up more attention for the product.

The trend’s your friend

Still, savvy PR or not, when even fast-food giants such as KFC, McDonald’s and Burger King are busy launching vegan products, and seeing sales exceed expectations, it would be hard to deny that something is going on.

Even Smithfield meat market in London, an 800-year-old institution that was a livestock market back in the Middle Ages, is tiptoeing into veg, reports the Financial Times. PJ Martinelli recently became the first vendor in the market to stock plant-based meat substitutes, offering burgers made from vegetable ingredients from UK based start-up Moving Mountains. “I see it as a natural development in the food industry,” Paul Martinelli, the managing director, told the FT. “There is a lot of interest in the product and our clients are asking us about it. They may choose to do it more in January and February than in the run-up to Christmas, but we are having the discussions.”

People may never, as Spence says, go vegan en masse. The arguments for and against doing so, whether from the perspective of consumers’ health, environmental protection or animal welfare, have been well rehearsed in the press recently as a result of the Veganuary campaign. But regardless of where you stand on such issues, what seems clear is that there is a trend towards people eating less meat, consuming fewer animal products and generally following a more plant-based diet. One in eight Britons now claims to be vegetarian, according to an analysis of consumer habits by Sainsbury’s in 2019. That number is predicted to rise to a quarter by 2025.

Veganism – the more extreme form of vegetarianism that shuns all animal products, including honey, leather and, to Boris Johnson’s astonishment, cheese – has also been on the rise: there are now 600,000 vegans in the UK, according to the Vegan Society. Sales of vegan products in the UK have grown by 40% over the past five years to £816m and are expected to be in excess of £1.1bn by 2024, according to Mintel, a consumer research company. Almost a quarter of all new food product launches last year were labelled vegan.

But as we said, this is not just about the still vanishingly small proportion of people who identify as vegans. According to Mintel, 39% of British omnivores are actively reducing their meat consumption. Half of the sales of meat-alternative products are actually bought by meat eaters, according to the Agriculture and Horticulture Development Board. And it is that trend that is proving to be a money-spinner for food producers and retailers.

When people switch to a vegan diet, they inevitably find they are either going to have to spend a great deal more time shopping and chopping in the kitchen, or find instead vegan-friendly processed food. The latter does not come cheap.

An analysis of data from supermarkets by The Times shows that, pound for pound, vegan sausages and burgers, for example, are more than twice as expensive as their meat counterparts. “There is undoubtedly a bandwagon,” Clive Black, a retail analyst at Shore Capital brokers told The Times. “There is an aspiration from retailers to extract as much value from the vegan and ‘free-from’ trend as possible. It does seem like the fewer calories you eat, the more expensive they are.”

That price premium may come down as efficiencies are introduced in manufacturing and competition hots up. But the size of the overall pie is likely to keep growing. The global vegan and vegetarian market is worth more than $50bn, according to Euromonitor, a market researcher, and sales of vegan alternatives to meat reached $19.5bn in 2019.

US consulting firm A. T. Kearney predicts sales of plant-based meat alternatives will grow annually by 20%-30% in the coming years. Investment bank UBS forecasts the global plant-based meat market will grow rapidly to roughly $50bn by 2025, equating to a 2.5% penetration into total meat consumption volume, up from less than 1% today. In short, eating habits are expected to undergo profound change over the next five years, as Shares magazine puts it, and that has implications for the whole food industry.

Some investments to tuck in to

So what to invest in to profit from this trend? If you had bought into the Beyond Meat (Nasdaq: BYND) float back when we last wrote about veganism and suggested it might be worth a punt, you’d now be sitting on a tasty 240% gain. The LA-based company makes products designed to look and taste like meat, using vegetable fat and proteins – and some beetroot juice for the bloody look. The buzz around its products has pushed the stock up to bubbly levels, but the company has struggled to meet demand, and profits, let alone dividends, will not materialise anytime soon. And while the upstart struggles to make its mark, “competition is rife and more rivals with significantly greater firepower and reach are emerging”, as Joshua Warner of broker IG points out. You’d have to believe that Beyond Meat is the Amazon of a vegan revolution to buy in.

Greggs (LSE: GRG) is a more established player and has followed up on its hit sausage roll with vegan steak bakes and doughnuts, among other things. The buzz generated by its pastry treats has helped the firm to a “phenomenal” year in 2019, says CEO Roger Whiteside. Given the PR flair mentioned above, it’s unlikely this will be news to anyone, however, and “the share price and current valuation leaves no room for disappointment”, as broker AJ Bell points out.

James Crux of Shares magazine highlights Irish-food producer Kerry (LSE: KYGA). The complexities that arise when food producers shift to plant-based products puts the firm in a good position to supply the technology needed in their supply chains to meet growing demand, according to investment bank UBS. The firm also last year launched its first meat-free sausage under the Richmond brand, as well as meatballs, burgers, mince and sausages under its first dedicated meat-free brand, Naked Glory.

An alternative strategy is to invest in the companies that produce the stuff that goes into vegan processed foods. Scandinavian firm AAK (Stockholm: AAK), for example, is the world’s leading producer of speciality oils and fats, says Warner, and helps make products suitable for different dietary and nutritional needs. Its products are popular in chocolates, confectionery and other sweet treats and it recently launched AkoPlanet, which helps develop plant-based alternatives for meat, dairy and ice-cream makers. Other firms producing the stuff that vegan labels will need to buy include Ingredion (NYSE: INGR) and Bunge (NYSE: BG), which turn plant materials into various ingredients, such as sweeteners and oils, used in processed foods.

Another option is to look for investment vehicles that have strong environmental, social and governance (ESG) policies. Securities Trust of Scotland (LSE: STS), for example, invests in firms it believes are a “force for good”. Among its holdings are food maker Danone, flavouring brand International Flavours & Fragrances and nutrition and health company DSM, all of which are set to benefit from the plant-eating trend. Sarasin Food and Agriculture Opportunities is also worth a look. Its investments include Dutch-listed life-science firm Koninklijke, which has a product that helps plant-based foods taste better, and a livestock-feed enzyme able to reduce the methane emissions from dairy cows by about 30%. Vegan feed for humans capable of doing the same is an opportunity that has yet to be exploited.