Hi everyone,
I'll be running an Ask Me Anything session on Friday, 26 February. I'll start around 9am PST and will finish up by 6pm PST, so try to get your questions in on Wednesday or Thursday.
About me: I lead Open Philanthropy's work on farm animal welfare, and am a fund manager for the EA Animal Welfare Fund. 80,000 Hours released a podcast with me a few weeks ago, and I write a research newsletter on farm animal welfare.
Some topics I’m excited to discuss:
- Alternative proteins: progress to date, key challenges, future directions
- Farm animal welfare: current conditions by species, progress on various issues, and new strategies
- The global farm animal movement: status by country, challenges, and new opportunities
- Animal welfare’s place in EA, and what other EA movements can learn from it and vice versa
- Frontier topics: wild animal welfare, invertebrates, cultivated meat, etc
But feel free to ask me anything!
In a recent newsletter, you suggested getting plant-based meat cheaper would revolve around cheaper ingredients and production efficiency.
Couple of questions around that since it felt like there was some abstraction for brevity in that newsletter
First, some data to work off. According to Beyond's latest filings for nine months up to Sep 2020, their per pound price is probably more like $3.97 per pound vs your $3.5 per pound estimate (I'm including outbound shipping and logistics as well which is probably more accurately a cost of goods sold item but an SG&A item for Beyond). Meanwhile, they seem to be selling at around $5.6 per pound (revenue / volume in pounds) giving them a 31.8% gross margin.
Being generous, I think this gross margin is probably a Covid related impact (overspent on fixed costs) because their gross margins have been higher before so I think there's probably room for another 600 basis points of gross margin improvement (look at Sep 2019 quarter filings). In that particular quarter with higher gross margins, the cost per pound (same method as above) was $3.9 per pound, and the selling price was roughly $5.74 per pound.
Again being generous, without covid and therefore better fixed cost leverage within the cost of goods sold, let's say they could've done the same margins with $5.6 cost per pound. That means a production cost of $3.6 per pound (again emphasizing that I include outbound logistics whereas Beyond don't)
$3.6 per pound is still 33% more than farm prices for beef in the US in Jan-21. So that's where (in my opinion) where we're currently at.
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Questions:
1) Production efficiency: Practically, this means increasing the amount of product you can produce per unit cost. As I see it, in plant-based meat, this means being more efficient with your direct labour, equipment costs even ingredients (ie reducing wastage). These are all relatively small cost items. My own estimate would be less than 25% of total cost. For a more outside view, depreciation and amortization expenses (largely fixed costs) as a % of Beyond's cost of goods sold is only 4.5% of cost of goods sold (9 months upto Sep 2020) and direct labour is ultimately going to be dependent on where you're producing.
So how much of that 33% gap do you think can really be closed with production efficiency (more automation, higher throughput equipment, less wastage etc.)? Because to me, it really looks quite small.
2) Cheaper ingredients: As per my estimate, this is likely a much bigger piece of the pie and ~40% of the cost base. Unfortunately, I can't find any good external data on this (just based on my estimate seeing several plant-based meat startups over the past couple of years in venture capital). Typically the two biggest fractions of cost there are the protein fraction (concentrate, isolate etc) and the flavours (as well as other functional ingredients). To me, it seems relatively low impact to innovate and bring down the prices of major and already cheap proteins like soy because in most cases that's likely to positively correlate with feed costs (and therefore bring those costs down as well).
So with respect to flavours, what do you think is the scope to bring down flavour (and other key functional ingredients) costs over the next couple of years/decades and how much can that contribute to closing that 33% gap to beef prices in the US? (I have no view on this)
Note: I don't like being anonymous but I think it makes it easier for me to be honest and candid.
Hey Lewis,
Sorry for the delayed and long-ish reply here.
Distribution and retail inefficiencies:
I would concur that those are issues. For example, retailers and distributors typically take higher margins on plant-based products vs animal-based ones. I can't really give a good benchmark number here because it changes a fair bit based on country, how the retailer is positioned etc.
That being said, I think the question worth asking is whether this is a tractable issue at all. My own take is that it isn't particularly tractable (at least in th... (read more)