Host:
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As the substitute for animal meat and dairy products, the evolution of plant-based protein has been rapid. Two years ago, the prevailing question about the category was, will it last? Today, the questions for many companies and investors are both, how big can it be and how do we participate in this space? In this episode, we'll discuss how companies participating in the plant-based protein revolution are focused on product improvements. You'll gain insights on how the momentum in this space presents multiple opportunities for companies and investors. Today, you'll be hearing insights from Jen Wu and Rob Wilson, along with your host for this episode, Maria Steingoltz.
Maria Steingoltz:
Hi everyone. I'm Maria Steingoltz. I am a managing director in LEK's Chicago office. I'm actually head of the office and I'm also part of the retail and consumer team. And I focus on the food and beverage segment.
Rob Wilson:
Hi everyone. I'm Rob Wilson. I'm a partner and managing director based out of Chicago, and I lead the food and beverage practice in North America.
Jen Wu:
Hi everyone. I'm Jen Wu. I'm also in the Chicago office with Rob and Maria, and also part of the food and beverage team focused on branded food and bev and plant based proteins.
Maria Steingoltz:
Welcome to both of you.
Jen Wu:
Thanks, Maria.
Rob Wilson:
Thanks, Maria.
Maria Steingoltz:
Well, I'm so excited to be talking about my very favorite topic, which is plant-based protein. So we're going to start out, how fast do you see the space growing and what do you think is driving the growth?
Jen Wu:
Yeah, I think it's, you know the there's so much activity in media around this topic that I think if you were just reading the headlines, you'd think that this was, 20, 30% of the category already. But realistically, when we talk about plant-based protein alternatives within the space, I mean, right now we're at about one to 2% of total meat and dairy consumption, and we think it's going to be about four to 5% of meat and dairy consumption by 2025. And so it's important to note that is a volume percentage because when we look at the value percentage, it's actually going to be a little bit higher. We're not at the point right now where these alternative meats and dairies are at a price parity to their animal counterparts. They're still priced at a premium. And so you're seeing a higher penetration of that on the value side.
I think it's important to note that with the pandemic, we had this unprecedented amount of trial in the category. And so if you look at the overall fruit and beverage market as the bifurcation between retail and food service, that trial really happened on the retail grocery level. When you saw the stock ups, when you saw animal meat disruptions in the value chain and consumers picking the alternative on shelf. And so going forward, it's just important for us to understand how much of that trial is going to translate into repeat business and drive that penetration going forward.
Maria Steingoltz:
Wow, Jen, that's incredible almost two to three time increase in penetration. What are the approaches to identifying what's going to be successful within the market?
Rob Wilson:
Yeah, thanks, Maria. There's going to be a lot of exciting innovation in this coming year in the years ahead to meet consumer needs and desires. And there's a couple of errors I would point to. First is around format. Burger is really the big one that's been brought into the scene through the food service channel to the masses, but the next big wave is going to be in the poultry side. And poultry is going to require a different ingredient deck than burger, which is better with pea. And for a crumble texture for poultry, you want more of that tear apart texture. And so you're going to need different ingredients as a result to create that.
And we're going to see a shift for poultry applications. Less about pea, more about soy, wheat and other and other ingredients. And so the format shift in ingredient decks is certainly a big area. A different lens at which to look at innovation is going to be around price point and the ingredient deck and meeting the consumer needs around those two areas. And what I mean by that is a lot of the major producers have made commitments to drive to price parody at certain points in the future. And that is going to require a lot of value engineering to get the cost of products down so that they could be similar price to what we're seeing in conventional. And that gap has been narrowing and will continue to narrow. And that is a completely different direction from the other end of the market that wants more of a cleaner ingredient deck and healthier from a nutritional and caloric standpoint.
A lot of consumers today are eating plant-based with the perception that it's healthy, but the reality is some of it is, but a lot of it's not healthier than conventional. And so in order to make that happen a couple of different areas is going to be around clean label and cleaning up that ingredient deck and getting some of those nutritional and caloric metrics closer to where you want. And so it can truly be healthier and not just a sustainable value proposition for consumers.
Maria Steingoltz:
It's incredible, right? When you look at the ingredient deck on many of these products, consumers think it's healthy, but it's chock full of salt. It's chock full of starches, all these ingredients that if consumers only knew that they were included in plant-based, the health halo might go away a little bit. The reason that these companies must be putting the ingredients in there to make it, the product taste good and replicate meat in a little bit closer of a way. I mean, I think many of our listeners have probably heard about heme, which is the impossible magic ingredient. Jen, are there other ways that some of these companies in plant based products can compete against animal based and what are some companies doing today?
Jen Wu:
Yeah, that's a great question, Maria. I think when we actually are starting to more accurately call this entire new category as alternative proteins, even bit broader than just plant-based. Because when you look at the sources of the technology coming into this, we've talked about some of the classic plant proteins out there. And we think of this as splitting into the first generation. So tofu, seitan, tempeh, what vegetarians have been eating for generations. The real growth in the market in the last five to 10 years has come from that second generation where the products like Impossible and Beyond, they're really designed to mimic the functionality and the taste of meat. And you also see this in the dairy category with these new trends such as oat milk replacing soy milk as the first generation product.
But then when we look forward, there's two additional technologies that come on the market that are technically animal based, which is the interesting part. So you've got fermentation-enabled proteins, and this is either precision fermentation or biomass fermentation. And so this is when you're using yeast or another source to actually grow the actual animal proteins, and actually replicating the functionality of the dairy. And then of course, we've got this cell-based or cultured meat, which is really an emerging technology that you're seeing across the globe in different markets. And this is taking, starting really with an animal source and growing animal meat essentially outside of an animal.
Maria Steingoltz:
Wow. That sounds, technologically-
Jen Wu:
Sounds like sci-fi.
Maria Steingoltz:
It does. It really does. And really contrary to the non-GMO movement as well, which I know has been a big topic and one which many consumers have been against. But I mean, as you think about cell-based meat, are there really going to be drivers that unlock the demand? And can you talk about what some of those will be?
Rob Wilson:
Sure. Yeah. We think about it in terms of push and pull drivers. And what I mean by that is, on the push side, the broader movements towards animal welfare and sustainability as the most important factors. Of course, there's food safety and broader general health concerns. And, and those movements are really pushing part of the plant-based movement. And then more of where the innovation and meeting those consumer demands is going to happen on the pull side. And some of those areas that we're referring to there are flavor, texture, nutrition, functionality, and price. And when you compare cell-based meat to plant-based meat, of course it's still emerging, but it does appear to outperform along a number of those dimensions on both the pull and the push side. But there are, of course, some uncertainties that lie ahead.
Maria Steingoltz:
Yeah. It's interesting. We won't need with cell-based a new unique ingredient, like heme to make the meat bleed. It's already going to do so, because it's a real meat product, right. It's derived from the animal. But because it's so far in the future, the market is still evolving. Are there uncertainties related to it or do we feel like it's a sure thing?
Jen Wu:
Yeah. I think it's, this is something where, when we talk about real commercialization of either of these technologies, I think you're starting to see. I mean, we have fermentation-enabled dairy protein on the market already, but when you think about that true commercialization, that there's really three barriers that stand in the way for both cell-based cultured and fermentation-enabled proteins. And so the first one is going to be regulatory. And so speaking for the US, I mean, for cell-based and cultured meat, this has to be a collaboration between the FDA and the USDA. So both bodies were meant to come up with a scheme or at least a kind of protocol and process back in 2019, and that never happened. And so that's still going to be a hurdle for just the regulatory approval of these products.
Jen Wu:
And the second factor of course is going to be price. I mean, we're still in a space where we're not even at price parity right now with plant-based proteins. And these are made out of pretty basic ingredients like soy and pea and wheat. And so getting down that price curve is going to be huge for the fermentation-enabled and salt cultured proteins. And then the third of course is going to be consumer acceptance because to your point, Maria when we're talking about something like heme, consumers appear to have accepted that as this, despite the fears about GMO, but when we really start talking about animal meat being made in a lab outside of, in a Petri dish, I think consumers are going to have a strong reaction to that.
Maria Steingoltz:
It's a little bit of an ick factor if you will, Jen.
Jen Wu:
Mm-hmm (affirmative). Exactly. And so we've seen a lot of consumer surveys about this and there seems to be interest, but it's more of that novelty interest right now. And so that actual, are you going to buy this three times a week? That's still a question mark.
Maria Steingoltz:
That's really interesting. I know when plant based and Impossible first came into the QSRs, there was a lot of question whether it would be replacing and a one time kind of a visit or a more sustainable business model. I think the history has proven that there is demand for this market and consumers continue to go, and it's more than just novelty. Are you hopeful for the cell-based future?
Jen Wu:
I am. I think I'm, I would say I'm very, very bullish on the fermentation-enabled proteins, because I think from a production perspective, it's easier to scale. And so that's probably what I'm most excited about right now here in the US. I would say on the cell-based and the cultured protein side, I think we're seeing so much interesting technology coming from Singapore, other parts of East Asia and also Israel. And what you're seeing there is some of the more regulatory support behind those launches as well.
Maria Steingoltz:
That's really interesting. Rob, any final thoughts you'd like to share about the market or the report?
Rob Wilson:
What I would share is this is one of the most popular areas for our clients right now. And it seems everyone's looking at it. Folks you would expect to look at it, and a lot of folks who you wouldn't expect to be looking at plant based are looking at it in different parts along the value chain and in different channels and all to meet different goals. And there's no question a very bright future ahead. It's worth noting, plant based is isn't for everybody. Take Maple Leaf Foods as an example, when they announced that they were going to reassess their investment in the plant-based space, primarily through their Lightlife brand, the stock price actually increased. That particular brand has been falling short of expectations. And there's been others like that as well.
You've got to have the right offering. You've got to hit on those benefits from the push and pull drivers we talked about to hit for the consumers. At the end of the day, you got to have a great tasting product. We've done hundreds and hundreds of projects within food and beverage and every single time, with the exception of just a couple of cases, taste is almost always the number one criteria. The exception to that would be something like emergency foods in which it's shelf life for food that you never want to actually eat. For everything else it's taste. And so those who are going to come out with a good offering and win on taste are going to be in the best position to win in the end.
Maria Steingoltz:
Agreed. Well, thank you so much, Rob, Jen, great to chat with you. Let's do it again soon.
Rob Wilson:
All right. Thanks, Maria.
Jen Wu:
Thanks, Maria.
Host:
Plant based protein products may have started as a fad niche category, targeting vegetarians and vegans, but the category is considerably more than that now. It is a significant mainstream market segment with high upside opportunity. How big that opportunity will be and what direction the categories growth will take remains uncertain. But it is safe to say that consumer interest is likely to continue for companies and investors that can master consumer trends on the right emerging technologies. Those that deliver taste, texture, favorable pricing, scale, and profitability, the reward is there for the taking. To download the detailed executive insights from this conversation, locate the link in the show notes or visit LEK.com.
Thank you, our listeners, for joining us today at the Insight Exchange presented by LEK Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at LEK.com.
