(Bloomberg) — In February 2021, Beyond Meat Inc. promised to bring fake meat to Pizza Hut, KFC and Taco Bell. More than a year and millions of dollars later, none of the restaurants has permanently added a faux-meat menu item in the US, leaving Beyond struggling to expand past its flagship burgers and sausages.
No product may be more emblematic of the El Segundo, California-based company’s current challenges than Beyond Pepperoni. Spicy, sliced pork is the most popular topping in the $46 billion US pizza business, and the alt-meat maker spent more than a year trying to nail a vegan version of it, but was plagued by production setbacks. In the meantime, competitors like Hormel Foods Corp. and Maple Leaf Foods Inc. started offering their own vegan pepperonis at smaller chains.
The pepperoni problem is one of several issues in Beyond’s deal with Yum! Brands Inc., which has about 54,000 restaurants worldwide. KFC’s chicken-nugget rollout was delayed and then short on product. Taco Bell has yet to test Beyond’s “carne asada” in a single restaurant after the fast-food chain was dissatisfied with samples. The partnership is Beyond’s most high-profile collaboration aside from a partnership with McDonald’s Corp. to sell a meat-free McPlant burger. Sales for the McDonald’s test have been “disappointing,” according to BTIG LLC analyst Peter Saleh.
This is a critical time for Beyond, which went public in 2019 to much fanfare and a soaring stock price. At the time, it was seen as a first mover in the fake-burger category, but it has since lagged behind its peers in the next frontier of meatless proteins — fake chicken. Before a rally that started in early July, the 13-year-old company’s stock spent several weeks trading close to its $25 IPO price. It closed Wednesday at $37.17.
“I don’t really understand their strategy right now,” said Arun Sundaram, an analyst at CFRA. “They’re saying they have a vision where they’re introducing all kinds of plant-based meat products, but they don’t have the experience of scaling any individual product with the end goal of sustaining profits and cash flow.”
The most recent setbacks highlight a recurring issue, according to conversations with 19 current and former employees of Beyond Meat and a review of internal documents, photos and communications. Beyond has a history of showing products to customers without a capital-efficient approach or the technical know-how to commercialize them, said the current and former employees, who asked not to be named discussing private company information.
Beyond Meat and Yum declined to make executives available for interviews.
“We work hand in hand with Yum! Brands to create best-in-class products to serve their customers and strongly refute any claims to the contrary. Beyond Meat’s global strategic partnership with Yum! Brands has resulted in the development of innovative plant-based proteins for KFC, Pizza Hut and Taco Bell, and we continue to work with them on exciting new opportunities,” a Beyond Meat spokesperson told Bloomberg.
“Yum! Brands values our global strategic partnership with Beyond Meat that’s focused on co-creating and offering innovative and delicious plant-based menu items,” Yum said in a statement.
Pepperoni Production
In August 2021, Beyond ran a small test of its pepperoni in fewer than 70 of Pizza Hut’s approximately 6,700 US locations. But in the months leading up to the test, the company kept hitting speed bumps, according to descriptions from eight of the current and former employees who spoke with Bloomberg.
Assembling the pepperoni involves multiple steps, first to form cylindrical, salami-like links known as chubs; these then have to be cooked and sliced. Beyond took an unconventional approach to this process for the August test: First the chubs were made in Beyond’s Pennsylvania plant, then they were flown to its European manufacturing facility for slicing, then brought back stateside for Pizza Huts. Both before and after that test, according to seven of the current and former employees, there were ongoing disagreements over the order of cooking and slicing.
Flying a partially finished product from the US to Europe for completion and then back again is “unusual for a company of that stature,” said Sunil Pande, a veteran food executive who led fast-food and retail partnerships and growth strategies at Tyson Foods Inc., in the US and abroad. Pande said that finding the necessary equipment domestically should have been possible. “Cost and complexity would tell you to do things in the US,” he said.
“Arriving at a best-in-class outcome for breakthrough novel products is an iterative process,” a Beyond spokesperson said in an email. The company explained its decision to fly the pepperoni from the US to Europe and back as “the more efficient solution to serve the needs of the small test.”
In July, just weeks before the Pizza Hut test, an explosion rattled a Kentucky Dippin’ Dots factory. The facility supplied the cryogenically frozen pellets of fat that are incorporated into the pepperoni to more closely mimic the pork product. The incident temporarily paused production of the ingredient, the dessert maker’s chief executive officer, Scott Fischer, told Bloomberg. Ten employees suffered non-life-threatening injuries. The explosion didn’t cause a “material disruption” to Beyond’s supply chain, Beyond’s spokesperson said, and Dippin’ Dots is still waiting for a final report on the cause.
In a November 2021 earnings call, Chief Executive Officer Ethan Brown told investors the company “overcame numerous technical challenges” to make the pepperoni and it was “excited” about its potential over the coming quarters. But despite the initial enthusiasm from Yum and Beyond’s hefty investments, Pizza Hut balked at the high price of the pepperoni and has expressed doubts about Beyond’s ability to produce it at commercial scale, former employees with knowledge of the matter told Bloomberg.
By April 2022, Beyond still hadn’t finalized its commercial process for making pepperoni.
Complex Machinery
Developing and manufacturing novel plant-based meats relies on complex machinery. The process of assembling a standard pea-protein-based burger is completely different from the extrusion process that creates a fibrous piece of fake chicken, and different still from making fake cured meats. The specialized machines can cost millions of dollars and are often built to order, sometimes keeping companies waiting more than a year, said Peter Golbitz, founder of food-company consultancy Agromeris.
Beyond wasted no time in purchasing at least four multimillion-dollar production lines from Metalquimia, a Spanish maker of industrial meat-production machinery, despite having no large orders in hand. Making the whole-muscle texture required for the KFC Beyond Fried Chicken needed yet another kind of expensive machinery: high-moisture extruders, which can cost anywhere from $200,000 to $2 million, according to Golbitz.
Beyond’s fried chicken landed on KFC menus months after it was originally scheduled because of more production delays, according to descriptions from 11 people with knowledge of the matter. In an echo of its pepperoni process, Beyond made “blanks” in a Missouri facility and then shipped them to its Pennsylvania plant for marinating, breading and frying, former employees explained to Bloomberg. Beyond struggled in making the products according to Yum’s specifications and to produce enough of them, according to people familiar with the matter who weren’t authorized to speak for the company.
Listeria has been found in Beyond’s production facilities, according to six people with knowledge of the matter who weren’t authorized to speak publicly; the presence of the bacteria interfered with production for KFC, three of these people said. A spokesperson for Beyond said the US Food and Drug Administration “comprehensively inspected our facility during our most recent routine audit and concluded the inspection without any adverse findings,” and the FDA is unaware of any Beyond Meat products carrying Listeria, an agency spokesperson said.
While sales of Beyond at KFC were healthy, it wasn’t a big moneymaker. “In the first couple weeks it was out, it performed well,” said Saleh, the BTIG analyst. Franchisees sensed that it lured new customers, but “the problem was the margins were really poor on the product,” Saleh said. He estimated the cost of goods on the Beyond nuggets was about 40%, compared with 30% to 32% for real chicken.
Despite falling short on product and profits, Beyond Fried Chicken brought in plenty of attention. Yum CEO David Gibbs said in a company earnings call in May that it “elevated the brand and boosted relevance, resulting in more media impressions than any other product launch in the brand’s history.” In Canada, meanwhile, KFC tested a plant-based chicken made by Maple Leaf’s Greenleaf Foods unit in 2019 and created a permanent menu item less than a year later.
Distribution
Since the August 2021 test, Pizza Hut hasn’t put Beyond Pepperoni back on the menu. Beyond has tried to court other customers for its pepperoni product, but so far it hasn’t announced any. Pizza Hut’s biggest competitor, Domino’s Pizza Inc., which doesn’t currently offer plant-based meat toppings, said it has considered some products but didn’t reveal from which companies.
“Products created for Pizza Hut are exclusive to Pizza Hut,” a Beyond spokesperson said, adding that the pepperoni product made for general foodservice customers recently won an award from the National Restaurant Association. Beyond didn’t name any planned customers for its foodservice pepperoni product.
LeBron James-backed Blaze Pizza has tried several vegan pepperoni products, including Beyond’s, but didn’t move forward into official testing, citing problems with taste and texture. Your Pie Pizza, a national chain with about 75 locations, also considered Beyond’s pepperoni but it wasn’t what the chain was looking for “in terms of taste or price point,” said Drew French, the chain’s founder.
Vegan pepperoni “still has a little ways to go when it comes to the meat-lover loving it,” said Jim Vowler, chief executive officer of Gourmet Provisions International Corp.
Even so, sales are taking off. Overall, vegan pepperoni units shipped to restaurants and retail foodservice outlets increased 174% in the year ended in April, according to data provided by the NPD Group’s SupplyTrack service. Greenleaf’s vegan pepperoni is in more than 700 restaurants in North America and over 10,000 US retailers. Hormel, a top producer of pork pepperoni, is also selling a vegan version through more than 200 distributors across the country.
Missed Opportunities
In the February 2021 earnings call at the time of the announcement of the Yum partnership, CEO Brown was light on details, telling investors that “any activity is likely to skew toward the latter part of this year.” Yet there were no major US offerings in 2021, and now, more than halfway through 2022, there has been nothing else aside from the KFC limited-time offer. Beyond shared no other plans for the partnership in its latest earnings call in May, other than a reference to “continuing to do trials.”
Beyond has enjoyed some success in the pizza business. Its “sausage” crumbles are basically indistinguishable from the real thing, Vowler said, and are on his company’s frozen vegan pizza. The crumbles were also added to menus at more than 450 Pizza Hut units in Canada after a successful test.
But that hasn’t assuaged investors, who have watched the stock price plummet more than 80% since its peak in July 2019. Leadership changes last year, including a new chief operating officer from Tyson, haven’t made a noticeable impact yet. Wall Street analysts including Brian Holland from Cowen Inc. are wondering whether Brown is still suited for the top job. “Startups reach inflection points,” he said. “Is the person with the vision still the right person to execute the day-to-day plan?”
Lisa Feria, managing partner and CEO of venture capital fund Stray Dog Capital, said she still has full confidence in Brown, though her fund exited with the IPO in 2019. “The great majority of startups that we work with do go through a lot of growing pains as it relates to scaling their products,” she said.
Golbitz, the food-company consultant, is sympathetic to Beyond’s challenges. “It’s not that they don’t have the wherewithal to produce excellent products, it’s the speed they’re trying to do it and the volume that’s required,” he said.
Speed is what’s necessary, though, along with product improvements and lower prices. After surging in 2020, sales of plant-based meats at supermarkets largely flatlined in 2021. Consumers are increasingly questioning claims about the healthfulness of the highly processed products. On the restaurant side, even as the industry rebounds, excitement around vegan options hasn’t returned to pre-Covid levels.
“The world is turning, and this has been deprioritized with consumers for value,” said Joseph Szala, managing director of Vigor, a restaurant consultancy. With inflation driving up food costs across the board, consumers are less likely to pay a premium for what is ultimately a substitution product. “If I had to guess, the energy, momentum and interest in this is dissipating,” Szala said.
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