PepsiCo, Beyond Meat JV a bet plant-based category will grow – experts

PepsiCo Inc.'s new joint venture with Beyond Meat Inc. should help the food and beverage company expand into the growing plant-based foods sector and give its smaller partner access to better distribution without giving up control of its destiny, experts say.

The companies announced Jan. 26 plans for a joint venture called Planet Partnership LLC to develop and produce new plant-based snacks and drinks. Financial terms were not disclosed. Shares of Beyond Meat jumped on news of the partnership, pushing the 12-month gain to 49.8% as of market close Jan. 26. In the same period, shares of PepsiCo have been relatively flat.

Beyond Meat's expertise in plant-based protein and its strong market appeal with younger demographics made them PepsiCo's ideal partner, PepsiCo said in an email. The beverage company also said recent studies show about half of teens either consume or are open to consuming plant-based meat and nearly two-thirds of those in Generation Z find plant-forward eating appealing.

Asked whether the joint venture could lead to an eventual acquisition of Beyond Meat, PepsiCo said it is focused on the launch of this joint venture and creating and scaling new plant-based foods and drinks.

With PepsiCo's reach and distribution, Beyond Meat will be able to enter new categories and channels and accelerate bringing these products to markets around the world, a Beyond Meat spokesperson said in an email.

PepsiCo's interest in teaming up with Beyond Meat is not all that surprising given that large established players tend to look for opportunities to buy growth, and the health food industry is growing strongly, Will Knuff, managing partner at the investment management firm Knuff & Co., said in an interview. The deal comes as more big food companies are increasing their investments on plant-based products to meet growing consumer demand.

"I could certainly understand PepsiCo taking a hard look at that segment and wanting to sort of round out their product offerings," Knuff said.

PepsiCo could have easily bought Beyond Meat given how much bigger the company's enterprise value is compared to Beyond Meat's, Knuff said. As of Jan. 27, PepsiCo's total enterprise value of $226.88 billion eclipsed Beyond Meat's $12.11 billion, according to S&P Global Market Intelligence data. But it is understandable the plant-based foods upstart would not want to sell because the company still has room to grow, Knuff said. A joint venture allows Beyond Meat to grow into its valuation and it keeps the door open for opportunities to work with PepsiCo competitors, Knuff said.

The partnership has multiple product avenues it could explore, including plant-based dairy and plant-based jerky or meat snacks, Erika Jackson, a UBS analyst, said in a Jan. 26 report. More details could emerge on PepsiCo's upcoming earnings report scheduled for Feb. 11.

The joint venture is Beyond Meat's first expansion outside plant-based meats, suggesting that the company's total addressable market is likely larger than investors first envisioned, Rebecca Scheuneman, a Morningstar equity analyst, said in a Jan. 26 note. Yet, if the partnership is limited to the kinds of products already in PepsiCo's lineup, then Beyond Meat's stock movement is likely an overreaction, Scheuneman said.

"If the venture expands to other dairy and meat-based products outside of PepsiCo's current portfolio, the market opportunity will be larger, but so will execution risks as the firms move further away from their traditional areas of expertise," Scheuneman said.

Not all of PepsiCo's partnerships have panned out well: A distribution agreement with the energy drink company Bang recently went sour. But the formality of the joint-venture structure and the favorable secular backdrop could make the PepsiCo and Beyond Meat partnership a more fruitful endeavor for both companies, Scheuneman said.

The project also further confirms the consumer trend toward plant-based proteins in the U.S. and globally, and it is a sign that the product assortment of plant-based products is expanding beyond traditional meat alternatives, Peter Saleh, a BTIG analyst, said in a Jan. 26 report. Still, the announcement of the deal lacked meaningful detail on the timing of new products, product categories or financial measures, Saleh said.

"We continue to believe that a broad-based distribution agreement in quick-service restaurants this year is unlikely, but recognize that this partnership took investors (and ourselves) by surprise and drove a corresponding surge in the stock price," Saleh said of Beyond Meat.