Although vegan diets have existed for thousands of years, practiced by many societies for religious and health reasons, veganism is now one of the fastest growing trends in the food industry.

Hundreds of thousands of people in the UK are taking part in this month’s ‘Veganuary’ challenge in a bid to benefit health and wellbeing while simultaneously combating climate change.

Veganism’s meteoric rise is also somewhat validated by the publicity surrounding Greggs’ (GRG) vegan sausage roll, which proved nothing short of a marketing phenomenon and has kept the bakery retailer relevant in the minds of UK consumers.

The increasing numbers of people becoming vegetarians or adopting ‘flexitarianism’ – limiting animal-meat intake but not eschewing it completely – is driving demand for more plant-based food and drink.

The health benefits of eating more plant-based protein are becoming more widely known, as is the impact that practices such as mass factory farming have on the environment.

All these factors mean investors should take note of the companies capitalising on the vegan trend. However, the huge popularity of the movement means lots of businesses are trying to jump on the bandwagon so there is a lot of competition.

What is plant-based meat?

The commercial success of plant-based meat takes aim at a $1.2trn global addressable animal meat industry. You might be familiar with the veggie burger, a meatless burger patty made from tofu, mushrooms, beans or other vegetables, but the term ‘alternative meat’ is a new phenomenon driven by two food technologies: plant-based meat and cell culture technology.

Through a processing technology known as extrusion, plant-based meat replicates the core structure of meat on a molecular level using proteins from plants – including peas, beans, lentils or other protein-rich plant substances – instead of animals.

Often processed in a way to taste like animal-based meat, plant-based meat products are already commercially available.

Cell culture technology is a process through which meat is grown from a small sample size of animal cells, similar to the technology used in regenerative medicine. While the first cultured burger was demonstrated in 2013, as yet no cell cultured meat products are commercially available.

MEAT-FREE FRENZY

January is the traditional month of the year when gyms experience a boom in memberships or boozers attempt a ‘Dry January’, but increasingly it is the time of year when people try to stick to a vegan diet; avoiding all animal products including dairy, as well as products which are cooked with meat.

The ‘Veganuary’ trend has entered the mainstream with the uptick in demand for vegan and vegetarian products being boosted by health-conscious and environmentally-aware millennials. Consumers are thinking more carefully about what they eat, where it comes from and how sustainable it is, and supermarkets are seeing demand for their meat-free and vegan ranges.

Fast-food outlets are getting in on the act too. KFC has launched a vegan burger in the UK, Caffe Nero has a ‘veganero’ menu featuring new products including vegan croissants and vegan sausage rolls, while The Co-op has launched a new vegan brand called Gro.

Burger King has launched ‘The Rebel Whopper’ made from soy and aimed at flexitarians, although it is not suitable for vegetarians because it is cooked on the same grill as the restaurant’s beef burgers, and even McDonald’s offers vegan options on the menus under its golden arches.

MEAT-ING THE CHALLENGE

Plant-based meat is often described as better for the environment than animal-based meat because its production uses fewer greenhouse gases. It also helps meet the challenge of resource scarcity because it requires less land and water to produce relative to animal-based meat.

Then there are the health benefits of plant-based products, which have lower cholesterol than their animal-based meat counterparts.

According to the American Heart Association, consuming a primarily plant-based diet reduces your risk of heart failure by 42%, although plant-based meat products are sold at a premium to comparable animal-meat products in both the grocery retail and foodservice channels.

The first vegan-themed exchange-traded fund, US Vegan Climate ETF, has done well on the stock market since floating last year. Unfortunately the product is not currently available for UK investors.

It screens the market according to vegan and climate-conscious principles. The top holdings aren’t the obvious food manufacturers or retailers; instead, you’ve got names like Microsoft and Apple which may come as a surprise to many investors.

PLANTING THE FLAG

Investment bank UBS forecasts the global plant-based meat market will grow rapidly to roughly $50bn by 2025 for 2.5% penetration of total meat consumption volume, up from less than 1% today. And over the next five years, eating habits are expected to undergo profound change with implications for food producers, restaurants and retailers.

Growing awareness of plant-based meat among investors owes much to the stunningly successful stock market debut of Beyond Meat on the US NASDAQ market in May 2019. Famed for its ‘Beyond Burger’ that mimics the traditional ground beef burger, Beyond Meat was (at one point) one of 2019’s biggest stock market success stories.

There was a feeding frenzy when it floated on the stock market with the stock initially jumping from its $25 IPO offer price by an incredible 163% to $65.75 and then topping $250 in July. Beyond Meat has lost sizzle since, settling back at $90.25 at the time of writing.

UBS says that the plant-based meat opportunity brings a growing profit pool to pure plays like Beyond Meat and its privately-owned rival Impossible Foods, the producer of a soy-based burger with the taste, texture and artificial bleed of traditional animal meat.

NO FREE LUNCH

Like all hot trends, it is worth considering the risks if you want to get involved as an investor. Appetite for meat alternatives is ravenous right now, but it could slow in the future. For Beyond Meat, it relies on a few suppliers for its main ingredient, pea protein, while its success is attracting hot competition.

Incumbent meat producers and food giants aren’t going to let disruptors like Beyond Meat and Impossible Foods eat their lunch. Major names are investing to enter the meatless meat category or the broader vegan and vegetarian foods market.

Tyson Foods has launched its own meatless products, Switzerland’s Nestle acquired plant-based meat maker Sweet Earth in 2017, while Kellogg, Conagra Brands and Nomad Foods have all highlighted plant-based meat offerings and innovation plans to investors. French food group Danone, whose brands include soya milk maker Alpro, is delivering strong growth from its plant-based offering.

Kraft Heinz’s main meat-alternative brand is the BOCA Burger (one of the first veggie burgers), although this has lost market share since 2013. One challenge for the BOCA Burger is that today’s alternative-meat craze is being driven not by vegetarians, but by flexitarians – meat devourers who occasionally buy alternative-protein products.

In order to appeal to these shoppers, Beyond Meat and other upstarts are convincing grocers to stock their products next to fresh-looking animal burgers in chilled-meat cases. In contrast, BOCA Burgers are frozen and sit in refrigerators with vegetarian and vegan products where meat-munchers might not think to look.

Examples of London-listed stocks with a vegan angle

Premier Foods (PFD) has a new plant-based brand called Plantastic whose products include cake bars and dessert pots which use plant-based ingredients. Half-year results in November went down well with the market. Stockbroker Peel Hunt says: ‘Premier Foods has been viewed as a zombie company for most of the past decade, constrained by its balance sheet and pension fund, and unable to invest sufficiently in marketing, new product development and assets. However, changes are afoot with a new senior management team combined with a business that is improving sales, profits and cash flow.’

Unilever’s (ULVR) portfolio of food brands includes The Vegetarian Butcher and numerous vegetarian and vegan friendly offerings such as Hellmann’s Vegan Mayo, Ben & Jerry’s vegan ice cream and Knorr Vegan Mealmakers. Unilever has also outlined an interest in healthier plant-based products with a lower environmental impact, although UBS describes the FTSE 100 giant’s steps in plant-based categories as ‘incremental rather than projecting a more serious strategic shift’.

Cosmetics supplier Warpaint London’s (W7L:AIM) wares include the Very Vegan cosmetics brand.

Science in Sport (SIS:AIM) makes a high-protein range of plant-based protein bars and powders under the PLANT20 name which caters for demand from vegan, vegetarian and clean-eating athletes along with the growing numbers of flexitarian and environment-conscious consumers. It also supplies a wide range of vegan products including the brand’s GO Electrolyte powder, GO Energy powder, Hydro and GO Isotonic Energy gels.

OTHER ISSUES TO WEIGH UP

Another factor to consider is how certain raw materials are produced. Agne Rackauskaite, a senior research analyst at Impax Asset Management, comments: ‘When evaluating investment in companies focused on meat alternatives, it is important for the investor to look at the environmental impact of the entire production cycle.

‘For example, if we want to invest in a company growing fruit and veg, we conduct a detailed analysis, looking closely at the company portfolio, what they are growing and its impact.

‘Almonds might score well on greenhouse gas emissions, but require a lot of water to grow while avocados can lead to deforestation and growing demand contributes to monoculture.

‘As companies developing meat alternatives continue to scale, they will have to focus on supply chain – by 2050, there will be 9bn people in the world and the challenge is to have more high quality based proteins to feed everyone.’

Meat players get in on the act

Hilton Food (HFG), the global meat packing business, is benefiting from vegetarian and vegan products produced by Dalco, in which it has a 50% stake.

Having made its bones by packaging up red meat for retailers including Tesco (TSCO), Hilton has moved with the times by investing in Holland’s leading vegetarian product maker, enabling it to diversify into a further protein and expand significantly into the fast-growing vegetarian market.

From an investment perspective, you will have to pay close attention to see if the vegan movement results in a drop in meat-related business and whether there is enough plant-based activity to pick up the slack for Hilton.

There is a similar angle with pork-to-poultry supplier Cranswick (CWK) which acquired Mediterranean food products business Katsouris Brothers in a deal that further broadened its non-meat activities.

Supplying everything from Greek olives and olive oil to feta and chickpeas, Katsouris also has a presence in nuts and grains. This acquisition helped high-quality pig processor Cranswick to diversify away from meats and into plant-based categories, while strengthening its ties with major retailers.

FOUR WAYS TO INVEST IN THE VEGAN BOOM

Securities Trust of Scotland (STS). Buy at 207.5p

We’re a fan of the quarterly-dividend paying investment trust whose manager Mark Whitehead goes global in targeting companies that have strong ESG policies and sustainability practices that drive revenues, profitability and cash flows.

‘These companies will most likely be aligned with a low carbon, equitable, healthy and safe society and reward shareholders with a growing dividend and strong total returns over the long term,’ the Martin Currie money manager informs Shares.

‘As investors we have a pivotal role to play in preventing climate change, and must act to prevent global warming by demanding that the companies we invest in are a force for good,’ continues Whitehead.

‘The increased amount of animal protein being produced is boosting greenhouse gas emissions that are contributing meaningfully to climate change. DSM estimates that livestock and fish production contribute to 14.5% of our world’s greenhouse gas emissions, at a time when the world is demanding more meat and fish as populations swell and incomes rise, particularly in Asia.

‘These factors are providing a tailwind for companies to be able to innovate and capture swelling demand for healthier and more sustainable plant-based alternatives to drive revenue growth.’

From the Securities Trust of Scotland portfolio, he cites Danone, International Flavours & Fragrances and DSM as three relevant companies harnessing the structural growth trend of people eating and using greater amounts of plant-based products.

Danone’s acquisition of Whitewave in 2017 increased its plant-based product set. And its Alpro brand has been around a long time making plant-based food and drinks including soya, almond and oat milks as well as lactose-free 100% plant-based yoghurts.

As for International Flavors & Fragrances, it is pioneering technologies that support alternative and sustainable food sources without compromising taste.

Sarasin Food & Agriculture Opportunities (B77DTQ9). Buy at 188.1p

One way to gain exposure to the vegan theme is through funds focused on ESG factors. Portfolio managers with ESG mandates are putting money to work in this area because veganism and vegetarianism offer solutions to ethical dilemmas such as climate change, animal cruelty, land degradation and human health.

Sarasin Food & Agriculture Opportunities, a fund managed by Henry Boucher and Jeneiv Shah, invests in Dutch-listed life science company Koninklijke DSM. It produces a ModuMax taste modulator which can be used in plant-based foods to help them taste better. It has also developed a livestock feed enzyme able to reduce methane emissions from dairy cows by about 30%. Another top holding in the fund is China Mengniu Dairy, currently enjoying success with its non-dairy range.

Greggs (GRG). Buy at £24.18

Perhaps the most obvious veganism play on the UK stock market is Greggs, whose strong festive sales were boosted by the ongoing, priceless publicity surrounding its now-iconic vegan-friendly sausage roll.

Greggs has added to its vegan-friendly range with the launch of the ‘Vegan Steak Bake’, which uses Quorn instead of meat with gravy made from vegan steak seasoning, onion powder, spice extracts, flavourings and water, as well as its first vegan doughnut.

Its initial vegan launch proved a marketing masterstroke and played a role in what proved a ‘phenomenal’ 2019 for the business, to quote chief executive Roger Whiteside, and the hype around new vegan launches could hold the key to further earnings upgrades. However, risk-averse investors should note the high-flying shares are now ‘priced for perfection’, according to Shore Capital analyst Darren Shirley, with a valuation that leaves no scope for disappointment.

Importantly for anyone considering an investment in Greggs, it seems clear that its vegan products have acted as a sustained catalyst to bring more people into its shops and that it wasn’t a one-off fad.

Kerry (KYGA). Buy at €114.9

The complexities associated with shifting to plant-based products leaves London-listed Irish food producer Kerry well-placed to provide its technological capabilities into the supply chain, says UBS.

Stockbroker Davy also sees Kerry as a beneficiary of the vegan boom. It says first generation plant-based food options often lacked flavour but second generation options now hitting the shelves have more focus on the taste experience, thereby benefitting Kerry as an ingredients business. It can make plant-based burgers tasted beefier, less salty and have a less starchy taste.

Kerry also has a consumer foods business with brands such as Richmond, which last year launched its first meat-free sausage, as well as its first dedicated meat-free alternative brand called Naked Glory. The latter offers meat-free meatballs, burgers, mince and sausages containing a natural smoke extract.

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