Mighty Oaks from Tiny Acorns Grow – Beyond Meat

Mighty Oaks from Tiny Acorns Grow – Beyond Meat

The newsletters of Adam Hartung.
Keynote Speaker, Managing Partner, Author on Trends
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Mighty Oaks from Tiny Acorns Grow – Beyond Meat

TREND: Beyond Meat (BYND, NASDAQ)

A big, new trend is emerging. Sales of plant based protein products may be small, but growth is remarkable. Could Beyond Meat be the next Netflix?

BEYOND MEAT plant based patties

In Q3 2019, Beyond Meat’s revenue is up 2.5x (250%) vs Q3 2018 — which was up 2.5x (250%) over Q3 2017. Yes, you can say this growth is on a small base, given that last quarter was $100M revenue.

Imagine what it’s like growing that fast. Imagine the exhilaration of solving problems – like funding your accounts receivable that’s growing with accelerating orders. Or amping up production faster than ever imagined. Or meeting needs of your customers, retailers and restaurants. Or paying out big bonuses due to beating all your planned metrics.

It’s not that much fun to work at Cargill. Or Tyson Foods. Or Smithfield. Or any other traditional company producing beef, or pork, or chicken. Those are huge companies, with lots of people. But they aren’t maxing out sales and profits – and bonuses – like Beyond Meat.

It’s easy to ignore a start up. But one has to look at the relative growth of a company to judge its future. There were cracks in the growth rate at Blockbuster 6 years before it failed. And during that time, Blockbuster kept saying Netflix was a nit that didn’t matter. But Netflix was growing like the proverbial weed. Netflix wasn’t even half the size of Blockbuster when Blockbuster filed for bankruptcy.

A Threat Enters

With growth like Beyond Meat it didn’t take long to upset an entire industry biz model. Amazon still doesn’t sell as much as WalMart, but it wiped out a significant number of retailers by changing volumes enough to erase their profits. Think about the changes wrought on the advertising industry by Google, which has pretty much killed print ads. Look at what’s happened to other media ad models, like TV and radio, by Facebook’s growth. And entertainment has been entirely changed – where today the onetime distributor is one of the biggest content producers – Netflix.

In traditional marketing theory, Beyond Meat, like Netflix, is selling new products to existing markets.

Most disruptors enter the markets in the new product/new market quadrant of the Ansoff matrix. They create the new market just by entering. If they even see them as competitors, established businesses dismiss these potential disruptors because of established focus on current markets/current products with sustaining innovations. Selling new products to existing customers is the first step companies take as they start to innovate.

Kraft was on this path when they acquired a new productc with its purchase of Boca Burger in 2000.  Kellogg’s and General Foods jumped into the alternative meat products at about the same time.  Vegetarian burger substitutes threatened the success formula of meat products and were relegated to niche products. In 2018, Kraft’s incubator tried to relaunch Boca, but the smaller, more nimble start-ups had already captured consumers’ attention and reframed the market.

The Acorn Sprouts

Beyond Meat had morphed quickly into a direct competitor to the meat industry by selling this new product to existing meat customers!

Riding the trends of climate change, sustainability and organic foods, Beyond Meat is starting to look like a true game changer. It may be small, but those other companies were too (along with Tesla, don’t forget, considered immaterial by GM, et.al.) Those who are in the traditional protein market (beef especially) had better pay attention – their profit model is already under attack!!

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“The creation of a thousand forests is in one acorn.”

Ralph Waldo Emerson

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Netflix – Delivering Your Value Proposition Is More Successful Than Optimizing Your Value Delivery System

Netflix – Delivering Your Value Proposition Is More Successful Than Optimizing Your Value Delivery System

Netflix announced new subscriber numbers last week – and it exceeded expectations. Netflix now has over 130 million worldwide subscribers. This is up 480% in just the last 6 years – from under 30 million. Yes, the USA has grown substantially, more than doubling during this timeframe. But international growth has been spectacular, growing from almost nothing to 57% of total revenues. International growth the last year was 70%, and the contribution margin on international revenues has transitioned from negative in 2016 to over 15% – double the 4th quarter of 2017.

netflix international growth

Accomplishing this is a remarkable story. Most companies grow by doing more of the same. Think of Walmart that kept adding stores. Then adding spin-off store brand Sam’s Club. Then adding groceries to the stores. Walmart never changed its strategy, leaders just did “more” with the old strategy. That’s how most people grow, by figuring out ways to make the Value Delivery System (in their case retail stores, warehouses and trucks) do more, better, faster, cheaper. Walmart never changed its strategy.

But Netflix is a very different story. The company started out distributing VHS tapes, and later DVDs, to homes via USPS, UPS and Fedex. It was competing with Blockbuster, Hollywood Video, Family Video and other traditional video stores. It won that battle, driving all of them to bankruptcy. But then to grow more Netflix invested far outside its “core” distribution skills and pioneered video streaming, competing with companies like DirecTV and Comcast. Eventually Netflix leaders raised prices on physical video distribution, cannibalizing that business, to raise money for investing in streaming technology. Streaming technology, however, was not enough to keep growing subscribers. Netflix leadership turned to creating its own content, competing with moviemakers, television and documentary producers, and broadcast television. The company now spends over $6B annually on content.

Think about those decisions. Netflix “pivoted” its strategy 3 times in one decade. Its “core” skill for growth changed from physical product distribution to network technology to content creation. From a “skills” perspective none of these have anything in common.

Could you do that? Would you do that?

How did Netflix do that? By focusing on its Value Proposition. By realizing that it’s Value Proposition was “delivering entertainment” Netflix realized it had to change its skill set 3 times to compete with market shifts. Had Netflix not done so, its physical distribution would have declined due to the emergence of Amazon.com, and eventually disappeared along with tapes and DVDs. Netflix would have followed Blockbuster into history. And as bandwidth expanded, and global networks grew, and dozens of providers emerged streaming purchased content profits would have become a bloodbath. Broadcasters who had vast libraries of content would sell to the cheapest streaming company, stripping Netflix of its growth. To continue growing, Netflix had to look at where markets were headed and redirect the company’s investments into its own content.

This is not how most companies do strategy. Most try to figure out one thing they are good at, then optimize it. They examine their Value Delivery System, focus all their attention on it, and entirely lose track of their Value Proposition. They keep optimizing the old Value Delivery System long after the market has shifted. For example, Walmart was the “low cost retailer.” But e-commerce allows competitors like Amazon.com to compete without stores, without advertising and frequently without inventory (using digital storefronts to other people’s inventory.) Walmart leaders were so focused on optimizing the Value Delivery System, and denying the potential impact of e-commerce, that they did not see how a different Value Delivery System could better fulfill the initial Walmart Value Proposition of “low cost.” The Walmart strategy never took a pivot – and now they are far, far behind the leader, and rapidly becoming obsolete.

Do you know your Value Proposition? Is it clear – written on the wall somewhere? Or long ago did you stop thinking about your Value Proposition in order to focus your intention on optimizing your Value Delivery System?

That fundamental strategy flaw is killing companies right and left – Radio Shack, Toys-R-Us and dozens of other retailers. Who needs maps when you have smartphone navigation? Smartphones put an end to Rand McNally. Who needs an expensive watch when your phone has time and so much more? Apple Watch sales in 2017 exceeded the entire Swiss watch industry. Who needs CDs when you can stream music? Sony sales and profits were gutted when iPods and iPhones changed the personal entertainment industry. (Anyone remember “boom boxes” and “Walkman”?)

I’ve been a huge fan of Netflix. In 2010, I predicted it was the next Apple or Google. When the company shifted strategy from delivering physical entertainment to streaming in 2011, and the stock tanked, I made the case for buying the stock. In 2015 when the company let investors know it was dumping billions into programming I again said it was strategically right, and recommended Netflix as a good investment. And I redoubled my praise for leadership when the “double pivot” to programming was picking up steam in 2016. You don’t have to be mystical to recognize a winner like Netflix, you just have to realize the company is using its strategy to deliver on its Value Proposition, and is willing to change its Value Delivery System because “core strength” isn’t important when its time to change in order to meet new market needs.

Netflix – Demonstrating Why Good Strategy Matters

Netflix – Demonstrating Why Good Strategy Matters

On January 23 Netflix’ value rose to $100B. The stock is now trading north of $250/share. A year ago it was $139/share. An 80% increase in just 12 months. And long-term investors have done very well. Five years ago (January, 2013) the stock was trading at $24/share – so the valuation has increased 10-fold in 5 years! A decade ago it was trading for $3/share – so if you got in early (NFLX went public in June, 2002) you are up 83X your initial investment (meaning $1,000 would be worth $83,000.)netflix profits 2017 statista

Back in 2004 I wrote that Blockbuster was dead meat – because by going after streaming Netflix would make Blockbuster obsolete. Netflix was using external data to project its future, and thus its strategy was not to defend & extend its DVD rental business but to spend strongly to grow the replacement. In 2010 I wrote that Netflix had projected the complete demise of DVDs by 2013, and was thus investing all its resources into streaming in order to be the market leader. At the time NFLX was $15.68. Over the next year it took off, tripling in value to $42.16. By cannibalizing DVDs it’s strategy was to leave its competition in a dying marketplace.

But, investors weren’t as sure of the Netflix strategy as I was. They feared cannibalizing DVDs would cut out the “core” of Netflix and kill the company. By October, 2011 the stock had tumbled to $12 (a drop of over 70%.) But, with the stock at new lows after a year of declines I optimistically wrote “The Case for Buying Netflix. Really.” I told readers the stock analysts were wrong, and the Netflix strategy was spot-on.

Netflix went nowhere for the next year, trading between $9 and $12. But then in December, 2012 investors started seeing the results of Netflix strategy, with fast growing streaming subscriber rates. By January, 2014 the stock was trading north of $52, so those who bought when my article published made a 400% return in just over 2 years! By March, 2015 NFLX was up another 23%, to $62 when I told readers “Netflix Valuation Was Not a House of Cards.” The Netflix strategy to dominate streaming by offering its own content may have shocked a lot of people, due to the investment size, but it was the strategy that would allow Netflix to grow subscribers globally. That has driven the last jump, to $250 in just under 3 years – another 400%+ return!

Strategy matters- to company performance, and thus long-term investor returns. Netflix has been a volatile stock, and it has had plenty of naysayers. These were people looking only short-term, and fearful of strategic pivots that have proven highly valuable. If you want your company, and your investment portfolio, to succeed it is imperative you understand external trends and use them to develop the right strategy. And heed my forecasts.

Can Netflix Double Pivot to Be a Media Game Changer?

Can Netflix Double Pivot to Be a Media Game Changer?

Netflix has been a remarkable company.  Because it has accomplished something almost no company has ever done.  It changed its business model, leading to new growth and higher profits.

Almost nobody pulls that off, because they remain stuck defending and extending their old model until they become irrelevant, or fail.  Think about Blackberry, that gave us the smartphone business then lost it to Apple and its creation of the app market.  Consider Circuit City, that lost enough customers to Amazon it could no longer survive.  Sun Microsystems disappeared after PC servers caught up to Unix servers in capability. Remember the Bell companies and their land-line and long distance services, made obsolete by mobile phones and cable operators?  These were some really big companies that saw their market shifts, but failed to “pivot” their strategy to remain competitive.

Netflix built a tremendous business delivering physical videos on tape and CD to homes, wiping out the brick-and-mortar stores like Blockbuster and Hollywood Video.  By 2008 Netflix reached $1B revenues, reducing Blockbuster by a like amount.  By 2010 Blockbuster was bankrupt.  Netflix’ share price soared from $50/share to almost $300/share during 2011.  By the end of 2012 CD shipments were dropping precipitously as streaming viewership was exploding.  People thought Netflix was missing the wave, and the stock plummeted 75%. Most folks thought Netflix couldn’t pivot fast enough, or profitably, either.

But in 2013 Netflix proved the analysts wrong, and the company built a very successful – in fact market leading – streaming business.  The shares soared, recovering all that lost value.  By 2015 the company had more than doubled its previous high valuation.

But Netflix may be breaking entirely new ground in 2016.  It is becoming a market leader in original programming.  Something we long attributed to broadcasters and/or cable distributors like HBO and Showtime.

Today’s broadcast companies, like NBC, CBS and ABC, are offering less and less original programming.  Overall there are 3 hours/night of prime time television which broadcasters used to “own” as original programming hours.  Over the course of a year, allowing for holidays and one open night per week, that meant about 900 hours of programming for each network (including reruns as original programming.)  But that was long ago.

Netflix Original ProgrammingThese days most of those hours are filled with sports – think evening games of football, basketball, baseball including playoffs and “March Madness” events.  Sports are far cheaper to program, and can fill a lot of hours.  Next think reality programming.  Showing people race across countries, or compete to survive a political battlefield on an island, or even dancing or dieting, uses no expensive actors or directors or sets.  It is far, far less expensive than writing, casting, shooting and programming a drama (like Blacklist) or comedy (like Big Bang Theory.)  Plan on showing every show twice in reruns, plus intermixing with the sports and reality shows, and most networks get away with around 200-250 hours of original programming per year.

Against that backdrop, Netflix has announced it will program 600 hours of original programming this year.  That will approximately double any single large broadcast network.  In a very real way, if you don’t want to watch sports or reality TV any more you probably will be watching some kind of “on demand” program.  Either streamed from a cable service, or from a provider such as Netflix, Hulu or Amazon.

When it comes to original programming, the old broadcast networks are losing their relevancy to streaming technology, personal video devices and the customer’s ability to find what they want, when they want it – and increasingly at a quality they prefer – from streaming as opposed to broadcast media.

To complete this latest “pivot,” from a video streaming company to a true media company with its own content, Morgan Stanley has published that Netflix is now considered by customers as the #1 quality programming across streaming services.  29% of viewers said Netflix was #1, followed by long-time winner HBO now #2 with 21% of customers saying their programming is best.  Amazon, Showtime and Hulu were seen as the best quality by 4%-5% of viewers.

So a decade ago Netflix was a CD distribution company.  The largest customer of the U.S. Postal Service. Signing up folks to watch physical videos in their homes.  Now they are the largest data streaming company on the planet, and one of the largest original programming producers and programmers in the USA – and possibly the world.  And in this same decade we’ve watched the network broadcast companies become outlets for sports and reality TV, while cutting far back on their original shows.  Sounds a lot like a market shift, and possibly Netflix could be the game changer, as it performs the first strategy double pivot in business history.

 

Why Tesla Could Be the Next Apple – and Put a Hurt On Exxon

Why Tesla Could Be the Next Apple – and Put a Hurt On Exxon

A recent analyst took a look at the impact of electric vehicles (EVs) on the demand for oil, and concluded that they did not matter.  In a market of 95million barrels per day production, electric cars made a difference of 25,000 to 70,000 barrels of lost consumption; ~.05%.

You can’t argue with his arithmetic.  So far, they haven’t made any difference.

Charging_Tesla_Model_S_01But then he goes on to say they won’t matter for another decade.  He forecasts electric vehicle sales grow 5-fold in one decade, which sounds enormous.  That is almost 20% growth year over year for 10 consecutive years.  Admittedly, that sounds really, really big.  Yet, at 1.5million units/year this would still be only 5% of cars sold, and thus still not a material impact on the demand for gasoline.

This sounds so logical.  And one can’t argue with his arithmetic.

But one can argue with the key assumption, and that is the growth rate.

Do you remember owning a Walkman?  Listening to compact discs?  That was the most common way to listen to music about a decade ago.  Now you use your phone, and nobody has a walkman.

Remember watching movies on DVDs?  Remember going to Blockbuster, et.al. to rent a DVD?  That was common just a decade ago.  Now you likely have shelved the DVD player, lost track of your DVD collection and stream all your entertainment.  Bluckbuster, infamously, went bankrupt.

Do you remember when you never left home without your laptop?  That was the primary tool for digital connectivity just 6 years ago.  Now almost everyone in the developed world (and coming close in the developing) carries a smartphone and/or tablet and the laptop sits idle.  Sales for laptops have declined for 5 years, and a lot faster than all the computer experts predicted.

Markets that did not exist for mobile products 10 years ago are now huge.  Way beyond anyone’s expectations.  Apple alone has sold over 48million mobile devices in just 3 months (Q3 2015.)  And replacing CDs, Apple’s iTunes was downloading 21million songs per day in 2013 (surely more by now) reaching about 2billion per quarter.  Netflix now has over 65million subscribers. On average they stream 1.5hours of content/day – so about 1 feature length movie.  In other words, 5.85billion streamed movies per quarter.

What has happened to old leaders as this happened?  Sony hasn’t made money in 6 years.  Motorola has almost disappeared.  CD and DVD departments have disappeared from stores, bankrupting Circuit City and Blockbuster, and putting a world of hurt on survivors like Best Buy.

The point?  When markets shift, they often shift a lot faster than anyone predicts. 20%/year growth is nothing.  Growth can be 100% per quarter.  And the winners benefit unbelievably well, while losers fall farther and faster than we imagine.

Tesla was barely an up-and-comer in 2012 when I said they would far outperform GM, Ford and Toyota.  The famous Bob Lutz, a long-term widely heralded auto industry veteran chastised me in his own column “Tesla Beating Detroit – That’s Just Nonsense.”

Mr. Lutz said I was comparing a high-end restaurant to McDonald’s, Wendy’s and Pizza Hut, and I was foolish because the latter were much savvier and capable than the former.  He should have used as his comparison Chipotle, which I predicted would be a huge winner in 2011.  Those who followed my advice would have made more money owning Chipotle than any of the companies Mr. Lutz preferred.

The point? Market shifts are never predicted by incumbents, or those who watch history.  The rate of change when it happens is so explosive it would appear impossible to achieve, and far more impossible to sustain.  The trends shift, and one market is rapidly displaced by another.

While GM, Ford and Toyota struggle to maintain their mediocrity, Tesla is winning “best car” awards one after another – even “breaking” Consumer Reports review system by winning 103 points out of a maximum 100, the independent reviewer liked the car so much. Tesla keeps selling 100% of its production, even at its +$100K price point.

So could the market for EVs wildly grow?  BMW has announced it will make all models available as electrics within 10 years, as it anticipates a wholesale market shift by consumers promoted by stricter environmental regulations. Petroleum powered car sales will take a nosedive.

The International Energy Agency (IEA) points out that EVs are just .08% of all cars today. And of the 665,000 on the road, almost 40% are in the USA, where they represent little more than a rounding error in market share.  But there are smaller markets where EV sales have strong share, such as 12% in Norway and 5% in the Netherlands.

So what happens if Tesla’s new lower priced cars, and international expansion, creates a sea change like the iPod, iPhone and iPad?  What happens if people can’t get enough of EVs?  What happens if international markets take off, due to tougher regulations and higher petrol costs?  What happens if people start thinking of electric cars as mainstream, and gasoline cars as old technology — like two-way radios, VCRs, DVD players, low-definition picture tube TVs, land line telephones, fax machines, etc?

What if demand for electric cars starts doubling each quarter, and grows to 35% or 50% of the market in 10 years?  If so, what happens to Tesla?  Apple was a nearly bankrupt, also ran, tiny market share company in 2000 before it made the world “i-crazy.” Now it is the most valuable publicly traded company in the world.

Already awash in the greatest oil inventory ever, crude prices are down about 60% in the last year.  Oil companies have already laid-off 50,000 employees.  More cuts are planned, and defaults expected to accelerate as oil companies declare bankruptcy.

It is not hard to imagine that if EVs really take off amidst a major market shift, oil companies will definitely see a precipitous decline in demand that happens much faster than anticipated.

To little Tesla, which sold only 1,500 cars in 2010 could very well be positioned to make an enormous difference in our lives, and dramatically change the fortunes of its shareholders — while throwing a world of hurt on a huge company like Exxon (which was the most valuable company in the world until Apple unseated it.)

[Note: I want to thank Andreas de Vries for inspiring this column and assisting its research.  Andreas consults on Strategy Management in the Oil & Gas industry, and currently works for a major NOC in the Gulf.]