With most CPG companies already having reported first-quarter earnings, the CPG-related news this week centered around descriptions of consumer strength from their retail partners. In addition, the largest CPG companies, such as Unilever, are making bigger pushes into sustainable packaging. Finally, Oatly shares soared in their debut on Thursday.
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Oatly (Nasdaq: OTLY) shares surge as they begin trading. There was evidence of institutional investor interest ahead of Thursday’s IPO date when the IPO priced at $17, the high end of the $15-$17 range. Shares appreciated 18.8% on Thursday to close at $20.20 to bring the company’s valuation to $13 billion. That is about double the market cap of Beyond Meat, the other public company involved in the production of plant-based food substitutes. Part of the excitement surrounding Oatly is that the company has been very successful in its home country of Sweden, not only with a strong 50% market share within the oat milk category, but the company also contributed to oat milk being the dominant plant-based milk alternative in Sweden with a 70% share. (Almond milk is the largest milk substitute in the U.S.) I expect Oatly to be a closely watched security as investors and competitors attempt to get their arms around the growth potential of plant-based food alternatives and also attempt to estimate the total addressable market for premium versions of foods that are healthy and/or more environmentally friendly than established products.
Oatly’s focus is revenue growth with help from an in-your-face advertising campaign. The company’s revenue more than doubled y/y in 2020 to $421 million while the company’s net loss increased to $60.4 million in 2020 from $35.6 million in 2019. A widening net loss should be expected during a growth-focused period as the company entered new markets, increased production capacity and increased its advertising budget heavily.
In its prospectus, Oatly touts the supply chain advantages of oats over dairy. The company’s ethos is sustainability throughout the supply chain, and that includes the local sourcing of oats to reduce transportation costs, using regional suppliers for packaging, and the local sourcing of other ingredients, such as rapeseed oil. Oats are a “low-input crop,” which use fewer resources in the agricultural stage of production and offer the possibility of crop rotation. Oats also have a longer ingredient shelf life than dairy. Oats can be farmed all over the world, which enables the local production of oats and reduces overall supply chain costs. Consistent with the company’s values, there is carbon footprint labeling on the containers.
Unilever makes a bigger push to reduce plastic usage. This week, Unilever announced plans to convert its entire global toothpaste portfolio to recyclable tubes by 2025 using a design that had been in development for four years. Enabling the company to do this, it innovated on the packaging used in toothpaste containers, converting it from a product that uses a combination of plastics and aluminum to one that is made mostly from high-density polyethylene (HDPE). The HPDE-based tube retains the flexibility of the aluminum-based packaging while making the tubes more recyclable. The company also plans to make the design available for use by competitors.
Unilever’s new toothpaste design expands upon its existing push to reduce plastic usage. Last year, the company announced plans to reduce the amount of virgin plastic it uses by half in five years from 2020 to 2025. In addition, the company committed to using at least 25% recycled plastic in its packaging. The company recently launched its first 100% recycled plastic toothbrush that is made from 100% food-grade recycled plastic that uses 40% less plastic than traditional toothbrushes.
Another example of the company’s environmental efforts includes teaming up with beer and spirits producer Diageo to use more paper-based containers similar to the ones that Diageo used in its Johnnie Walker bottle. The bottles use sustainably sourced wood to replace plastics.
Unilever is also a very heavy user of rail intermodal for its long-haul domestic dry freight movements. Intermodal is an environmentally friendly alternative relative to over-the-road truckload. It typically reduces the fuel surcharges billed to shippers by half, and also typically saves shippers 10%-15% off their freight bill compared to comparable truckload lanes.
Unilever not only uses rail intermodal in the dense freight corridors that are normally associated with rail intermodal, but also in lanes that are dominated by truckload. Unilever uses intermodal in the St. Louis to Jacksonville, Florida lane that is typically dominated by truckload. The chart below shows that, on average in the past week, only 15 domestic intermodal containers moved in the St. Louis to Jacksonville lane, indicating that Unilever is ahead of most of the CPG industry by utilizing rail intermodal in a lane with little density.
Retailers’ earnings highlight consumer demand strength. Most consumer goods companies have already reported earnings, but many of the large retailers reported this week. That typically happens about one month after most other companies (presumably to include January returns in their fourth-quarter numbers). One earnings report that stood out was Target, which exceeded analysts’ expectations and posted comparable sales up 23% from a year ago, and that was on top of growth in last year’s first-quarter growth of 10.8%. The evidence of continued strength in consumer demand is a positive for CPG companies, particularly those that sell into Target, which has taken share from other retailers in the past year. Target’s e-commerce growth was 50% y/y, a deceleration from the 141% y/y growth experienced in the year-ago period as the company rapidly increased its online capabilities as consumers bought more items online. Target’s stores remain at the heart of its e-commerce strategy, which includes pickup in store, curbside pickup, etc. In fact, in Q1 2021, 95% of the company’s e-commerce was fulfilled by store assets in inventory. Target expects its same-store sales to grow in the mid to high single digits going forward.