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It was in the late 2010s when plant-based foods went mainstream. The hype was concentrated in a few startups that had miraculously bridged the gap between real and fake. Impossible Foods and Beyond Meat captivated consumers with meatless products that now looked and tasted like actual animal proteins, and Oatly led the way with creaminess that was comparable to cow milk. They represented a paradigm shift in the world of consumer packaged goods. Vegan products historically were made by and sold to vegans who had already made the lifestyle switch, but vegans account for less than 1% of the global population,
and few companies were willing to stake millions of dollars in R&D for such a tiny market. But these new innovations were designed to be mainstream, not niche. They were, for omnivores first and vegan second rather than vice versa. With seemingly minimal differences in taste, texture or appearance, customers could easily substitute their beloved meat and dairy for these modern plant-based substitutes. Whether it was out of curiosity or novelty, these startups exploded in virality, and when customers demonstrated their willingness to pay a premium for these supposedly healthier, sustainable, plant
based substitutes, the market jumped headfirst onto the bandwagon. Restaurant chains joined the hype, aggressively rolling out plant-based menu items and dairy-free drinks. Retailers couldn't stock their shelves fast enough, as Oatly, Beyond Meat, and Impossible Foods all ran into shortages. CPG giants like Unilever and Coca-Cola fast followed with plant-based snacks and drinks of their own, eager not to miss out on this next gold rush. It didn't seem crazy to imagine a world where these vegan startups would one day become as big as the massive billion-dollar meat and dairy giants like Tyson, Nestle, and Danone.
Disruption seemed certain, one burger patty and one glass of milk at a time. Beyond Meat and Oatly quickly IPO'd to channel the hype into billions of dollars to its fans. Oatly was the poster child of sustainability and ethical consumption. On paper, it was also a stronger business given that milk is an easier, stickier, and more accessible product compared to ground meat. Oatly tasted good, was good for the body, good for the environment, and now would be good for shareholders. Yet this plant-based revolution lasted just five years.
The once high-flying Beyond Meat and Oatly have crashed and are just penny stocks these days. Both brands have shown zero signs of turning things around. They lose millions of dollars every year as their products seem to have lost their luster with retailers and consumers alike. The numbers seem conclusive. Veganism doesn't work. If these brands, with their virality, can't survive or be sustainable independent businesses, then how can anyone else ever make it work?
Vegans and environmentalists, in response, all claim that this game is rigged. Meat and dairy are subsidized, but their plant-based substitutes are not. If these vegan startups were given the same massive subsidies that governments give to the meat and dairy industry, then profits would flow. But instead, these vegan startups are unfairly crushed under the weight of not just generating supply and demand for these new products, but also shouldering the impossible task of matching the artificially affordable prices of meat and dairy today. All of this trickles down into the vegan tax, where customers consistently pay more, whether it's oat milk over cow milk or Impossible Meat over regular beef/
Thus, the whole argument is that until governments provide the same benefits to vegan companies, plant-based products will forever be too expensive for regular consumption and companies like Oatly and Beyond Meat will always fail. In this episode, we're assessing to see if this is true. We'll look at Oatly and the broader dairy industry to see if Oatly struggles are due to mismanagement, if the cards are actually as stacked against vegan companies as they say they are, and what a plant based future would really look like if vegan products were treated like the essential commodity that meat and dairy are today.
The dairy industry is highly mature, with an annual growth rate forecasted at just 1% over the next ten years. Milk is an essential commodity, but for most households, having some milk in the fridge is enough. The brand doesn't matter as much. This maturity means that, like how people are indifferent about milk, they also have the same attitudes about the razors they use. Under the traditional razor blade business model, companies make money by selling cheap handles but expensive blades. All the profits come from getting people to keep buying blade refills, and consumers have become indifferent to it over generations.
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That's www.hensonshaving.com/MBA for 100 free blades with your purchase of a Henson razor. Oatly IPO'd in 2021 with creative accounting and a brash narrative. But even though demand exceeded supply in the following years, the company's operating losses have only deepened, and these red flags have become fuel for its critics. Oatly's pitch is in its brand and tenure. They're the world's first and largest oat milk producer and have specialized in it for 25 years, long before the hype of the 2010s, which on paper gave them a leg up over the competition. People didn't want any regular oat milk.
They wanted Oatly. Whether it was the quirky marketing or hipster frenzy, that brand excitement had translated into real dollars. Revenue tripled in 3 years and demand outpaced supply as both Starbucks and retailers ran into shortages well into 2021. Contrary to traditional dairy, the majority of sales for Oatly came from customers buying a single box at a time off shelves, rather than through a splash at a time at coffee shops or other foodservice establishments.
Since people were asking for Oatly by name, it was a no-brainer to extend their brand into new product lines like yogurt, ice cream, whipped cream, and grab and go drinks. But despite selling out of every drop of oat milk, the company was still unprofitable. Creaminess and foaminess was Oatly's claim to fame, and they were dead set on keeping their manufacturing secrets close to the chest. In their early years, they had relied on third party co-packers out of necessity to create their finished oatmilk - a common, cost efficient practice in any manufacturer-intensive industry. But Oatly wanted to internalize as much of their supply chain as possible so they could fully capture the profits
for themselves over time and to protect their trade secrets. Relying on third party co-packers would always mean giving up margins, and Oatly didn't want to be seen as just another commoditized dairy business. Oatly committed half a billion dollars a year to building and scaling their own factories around the world to ramp up production capacity for the next decade. The company broke ground in Texas, the U.K., Sweden, China and Singapore under the conviction that the growth rates would hold at 20 to 30% every year.
Having self-owned production hubs in every major continent would mean not only greater production, but also faster distribution into the heart of Big Dairy's biggest markets. This would permanently also address the company's long-running issues around supply, contamination and congestion. After all, the demand was clearly there, all Oatly needed to do was to meet it. But whether it comes from cows or oats, there are economic realities to milk as a business that not even marketing can fix milk. Whether it comes from soy, oats or cow, milk is highly perishable and requires refrigeration.
With short expiration dates and refrigeration requirements, what's produced must be sold quickly, whereas other beverages like alcohol, soda, energy drinks and flavored fizzy water are shelf stable non-essentials with significantly longer shelf life. When we segment the beverage industry into two separate rosters of milk versus non milk, we can see these differences in fundamentals. Dairy companies, on average, suffer from dramatically lower gross and operating margins than non-dairy companies - and this is factoring in all the dairy companies around the world from the U.S. and New Zealand, all the way to Saudi Arabia and China.
Oatly makes its oat milk from oats, vegetable oil, water and enzymes. But despite dealing in significantly simpler raw materials and not having to raise cows, their gross margins were surprisingly lower than even the dairy companies that it was looking to disrupt. In an attempt to disguise itself like a radically different business, Oatly cooked its books. Costs of sales, by convention, should factor in every dollar that it took to not only produce the product, but also to deliver that item to its final place, where it's actually sold to a customer. In the beverage industry, the cost of distribution is factored
into cost of sales. Oatly broke from this well-established convention by excluding the cost of distribution, which in turn naturally inflated their gross margins. Despite this artificial inflation, Oatly's gross margins are still lower than that of traditional dairy companies. And when we manually add back in the cost of distribution ourselves, the real gross margins are depressing. It wasn't just the attempt to run two major hubs on every continent that was killing their margins, but also the high marketing and sales spend.
Oatly had first-mover advantage through the 2010s, but as the plant based hype progressed into the 2020s, competition increased. PepsiCo, Coca-Cola and Nestlé all released oat milks of their own, eager to capture some share in this fast growing market. When Oatly was the only game in town, they had to market to generate interest in oat milk as a product. But now consumers no longer need to be educated on why drink oat milk, but instead, why drink Oatly specifically, as they remain the most expensive brand on the market.
They had to continue their aggressive marketing to maintain appeal and to justify pricing as the premium choice in a now fully commoditized category - and this would theoretically, also help keep sales up as they waited for their new factories to get online. As a result, Oatly's spend on sales and marketing leads the industry and outpaces the spend of traditional dairy and even the alcohol and soda giants. By 2023, oat milk was everywhere and Oatly's over-expansion proved to be disastrous. It wasn't that Oatly was a fad, or that people suddenly stopped drinking oat milk overnight.
Whether it was the novelty wearing off or consumers adjusting to inflation, Oatly as a premium concept had hit its ceiling as growth slowed to just low single digits in two years with weakening demand. Oatly no longer needed so many factories, or needed so many product lines, and the ambition to have two production hubs in every region was overkill. The cost of these new facilities, both in their initial construction and the day to day operation, was killing margins and trying to scale everything themselves was not worth it, when the demand had already peaked. Crushed by the declining popularity
and the overhead of the factories that it couldn't run efficiently, losses have only deepened. They've since given up their dreams of vertical integration, sold off the factories, brought back the third party co-packers, and cut back on the new products to restore margins. But since the massive growth and untapped potential that Oatly had preached to fuel its IPO is nowhere to be found, the company has naturally cratered to penny stock territory. With its equity value now worth so little, they don't have the means to fundraise another war chest unless it's through debt.
Hence, their only option now is to batten down the hatches and to cut costs, while hoping that demand will persist in the coming years. Oatly's greatest failure was stubbornly believing that oat milk was some new product that would have radically stronger business fundamentals than cow milk, the very product it was trying to replace. If consumers don't see Oatly at their store, they can just buy a different brand, because having some oat milk is better than none at all. The competition may be inferior, but is ultimately not substantially worse.
Oat milk, in effect, has become just as saturated as regular milk, and Oatly's struggles come from trying to survive as a standalone branded premium for what is an essential commodity. To replace cow milk, Oatly must tether itself to a price range that's familiar to consumers. But because the dairy industry in every country relies on government subsidies to survive, Oatly can only really be a premium, not a floor. They can't price-match the cow milk they're trying to replace, and they also can't get any lower because they don't have the same economic safety net.
The barrier to entry to produce oat milk is much lower than cow milk. Oatmeal can be made at home in minutes, whereas raising a cow is a drastically greater undertaking. The company has tried to reinforce its brandpower in other ways, like suing competitors with remotely similar packaging or advertising dubious nutritional and environmental claims. What Oatly is doing is not any different from what existing dairy companies do to find an edge in a saturated, commoditized category.
A2, for example, grosses over $1 billion a year selling branded cow milk free of A1 proteins, despite the fact that there is zero scientific evidence that the naturally occurring A1 protein in milk is even bad for you. Their message for years has been that if you drink their milk regularly, you'll be associated with less risk of diabetes, heart disease, and even schizophrenia. And then on the other end, you have European brands who market their milk as grass fed and paint visuals of happy, free-roaming, ethically raised cows and meadows producing "healthier milk" despite near-identical nutrition.
Oatly's missteps amplified their struggles, but it's not like the cow milk and dairy industry is doing great in the first place. Milk is a terrible business. And even if cow milk is one day replaced with oat, soy or nut milk, these same poor fundamentals will still exist. Milk is not an ordinary product. It's a political symbol that transcends nutrition. Ordinary people gauge the health of the economy every day, not through job reports or unemployment figures, but instead through milk.
When the price of milk goes up at the store, everyone squawks, and that public disapproval lands on the government for not keeping things affordable for everyday people. Consumers pay attention to the price of milk more than any other essential, like bread, eggs and meat. As a result, supermarkets for generations have positioned milk as loss leaders. They always place milk in the back of the store, so customers are forced to traverse through the aisles of other tempting, higher-margin products.
The supermarket will generally make only a few cents, or even lose money on selling the milk, but will make profits so long as customers add other items to their cart on their way out. This is why the milk section of any store is always so well stocked. It's the only universally guaranteed product around the world that can get the customer in through the door multiple times a week. In short, consumers want cheap milk. Retailers want to carry cheap milk. Politicians want to keep milk cheap, and all of these pressures end up on the heads of the people who produce milk in the dairy farmers and dairy processors. So to solve for everyone, governments through history, from Canada
to the U.S. all the way to China, have provided enormous subsidies to keep farmers employed, prices low, and milk flowing. In the First World War, the U.S. kept their troops fed with powdered milk, cheese, and other processed dairy. After the war ended, demand disappeared. Production continued at the same levels. This led to a massive surplus and the price of milk cratered, leading farmers to unionize and to lobby for market protection. In response, the U.S. government created federal programs to force demand. The 1940 Federal Milk Program and the 1946 National School Lunch Act mandated that every school start serving lunch with cow milk,
which gave the dairy industry an infinite supply of mouths and first dibs on priming the next generation of Americans to drink cow milk under FDA's New Deal. The US government also started self-funding advertisements that positioned milk to the masses as part of the Healthy American diet. This was all nearly a century ago. By the 1950s, Americans were drinking more milk than soda or juice. But despite the forced conditioning, milk consumption per capita in the U.S. has declined decade after decade since.
The average American drinks about one third the amount of milk today than they did 70 years ago. But while demand has declined, milk production continues to reach record levels year after year. Even though everyone knows this is wasteful overproduction. There just doesn't exist enough demand for all this milk. And yet government subsidies have only intensified. At first, they tried paying farmers to produce less, but when that failed, the American government made themselves a customer. Starting in the 1970s, they bought up all the excess milk that the dairy farmers couldn't sell, converted it into cheese for longer shelf-life, and then began amassing
these stockpiles in vaults around the country. Since overproduction was now rewarded instead of punished, dairy farmers continue to overproduce and the vaults overflowed with millions of pounds of this government cheese. And since no one was actually eating this cheese, it was still going bad. Yet the government couldn't just sell their cheese off for cheap, since that would only undercut the actual commercial for-sale cheese that the dairy industry was peddling to the public. The only solution left was to simply give away the government cheese for free to low-income households on welfare and food stamps, but milk consumption still continued to decline into the mid 90s.
Leaving everything in the hands of farmers was clearly not working and the only option left was brute force. The government decided to throw more bodies at the problem by creating Dairy Management Incorporated a taxpayer-funded nonprofit supervised by the Department of Agriculture. The organization would employ hundreds of people full time, all dedicated every day, to finding ways to incorporate more dairy into the American diet. DMI rolled out the famous Got Milk? campaign and messaged cow milk as the key ingredient to strong bones and healthy joints.
Yet their strongest strategy has been their hidden partnership with American fast food. Crowd favorites like Pizza Hut Stuffed Crust and Domino's Cheesy Bread were not the creations of some visionary chef, but instead the result of long running partnerships from DMI. DMI is why there's more milk-based drinks at Starbucks, more cheese on Taco Bell's menu, and larger slices of cheese on McDonald's hamburgers these days. But ultimately, a sprinkle of cheese here, a flashy ad over there, and a mandated carton per student still has never been enough collectively to stop the decline in cow milk consumption. When we exclude government subsidies, the average dairy
farm has only been profitable three times in the past 23 years. Milk is sold by the hundredweight and farmers, broadly speaking, have lost anywhere from $1 to $5 per hundredweight. Since 2000, the only three years in which dairy farms were profitable without subsidies were in 2007, 2014 and 2022 as it was those years in which the price of milk spiked but then plummeted down the following year, once supply exceeded demand. Compared to corn, wheat or oats, milk is perishable and harder to store and transport. Once cow milk is harvested, it has to get on shelves and to be sold as quickly as possible.
Like every other agricultural commodity, there's fluctuations in demand, cost of feed, the health of cattle, weather, and exports. China and Mexico and Canada are the biggest international buyers of American milk. But even their demand is susceptible to changes in trade relations and economic policy. While crops have defined harvesting seasons, dairy is uniquely continuous as cows produce milk all year round. All these factors are why the price of milk is volatile and the dairy industry suffers from boom-and-bust year after year. When the prices up, farmers milk more cows so they can make more money.
But when the price is down, they still milk more anyways to try to minimize their losses through greater volume, leading to the same net of excess overproduction. The point is not that dairy farmers are uniquely unprofitable. Wheat and cotton farmers also for the most part, lose money without subsidies. Rice and soybean farms, on the other hand, are the exception with consistent returns. But the question to ask is that if most dairy farmers lose money, then why would they stay in this line of work? And the answer is that most don't. In the past decade,
the number of dairy farms in the U.S. has shrunk by nearly half. Even with fewer farms, milk production still remains at an all time high. What's happening is that the small multi-generation family farm is being replaced by the corporation, who's running fewer farms but with greater herds and the dairy processors love it for their bottom line, because they only need to make one pickup for their milk instead of making multiple stops at many small farms. On paper, farmers are made whole, as in theory, whatever money they lose operating is reimbursed by the government.
But agricultural subsidies are not evenly distributed across the US and the EU. Farmers are actually awarded subsidies based on production and acreage - another case of where the rich get richer the biggest, wealthiest farms and co-ops rake in the most handouts while small, independent farms get the least. Milk is the fifth most subsidized agriculture commodity in the U.S. From 1995 to 2023, only corn, soybean, wheat, and cotton farmers receive greater subsidies. The dairy industry gets its money through four main subsidies. There's the Dairy Support Program where the U.S. government guarantees profits for dairy farmers by setting a minimum price on milk, even when the market crashes.
Then there's the Milk Income Loss Contract program, where when milk prices drop below a specific threshold, the federal government will make it direct payments to dairy farmers. And that same payout is also given if the cost of feed increases beyond a certain price. If their milk is deemed unfit to sell, then dairy farmers also get a payout. The multi-billion dollar contribution of all these various subsidies are what's propping up the dying dairy industry. Ironically, the most capitalist and democratic solution to all of this would be to let the dairy industry shrink and to adjust to the free market. But there's no politician in the US
or the EU that would take this position of letting farmers lose their livelihood. Even the mere suggestion of letting farmers go broke would be a political death sentence. And because of optics and politics, the dairy industry continues to chug along, propped up by taxpayer money, for-sale politicians, and the cultural significance of cow milk as a product. But how does the fate of dairy farmers relate to Oatly? Vegans have argued that if Oatly was getting half the same government support that the dairy farmers get, the company would be in a much better spot.
There's truth in this if the U.S. government mandated oat milk or plant based milk instead of cow milk for school lunches, that would be a guaranteed customer base and a huge volume that Oatly wouldn't even need to lift a finger for. If the government subsidized advertising for these vegan startups and formed these taxpayer funded non-profits to help market these plant-based milks, then Oatly naturally wouldn't need to invest so much into their own sales and marketing. But the idea that Oatly would magically prosper if the world replaced cow milk with oat milk, and all the dairy subsidies flow to the oat farmers is just not true. In the world of dairy, the biggest players are the processors
Like Land O'Lakes, Nestlé, Danone, and Coca-Cola. Even though these companies own some of the most popular, recognizable brands like Fairlife and Horizon, they don't own any farms. They simply buy the raw milk from the dairy farmers and then they do their own processing and enhancements before packaging and distributing it to customers in the form of branded milk, butter, ice cream and yogurt. By definition, Oatly is a processor rather than a producer. They source the raw oats, they buy the vegetable oil and enzymes from suppliers, and they process everything together before packaging, branding and distributing the finished product to customers.
Dean Foods, until its bankruptcy in 2019, was the largest dairy processor in the U.S. They owned the biggest cow milk brands like Horizon, Tru Moo, Land O'Lakes and Dairy Pure. But even they couldn't make it work in spite of the subsidies and government support. The business idea behind Dean Foods was simple. Given the consolidation in dairy farms, it wasn't crazy to imagine that same kind of consolidation with dairy processors. If a single company could scale to be the largest processor in the nation, they could unlock economies of scale and cost advantages that no competitor could ever match.
They, in theory, had the supply chain to produce the cheapest milk possible, but also the brandpower to generate greater profits from their premium portfolio. This plan worked through the 2000, as Dean Foods boasted industry leading margins year after year. But after the Great Recession, the value of milk changed. With the economic downturn, retailers were desperate to restore foot traffic, and they found their silver bullet in private label milk and dairy as the only product that's guaranteed to get customers in the door multiple times a week. And if you have the cheapest milk, you're going to get people in and spending.
The issue wasn't the existence of cheap private label milk brands, but rather the desperation that retailers now had to strengthen their business. They were suddenly willing to aggressively lose money on their own milk and dairy products just to get customers in the door and so the price gap between branded milk like TruMoo and Horizon versus private label milk became greater. The floor got lower year after year and branded milk by association appeared far more expensive, even though their prices never changed.
There was nothing Dean Foods could do since they couldn't live off the school lunches alone, and they needed the retailers for the volume as much as the retailers needed them to supply milk. Dean Foods struggled. On one hand, they were constantly adjusting to the price of cow milk and the price of fuel every quarter. On the other hand, they were under direct pressure from retailers who were bidding Dean Foods against other processors in a race to the bottom to see who could provide them the cheapest milk. The consolidation that was occurring in dairy was also happening now in retail.
There were fewer retailers exiting the Great Recession, and the ones left like Target, Walmart, Costco, and Albertsons had all the leverage. Cost could not be passed directly on customers like before. This is why Dean Foods' operating margins declined rapidly after 2009, as they, like all processors, were squeezed between a rock and a hard place. Dairy farmers thrive whenever the price of milk goes up, but they're also insulated by the government subsidies whenever it goes down. But Dean Foods didn't get that same protection. When milk prices went down, they still had to pay farmers
the floor price that was set by the government. Dean tried to stem the top line bleeding through product innovation and cost cutting. They leaned into flavored milk, value-added protein brands, shut down their factories and cut back on SGA. But none of that ever helped the company recover its margins. All of the consumer, political, and retailer pressure for cheap cow milk was placed solely on the dairy processors, and Dean Foods, in effect, became the very commodity that was selling
with shrinking operating margins, stagnant growth, declining sales and forever pressure to deliver cheaper and faster. The premium brands like Horizon, TrueMoo and Dairy Pure were the only way the company could become, in its own "commodity resistant" but none of those measures ever succeeded. Customers got used to trading down from premium brands to private label, cow milk consumption continued to decline overall, and Dean Foods went bankrupt. If the world one day replaces cow milk with oat milk, where people will go into supermarkets multiple times a week to buy what they perceive to be a dietary essential, then the same political, consumer and retailer pressures will then fall on Oatly. Retailers
these days have already come out with their own private label oat milk or nut milk to undercut the premium brands. Oatly is already clinging onto its brand as its only moat, just like Dean foods desperately did on its deathbed. Before Dean Foods went bankrupt, it had invested in silk, who is the pioneer of plant based milks before Oatly. Silk's revenue surged in the early 2010s as the only nationwide player for soy milk, almond milk, and cashew milk. But Silk ultimately lacked pricing power. Silk dominated shelves, but they still could not demand higher margins, even though retailers at the time were too focused on private label cow milk to really care about private label soy or not milk.
As a result, Silk's operating margins were still lower than that of its dairy rivals, even at its peak. Once Silk got acquired by Danone in 2016, they stopped reporting their financials. And based on Danone's results and what we see in the grocery store, Silk has only gotten cheaper, especially now that demand has plateaued and the competition has increased. There are only two roads in which an Oatly, Silk or vegan food brand can survive as a business. They don't have any future as a standalone independent company, with or without government subsidies.
They can only thrive in two ways - one, as a supplemental portfolio piece in a larger processed food conglomerate like Dannon, Nestle or PepsiCo, who's only relying on this brand for sales coverage rather than profits. The only other alternative is for these vegan brands to be owned and operated by the farmers themselves. Farmers are the only entity in this landscape that's economically insulated from the fundamental realities of supply and demand. The largest dairy companies in the world these days are not the giant food conglomerates, but rather co-ops run by thousands of dairy farmers who are able to collectively leverage their subsidies to take on the overhead
and to endure the low profits of processing, marketing and branding and their profits. Farmers are ultimately dependent on not selling another gallon of milk as much as it is securing that next government paycheck. If vegan milk does one day supplant cow milk, it will be the oat farmers, the cashew farmers, the almond farmers, and the soy farmers that survive and thrive - not an independent brand [and processor] like Oatly.
