Banking on plant-based products for growth

The company's logo is seen at a Nestle plant in Konolfingen, Switzerland September 28, 2020. REUTERS/Arnd Wiegmann?

KUALA LUMPUR: Nestle (M) Bhd could see margins compression from the rise in commodity prices, but its venture into plant-based products could be earnings accretive in the long-run.

Last year, Nestle invested RM150mil to set up a plant-based meals solution manufacturing facility in Shah Alam, being the first of its kind in South-East Asia.

The products are targeted to cater to both the local and export markets under its Harvest Gourmet brand.

MIDF Research said that as Nestle’s plant-based segment is still in the nascent stage, the contribution to the group’s total earnings will remain modest for the next three to five years before becoming a more significant contributor.

“We estimate that the plant-based and dairy alternatives segment will gain market share, over the years and be accretive to the group’s earnings, given the group’s track record of developing products tailored to the domestic taste buds and relevance,” it said in a report yesterday.

According to a report from Bloomberg Intelligence, titled Plant-based foods poised for explosive growth, the global plant based alternatives market could grow almost five-fold, from US$29.4bil (RM123.6bil) in 2020 to US$162bil (RM681bil) in 2030.

The primary factor behind this strong shift away from animal sourced food is on ethical, environmental and health grounds.

According to a study conducted by AT Kearney, although the plant-based market is currently dominated by the United States, followed by Europe, the Asia Pacific market is expanding at a fast rate and is forecasted to hold the largest share of the global plant-based market by 2025.

“This is primarily due to existing familiarity with soy-based mock meats, fermented protein such as tofu, tempeh and rising environmental and health awareness, as well as technological advancements which will allow production of alternative meat,” MIDF said.

“From a health perspective, we think the prevalence of lactose intolerance in Malaysia will also increase adoption of a dairy-free diet,” it added.

A study conducted by lecturers from Universiti Kebangsaan Malaysia between 2015 and 2017 involving 400 children from the urban areas in Klang Valley, revealed that only 12.3% of children were lactose tolerant.

Nonetheless, MIDF raised the concern that rising commodity prices will affect margins and lead to slower growth for Nestle, as soy and wheat are the primary ingredients for the meat-free burger.

“Despite the group’s cost management initiatives, we think that if raw material prices continue with the current momentum, there will be possible price hikes for items in the segment.

“Due to the price sensitive nature of the majority of Malaysian consumers, we think that price hikes in the already premium plant-based products segment will result in slower growth of the segment as customers will switch to affordable options,” MIDF said.

It has trimmed Nestle earnings for financial year 2022 (FY22) and FY23 by 16.0% and minus 25.4%, respectively, to account for the rising cost of raw materials which could continue to affect the group’s profit margins moving forward.