A Fork in the Road: What We Can Learn From Burcon (BRCN) and Tattooed Chef's (TTCF) Upcoming Earnings

By Arlin Wasserman, Changing Tastes

Food companies and investors are at a strategic fork in the road — with all puns intended — about whether the path to greater sales and profits will come from selling great ingredients or great meals.

We’ll gather some insight when two recent additions to Nasdaq — Burcon and the Tattooed Chef — both announce earnings over the next few weeks, about a year after they were listed. The first year of trading hasn’t been kind to either company or their investors. Burcon is down about 75% and Tattooed Chef is down over 50%. Neither is profitable. This quarter’s earnings will be interesting over the short term, but looking ahead a year or two, the market and our planet have already picked the winning business strategy.

Burcon Nutrascience (BRCN) is a bet on ingredients and “a new world of protein.” The company is focused on making pea protein isolate from yellow peas and also extracting protein from the leftovers from making canola oil, two crops grown in central Canada. By and large, Burcon’s products are not made up of ingredients most of us will pick up as standalone items in the grocery store. Pea protein isolate is a key ingredient in the manufactured, plant-based foods that are showing up on menus and in supermarkets, like Impossible and Beyond burgers, nuggets, meatballs and the like. Canola isolates show up in candy and sports drinks among other consumer products.

The Tattooed Chef (TTCF) sells “plant based meals for people who give a crop,” which means reimaging frozen meals (think TV dinners) without meat and often gluten. They feature an array of the latest “it” foods like hemp, cauliflower, kombucha and acai. The Tattooed Chef may not offer up a Salisbury steak like the OG frozen dinners from decades past, but its burgers, bowls, and pizzas are a couple minutes in the microwave away from being a fork- or spoon-ready meal.

Come the next earnings call, every company, food-related or not, can explain away its bad performance to investors given the supply chain and market disruptions wrought during COVID. And they’re real. But for these two companies, there are two more important stories.

Grappling with climate change

First, there’s the lesson we’re learning from the planet. That is that there’s a great deal of risk in companies that bet their success on just one or two ingredients. Climate change is making crop harvests unpredictable. Severe weather and temperature changes are affecting yields and quality. The risk of a bad harvest in any given year is going up and there are likely to be more years with bad harvests than in the past.

Growers are hard-pressed to keep up as new pests arrive and temperatures change. Even GMO crops are now requiring more pesticides, which means higher production costs over the short term along with long-term questions about sustainability. For yellow peas, the harvest last fall was a bad one. Yields were low, prices more than doubled, and Burcon must keep relying on that weak harvest and pay very high input costs until next fall’s crop comes in. With its major customers seeing sales drop, passing along big price increases isn’t in the cards.

Canola looks to bounce back from last year’s harvest which was down a third from the prior year. But 2022’s crop looks to be up 65% if the weather holds, which is never a sure thing. That boost brings the yield back to where it was a couple years ago. That’s good news if Burcon can also pull off the very tricky maneuver of securing substantial price reductions following this year’s 36% rise in the price of canola.

For Tattooed Chef, the impact of a poor harvest is a bit different. Should California have another year of historic drought, which looks likely, they have a much easier time replacing minced cauliflower with sweet corn, brown rice, black beans or other crops that are plentiful. Using what’s abundant requires flexibility over what inputs you use. It’s also what chefs have been doing for centuries, picking the recipe that matches what they find in the market, and that’s a better business model in an era of climate change.

COVID’s lingering impacts

The other story is the one the market is telling about where demand and revenue are headed and how COVID accelerated some changes in what America eats. At first glance, both companies have a great story about how well positioned they are to take advantage of our changing tastes. Over the past two years, COVID drove us to cook and eat at home almost every meal, reversing a long-term trend of eating more of our meals away or at least having professionals do the cooking for us as we enjoyed take out and restaurant delivery services.

That’s some of what we learned from research we conducted at Changing Tastes focused on consumer eating habits from April through December of 2021. In it, we repeatedly asked consumers what they ate, where they ate, and where they wanted to eat as vaccines became available and then the Delta and Omicron variants arrived.

Our research also found that nearly 1:11 American adults decided to cut back on how much red meat they eat. Now, nearly 40% of American adults are looking to eat a bit less red meat in the coming year or two as COVID propels them seek more ways to take control of their health. Good news for Burcon and Tattooed Chef. But the story about demand and revenue is more nuanced.

What’s in store

Today, American’s top choices for reducing how much meat to eat usually is just to simply cut back on portion size or eat fish and seafood instead. There’s not much interest in becoming vegan or vegetarian, and after trying plant-based meat replacements at home during COVID, most Americans have moved onto other choices, many will not eat them again, with sales of those products declining without getting much penetration.

That brings mixed news for Tattooed Chef. They focus on a clean label and use real ingredients like the ones we might have in our own kitchens. Eating those kinds of plant-based foods is something that’s of interest to most consumers, maybe not as often Tattooed Chef hopes.

Many of us — especially Millennials and Gen Z-ers — also are looking for ways to have others do the cooking for us. The channels began to blur as we got ready-to-eat meals handed to us from restaurant take out, delivery services that were just a click away, ghost kitchens that cooked for us but don’t welcome diners, and ready-to-eat meals delivered from grocery stores. That's a lot of competition. For Tattooed Chef, sales may come back as we return to some normal balance between eating at home and dining out. Changing or adding recipes to attract more customers is also a fairly easy move as the company looks to grow its offer overall. For Burcon, it’s a little trickier as they will have to find new uses for an ingredient that isn’t in demand. That’s a slower and less certain path.

When the two hold earnings, we may see weaknesses in both. Perhaps Burcon will get to pass along some price increases and diversify its ingredients sourcing, while the flexibility of a business that works like a chef, switching up the menu or changing the recipe based on what’s available gives Tattooed Chef an advantage moving forward.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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