Oatly, a Maker of Oat Milk, Is About to Have Its IPO

Private equity has a seat at the table, as does Oprah and Jay-Z. Food giants like Nestlé are trying to get a foot in the door. There are effects on the climate. There is even geopolitical rumble.

The unlikely focus of this fuss is Oatly, a maker of an oat milk substitute that can be poured onto muesli or foamed for a cappuccino. Oatly, a Swedish company, will sell shares to the public for the first time this week. The offering could be worth $ 10 billion and exemplify the changes in consumer preferences that are transforming the grocery store.

It is no longer enough that food tastes good and is healthy. More and more people want to make sure that ketchup, cookies, or mac and cheese don’t help melt the polar ice caps. Food production is a major contributor to climate change, especially when animals are involved. (Cows belch methane, a powerful greenhouse gas.) Milk substitutes made from soybeans, cashews, almonds, hazelnuts, hemp, rice, and oats have increased due to increasing demand.

“We have a bold vision for a food system that is better for people and the planet,” Oatly stated in his prospectus for the offering. The company’s shares are expected to trade in New York on May 20.

To justify its foamy valuation, Oatly needs to convince investors that it can dominate a market that is already highly competitive and where large food conglomerates are just beginning to deploy their vast resources. Nestlé, the world’s largest producer of packaged foods, launched its own milk alternative made from peas this month.

Oatly maintains an up-and-coming image with packaging art and a logo – Oatly! – that looks hand-drawn. It advertises that it is “like milk, but made for people”. But the company is more than 25 years old and has serious money backing it.

The majority shareholder is a partnership between a Chinese government company and Verlinvest, a Belgian company that invests part of the assets of the families who control the beer empire Anheuser-Busch InBev. Blackstone, the giant private equity firm, owns a little less than 8 percent of Oatly.

The interest from heavyweight investors is confirmation that vegan food has become mainstream, but it could also make it difficult for Oatly to maintain its anti-establishment image. The company faced a backlash from some fans after Blackstone made a $ 200 million investment in Oatly last year. Stephen A. Schwarzman, the executive director of Blackstone, has been a staunch supporter of former President Donald J. Trump who has claimed climate change is a hoax.

Oatly hoped Blackstone’s investment would inspire other private equity firms to “channel their total $ 4 trillion worth into green investments.” Blackstone’s support also helped make Oatly credible on Wall Street. And there was no sign that Blackstone’s involvement slowed Oatly’s sales, which doubled in the last year.

Oatly’s image benefited from a number of prominent investors, including Oprah Winfrey, Natalie Portman, Jay-Z’s Roc Nation company, and Howard Schultz, the former chief executive of Starbucks. All of them have a certain connection to the vegetable or healthy movement of life.

Oatly declined to comment, citing regulations restricting public speaking prior to going public.

Oat milk is part of a larger trend towards foods that mimic animal products. So-called food tech companies like Beyond Meat have raised just over $ 18 billion in risk financing, according to PitchBook, which tracks the industry. Plant-based dairy products, which include brands like Ripple (made from peas) and Mooala (bananas) in the U.S., raised $ 640 million last year, more than double the amount a year earlier.

In the US, milk substitutes like oat milk and rice milk make up a $ 2.5 billion industry that is expected to grow to $ 3.6 billion by 2025, according to Euromonitor. Globally, the $ 9.5 billion industry is expected to grow to $ 11 billion.

Once a niche market, alternative milk has become as American as baseball. A frozen version of oatly that mimics soft ice cream is on sale this season at Yankee Stadium, Wrigley Field in Chicago, and Globe Life Field in Arlington, Texas, where the Rangers play.

Although Oatly’s revenue rose from $ 204 million in 2019 to $ 420 million in 2019, the company posted a loss of $ 60 million as it invested in new factories, marketing, and new products. Oatly also sells its milk drink in chocolate and other flavors, as well as a non-dairy substitute for yogurt, ice cream, cream cheese and even crème fraîche.

Oatly was founded in 1994 by Rickard Oste, Professor of Food Chemistry and Nutrition in Sweden, and his brother Björn Oste. In Malmö, Sweden, they developed a method of processing an oat and water slurry with enzymes to achieve natural sweetness, as well as a milk-like taste and consistency.

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May 18, 2021, 10:29 p.m. ET

The company’s growth accelerated after Verlinvest acquired a majority stake in 2016 through a joint venture with China Resources, a state-owned conglomerate with large stakes in cement, power generation, coal mining, beer, retail and many other industries. The new funding helped Oatly expand in Europe and export to the US and China, where many people cannot tolerate cow’s milk. China Resources’s commitment has undoubtedly helped open doors in the Chinese market. Asia, especially China, accounted for 18 percent of sales in the first quarter of 2021 and is growing 450 percent annually, according to Oatly.

In Europe, concerns are growing about Chinese investments in strategic industries such as automobiles, batteries and robotics. The European Commission has started putting regulatory barriers in place for companies with financial ties to the Chinese government. So far, however, no one has voiced concerns that China will dominate the global oat milk supply.

Just in case, Oatly’s prospectus offers a Hong Kong listing when foreign ownership becomes an issue in the US.

The potential of the market for milk alternatives is not lost by large food manufacturers. Oatly acknowledged in its offer documents that it faces stiff competition, including from “multinational companies with far greater resources and activities than we do”.

This includes the British consumer goods manufacturer Unilever, which announced last year that it would generate sales of one billion euros or 1.2 billion US dollars by 2027 with plant-based substitutes for meat and dairy products such as Hellmann’s vegan mayonnaise or Ben & Jerry’s dairy products free ice. Unilever has not announced any plans for a milk substitute.

Some industry analysts argue that Oatly’s size gives him an edge over these giants and allows him to be more innovative than a corporate giant. Food start-ups are “younger and faster,” said Patrick Müller-Sarmiento, head of the consumer goods and retail practice at Roland Berger, a German consulting firm.

The established food giants also have a harder time than newcomers convincing consumers that they sincerely want to save the planet, an important part of the oat milk sales pitch.

Mr. Müller-Sarmiento, the former managing director of Real, a German chain of big box stores, said that meat and milk alternatives have no problem competing with big food for valuable retail space. “Retailers are urgently looking for new products,” he said.

At the time, Nestlé or Unilever would have simply acquired Oatly, just as they devoured hundreds of other brands. However, they would struggle to justify the bold $ 10 billion price tag that Oatly has set as the benchmark for its stock offering.

Nestlé’s response was to develop its own milk substitute, Wunda, which the company launched this month and which will initially sell in France, Portugal and the Netherlands. Wunda is made from a variety of yellow peas and contains more protein than oat milk. Some nutritionists have said that oat milk and other milk alternatives are poor substitutes for cow’s milk because they don’t contain nearly as much protein.

Stefan Palzer, Nestlé’s chief technology officer, has had trouble with those who say a big company can’t move as fast as a bunch of Swedish foodies. A young team from Nestlé developed Wunda in nine months, including three-month market tests in the UK, Palzer said in an interview.

Nestlé was able to adapt existing production facilities to Wunda instead of building new factories as Oatly has to do. The company already had plant scientists who could identify the best pea and food safety experts to steer the regulatory approval process, Palzer said.

The Wunda developers “could have any expert they wanted for the project,” said Palzer. “That allowed them to move at that speed.”

Nestlé already has dairy-free versions of Nesquik drinks and Häagen Dazs ice cream, and sells creamer made from a blend of oat and almond milk under the Starbucks brand. The company goes to great lengths to develop substitutes for almost all types of animal products. The next frontier: fish. Nestlé has started selling a tuna substitute called Vuna and is working on scallops.

“It’s a great opportunity to combine health with sustainability,” said Palzer of plant-based alternatives to milk and meat. “It’s also a great growth opportunity.”

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