“Oatly will likely never make money in a notoriously fickle and deflationary food industry,’ claims activist short seller; Oatly ‘rejects all these false claims’

By Elaine Watson

- Last updated on GMT

Picture credit: Oatly
Picture credit: Oatly

Related tags Oatly oatmilk Spruce Point Capital Management

Shares in Swedish oatmilk maker Oatly – which went public in May – dropped sharply on Wednesday following a report from New York based activist investor and short seller Spruce Point Capital Management arguing that “the walls are collapsing on Oatly’s ambitions to dominate the oat milk market.”

In the report​ Spruce alleges that Oatly omitted and manipulated facts in its prospectus​ and in an investor presentation last month​ and “will never achieve profitability​."

It added: “While investors are enamored with its sales growth in the plant-based food fad, and its commitment to ESG practices, we believe they should be focused on its loss of market share in Sweden and the US, minimal barriers to entry, lack of competitive advantages, rising commodity input costs, and supply challenges created partly through poorly planned production facilities. As such, we believe Oatly will sorely disappoint investors and will never achieve profitability.”

Oatly: Spruce is a short seller that stands to gain from a drop in Oatly’s share price

Oatly, in turn, did not address each individual allegation in the report, but told FoodNavigator-USA that it was “aware that a short seller is making false and misleading claims regarding the company,” ​pointing out that Spruce “stands to financially benefit from a decline in Oatly's stock price caused by these false reports.”

It added: “Oatly rejects all these false claims by the short seller and stands behind all activities and financial reporting.”

In the 124-page report, Spruce calls for Oatly’s Board to hire an independent forensic accountant to open an investigation to evaluate its claims relating to Oatly’s accounting practices. It also alleged that:

  • Oatly ‘cherry-picked’ data to make its sustainability credentials look more favorable.
  • "Oatly has not only located production facilities thousands of miles from its oat sources, but also massively overpaid and run wildly over budget in its capital planning. Now as a public company, we believe Oatly is asking investors to pour nearly $1bn into existing and expansionary capex to fix management’s blunders. We estimate cost per liter of new capacity will cost upwards of 77% more than Oatly’s historical cost and continue to make its business non-economical."
  • Oatly’s Utah’s “actual CapEx is running more than 100% over budget at $100m.”
  • A footnote in Oatly’s June presentation “calls out that finished goods of oat base production volume are an estimate. We believe that if volumes of production are an estimate, then Oatly’s entire reported revenue stream should also be qualified.”
  • Oatly’s “gross margins are overstated​” by not including outbound shipping costs: "Based on our industry analysis, a majority of public peers report outbound shipping costs in COGS. Oatly, puts the cost in SG&A ​[see p60 of the report​]."
  • "Oat prices and rapeseed oil, as measured by futures contracts, are up sharply in 2021. Curiously, Oatly fails to say anything about the effect of these commodity prices on its business prospects."
  • "Oatly overstates the proprietary nature of its business, and that in the long-run, any such advantages will be competed away. At the core, oat milk is made from oats, water, enzymes and flavoring ingredients."

Spruce: Oatly is losing market share to Chobani and Califia Farms

According to Spruce, “Oatly is losing market share to Chobani and well-capitalized peer Califia Farms. We have been tracking Oatly’s core oat milk product online at major food retailers such as Amazon, Walmart and Kroger and find evidence it is losing promotional prominence and even being price discounted. We also believe Oatly faces waning chances of success in yogurt and ice cream. We find evidence that Oatly’s yogurt is also being price discounted and losing shelf space.”

It added: “Per Euromonitor, the plant-based dairy market in its key regions is expected to reach $21bn by 2025. However, Oatly’s current valuation is almost 60% of the potential market. Based on our current observations of the competitive dynamics, it would seem unlikely to us that Oatly ever captures this percentage of the market.”

“Oatly will likely never make money in a notoriously fickle and deflationary food industry.”

Oatly CEO: ‘Weare going to prioritize growth, no matter what’

Quizzed by FoodNavigator-USA in May​ during a call with reporters about the path to profitability for Oatly - which posted a net loss of $60m and an operating loss of $47m in 2020 on sales up 106.5% year-on-year to $421.4m – CEO Toni Petersson said the company may incur losses for some time as it ramps up production and aggressively expands into new markets.

“We​​ have been building capacity for a long period of time, but also building the organization, our systems and the back office structure across three continents, and I think this is super normal where you are growing as much as we are doing. And going forward on the profit side, we are going to prioritize growth, no matter what.”​​

He added: “We do have a very ambitious plan, but what we are focused on right now is to see… how can we capture incremental demand?.... This is about conversion, it's about converting people who used to drink cow's milk into Oatly. And the addressable market is just massive… so it’s growth over profit.”​​

‘The addressable market is just massive’​​

As to the company’s ability to compete with multinationals in the burgeoning plant-based dairy category, Petersson said: “We’ve been competing with the biggest companies out there for many years, but if you look at the performance data, it's clear that we are beating them greatly in terms of velocity.”​​

While there are plenty of other players in the plant-based arena – from multinational CPG companies and leading dairy companies to legacy brands and food-tech startups – Oatly’s inhouse creative team has built an especially loyal consumer base, he said.

He added: “We are here to try to make the world better. We're trying to make something that is designed for human beings​​ [Oatly’s marketing has frequently noted that cow’s milk is for cows, not humans] and better for the planet. ​​We're not trying to put a product on shelf just because it's a healthy growing category and it’s a business opportunity. ​​

"Those two things are two different mindsets in how you run a company. And I think that is something consumers can see and feel. So, we know that we beat competition greatly on emotional connection and sustainability credentials, and those parts are equally important to people today when they're making their purchase decisions.”​​

Oatly generated revenues of $100m in the US in 2020​​

Four years after entering the US market, ​Oatly products can now be found in >7,500 retail shops and 10,000 coffee shops in the United States (where it generated revenues of $100m in 2020), and more than 32,000 coffee shops and 60,000 stores across the world (as of Dec. 31, 2020).

In the Chinese market – which it entered in 2018 via the specialty coffee and tea channel, Oatly has been able to scale rapidly via an e-commerce partnership with Alibaba and an exclusive partnership with Starbucks in 4,700+ stores, said the company, which said in its IPO prospectus​​ ​​that it has “a significant opportunity to expand into new international markets.”​

Production capacity​​

Oatly’s New Jersey facility – which opened in May 2019 – has helped the company meet explosive demand​​ in the US market, where oatmilk recently overtook soymilk to become the #2 player in the plant-based milk category behind almondmilk.

The second facility in Ogden Utah (producing oat base and finished products), which was scheduled to open last year, has recently come online.

Three additional facilities in Singapore, Maanshan (China), and Peterborough (UK), are also under construction or in the planning stages, while expansions are planned for existing factories in Sweden, the Netherlands and new Jersey, said Petersson, who told reporters that the money raised from the IPO would not be used to go on a plant-based buying spree. 

'We have cultivated a loyal consumer base that is highly aligned with our ambitions’​

oatly mural ads
Pictured: Oatly ad in the UK. Credit: Oatly

While there are plenty of other players in the plant-based arena – including multinational CPG companies and leading dairy companies – Oatly’s inhouse creative team has built an especially loyal consumer base through engaging and sometimes provocative ads, claims the company.

 “We have torn down the conventional corporate approach to brand building and have developed a voice that is human, compelling and honest… Our advertisements are bold and eye-catching, meant to drive conversation among consumers, while challenging norms and outdated industry practices. ​

“Through the efforts of our authentic and award-winning in-house creative team​​,” ​adds Oatly - which generated a lot of buzz with a polarizing Super Bowl commercial featuring its CEO singing 'Wow, No Cow' in a field – “We have cultivated a loyal consumer base that is highly aligned with our ambitions."​

According to the Shopper Intelligence​ tool from online data insights firm similarweb​, "Oatly revenue on Amazon is less impressive showing less than 5% growth, but it is still capturing 46% of Amazon's oatmilk category revenue."​ A spokesperson added: "The loyalty rate is 75% which is outstanding for a brand, however, Oatly only captures 23% of oatmilk searches; the leader is Califia Farms."

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