Insights

Oatly Guts Its Expansion Plans

Oatly‘s (NASDAQ: OTLY) biggest problem used to be that it couldn’t keep up with demand for its popular dairy substitute. The company laid out ambitious expansion plans when it went public last year, and it later increased those spending targets.

Oatly had originally planned to spend between $300 million and $400 million this year on capital expenditures. As recently as May, the company was sticking with an increased range of $400 million to $500 million. To put that spending in perspective, the top end of Oatly’s latest revenue guidance range for this year is $830 million.

Image source: Oatly.

Pulling back hard

As inflation puts pressure on consumers, Oatly is starting to feel the effect. The company cut its full-year revenue guidance along with the second-quarter report, and it also drastically scaled back its capital spending plans.

Oatly now expects to spend just $220 million to $240 million this year on capital expenditures. That’s even lower than its original plan. The company is spreading out its footprint expansion efforts as it adapts to a weakening economic environment.

Oatly’s new outlook assumes that the economy in Europe won’t get any worse, that there will be no more pandemic lockdowns in Asia, and that the effect of the war in Ukraine doesn’t change. Oatly generated about 46% of its revenue from Europe, the Middle East, and Africa in the second quarter.

The company still expects its production capacity to reach 900 million liters by the end of the year, but the slower pace of spending means that it will take more time to hit the longer-term targets laid out last year. Oatly was originally planning to reach a production capacity of 1.4 billion liters by the end of 2023, a target that now looks unlikely.

The problem with Oatly

Oatly has the same problem that fellow plant-based food company Beyond Meat has: It’s competing with a commodity product while expecting to eventually achieve far superior margins. Just like commodity meat, commodity milk is not a particularly profitable business, at least averaged over time. Oatly’s alternatives are expensive, and that price difference seems to be a bigger problem now that consumers are battling historically high inflation.

Oatly has been in some European markets for decades, but in newer markets, its brand just doesn’t carry much weight. There are so many direct competitors, as well as a slew of other non-dairy alternatives. It’s also a category that lends itself well to store brands. Whole Foods sells oat milk under its 365 brand, for example.

Does Oatly have an advantage over its competitors? I’m not seeing one. And despite its product being made from inexpensive ingredients — mostly oats, water, and vegetable oil — the company’s bottom line is in deep red territory. Through the first six months of 2022, Oatly reported a net loss of $159 million on $344 million of revenue.

Even with its toned-down spending plans, Oatly is pouring huge sums of cash into expanding its capacity. The company is making two bets: One, that oat milk will continue to take share over the long run; and two, that it will somehow be able to best all its competitors.

The issue with the first bet is that oat milk may not have staying power. Alternative milks come and go in popularity. Almond milk overtook soy milk in the U.S., for example, and oat milk may very well eventually overtake almond milk. But is oat milk the be-all-end-all alternative milk? Who knows?

Winning the second bet requires people to care about the brand of their oat milk. Certainly, some people will prefer the taste of one brand over another. But when it’s being mixed in with coffee, does it really matter? Do Oatly’s decades of experience mixing oats with vegetable oil give it an advantage? I have my doubts.

Shares of Oatly tanked on Tuesday following the second-quarter report, and for good reason. With a market cap that still exceeds $2 billion, slowing growth, and massive losses, investors are right to stay away from this plant-based food stock.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Beyond Meat, Inc. The Motley Fool has a disclosure policy.

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