From 2013 to 2018, Where Food Comes From more than tripled their revenue, yet their stock price is basically flat. I think there are two main reasons. While they have expanded their scale quite a bit, they have yet to show much operating leverage. This is fine as long as the investments widen their moat and improve their long-term economics, which I believe they have.
Second, there is already a lot of growth expectations built into the stock. This is because Where Food Comes From benefits from many large tailwinds including animal rights, food sustainability, and increased transparency in the food supply chain. It seems like a few of these trends may be approaching a tipping point. In my 2016 Where Food Comes From write-up, I predicted:
I think the most likely scenario is a few more years of 10-30% growth and then at some point a watershed of business comes via ADT’s next phase kicking in, more states (or the federal government) requiring non-GMO labeling, McDonald’s or one of the other giants forcing their farmers into audits, China ramping up meat imports, etc.
I still believe this to be true, and I think that watershed of business may be happening over the next couple years. As an investor, Where Food Comes From’s business can be frustratingly slow. New clients take months (or years) to acquire and new food standards and regulations can take 3-5 years to push through. Thankfully, it seems like a few of these long-term trends are starting to come together.
In 2003, China banned beef imports from the US after a mad cow disease outbreak. Fourteen years later in June 2017, China reopened its doors to allowing US beef. However, this proved to be a bit of a false start as the US-China trade war started roughly a year later in mid-2018. Currently, the China tariff on US beef is 25%.
Prior to 2017, Where Food Comes From did zero business to China. Despite the trade war, Where Food Comes From has still benefited from beef producers preparing their operations for China export. On the Q2 2018 call, John Saunders, the founder/CEO, said that of the cattle producers who signed up in 2017 specifically to take advantage of China exports, nearly 100% of them renewed in 2018. This doesn’t surprise me.
To export beef to China, the cattle have to be source and age verified from birth. While not required, most beef producers are getting their operations audited for non-hormone treated or verified natural cattle to prove their cattle aren’t given growth hormones, which are banned in China and spot-checked for at the border.
Getting either of those audits can require at least several months of work to get a beef producer’s operation in compliance. And when the operation does get in compliance, only new cattle born under those standards count. Thus, an operation needs to get into compliance with these standards, get a third-party audit to prove it, and then raise new cattle for around two years that can then be exported to China.
That’s a long way of saying that once a beef producer commits to exporting to China, they will probably stick with it. So, the trade war hasn’t affected the early adopters that Where Food Comes From signed up in 2017 and 2018, but it has almost certainly had an effect on new customer acquisition. It makes sense that beef operations that want to export to China are going to be hesitant while the US and China are in the middle of a trade war.
The US and China are going to be the two most important countries in the world for many decades to come. I think it makes sense that both would want to have decent trade relations longer-term. Whether the trade war ends next week or three years from now, there will be a very large opportunity for Where Food Comes From. China is the largest importer of beef and the US produces the highest-quality beef in the world.
Canadian Roundtable for Sustainable Beef
In 2015, Where Food Comes From worked with McDonald’s Canada on a pilot project. At the time, McDonald’s Canada was researching how to source all of their beef from sustainable sources. Through this project, Where Food Comes From worked closely with the Canadian Roundtable for Sustainable Beef, which has been developing their own beef sustainability standard for the past several years.
In November 2018, Where Food Comes From was named as one of two auditors for the Canadian Roundtable for Sustainable Beef’s new standard. McDonald’s Canada is the first company to work with this standard and to display the certification mark on its packaging. In addition to Where Food Comes From, Verified Beef Production Plus is the other approved auditor. However, of the three certification aspects of this new standard, Verified Beef Production Plus is only approved to do one of them. Where Food Comes From is approved to do all three. With that being said, both companies will be doing audits for McDonald’s Canada.
The hope is that eventually McDonald’s rolls this beef sustainability project out company-wide. If they do, there’s a good chance Where Food Comes From would be a significant benefactor as they are by far the largest third-party beef auditor—Saunders has estimated before they have around 90% market share. Thus, it would be easier for McDonald’s to use Where Food Comes From across as much of their supply chain as possible as opposed to using multiple regional or local auditors. Supporting this is the fact that McDonald’s has already transitioned their entire whitefish supply to sustainably raised sources, and importantly, it’s all verified by one third-party auditor.
Just the fact that McDonald’s is starting down this path in Canada is a very positive sign for Where Food Comes From’s business. There are a lot of companies in the North American beef supply chain, but the largest ones have significant leverage over the others. These large companies include producers (Tyson, Cargill, JBS-Swift), supermarket giants (Wal-Mart, Costco), and fast food hamburger joints (McDonald’s, Burger King, Wendy’s).
When one of these companies demands something from the thousands of farmers that supply them, those farmers don’t really have an option. And when one of these companies start to market their focus on sustainable food practices, their competitors often follow—as we see with Wendy’s and Progressive Beef.
In Q2 2018, Where Food Comes From purchased 10% of Progressive Beef for $991k and became the exclusive auditor for its program. The Progressive Beef standard has three main pillars: animal care, food safety, and sustainability. It’s meant to be more holistic than many other standards that only focus on one aspect of the animal.
Where Food Comes From and Progressive Beef had been in talks for some time, but what pushed Where Food Comes From over the edge is Tyson signing up for the standard. Tyson is looking to add a couple million heads of cattle to the Progressive Beef program over the next few years. This is important for two reasons.
First, Tyson is the second largest beef producer in the world. Where Food Comes From auditing most of Tyson’s US beef supply will be significant both monetarily and reputationally.
Second, as stated above, Tyson has a ton of influence in this industry and competitors are often copycats. If focusing on sustainable beef seems to be working for Tyson, the other large beef producers will be likely to follow their lead—either by joining Progressive Beef or by signing up for a similar program. Interestingly, Tyson is actually encouraging their competitors to join Progressive Beef. Saunders expects other producers to sign on as well.
Finally, Wendy’s announced in December that they were the first restaurant chain to partner with Progressive Beef. Their goal is to get 50% of their beef audited by Progressive Beef (i.e. Where Food Comes From) by 2021. With that being said, this is not incremental to the Tyson deal above as Tyson supplies Wendy’s.
Despite that, I think it’s a great sign that Wendy’s is marketing their use of Progressive Beef. Again, if they seem to be getting traction with this marketing, their competitors will be likely to follow. McDonald’s Canada and Wendy’s are both moving towards sustainable beef, but that sustainability has to be approved by a third-party auditor. This is a major trend in the industry and Where Food Comes From should be one of the main beneficiaries as the largest beef auditor in North America.
As I talked about in the beginning, none of these things will happen overnight. After following Where Food Comes From for ~3 years I’ve come to appreciate how slow this industry and their business works. But I think China, Canadian Roundtable for Sustainable Beef, and Progressive Beef all have the potential to meaningfully impact their business. And it seems like that impact may be sooner rather than later.