This is an English adaptation of a FoodBud historical article originally published on November 18, 2021.
Oatly’s third-quarter 2021 results showed strong demand, but also exposed the operating stress behind that growth.
For Q3 2021, the company reported revenue of $171.1 million, up 49.2% year on year. Oatly said the increase was mainly driven by additional supply of new products meeting rising global demand. Gross profit was $44.9 million, with gross margin of 26.2%, compared with $36.0 million and a 31.3% margin in the same period a year earlier.
The market reaction was severe: after the report, Oatly’s shares fell as much as 22% intraday.
Oatly CEO Toni Petersson said surging oat-milk demand had exceeded the company’s current capacity. Oatly was facing a global supply shortage and could fulfill only about 70% of sales orders while working to expand capacity.
The pressure was not only from higher raw-material costs. Oatly was also dealing with capacity shortfalls and regional logistics issues, including truck-driver shortages affecting supply into the UK market.
Oatly listed on Nasdaq on May 20, 2021, becoming the first listed global oat-milk company. It raised more than $1.4 billion, its share price rose nearly 20% on the first trading day, and its market value reached nearly $12 billion that day.
After peaking in June, the stock gradually declined. In July 2021, Spruce Point said in a report that Oatly had omitted or altered key facts in its prospectus and a June investor presentation, misleading investors, and argued the company would never be profitable. The stock then began falling sharply.
There was a small rebound in mid-to-late August, but after closing at $18.81 on August 30, the shares fell by about another 27%. At the time of the article, Oatly’s latest market value was $6 billion, roughly half its listing-day level.
In Asia, Oatly said its multi-channel expansion strategy was effective and had helped establish market leadership perception. The company still saw room to deepen coverage among existing customers. McDonald’s was distributing Oatly products in about 40% of its stores, while Yonghui Superstores sold Oatly products in 800 of its 1,500 stores.
Because of capacity limits, Oatly said it had not yet prioritized China’s retail channel, though it had already made meaningful progress.
In the first nine months of 2021, self-produced volume accounted for 21% of total output. Oatly’s target was to raise self-production to 50%-60%.
Pandemic disruption affected capacity in North America and Europe, forcing Oatly to reduce distribution in 12 European countries and move supply from Asia, which increased transportation costs. The company expected gross margin to improve gradually in 2022, with a long-term target of 40%.
Raw-material inflation was expected to affect Oatly’s total 2022 cost base by 5-6 percentage points. Oat prices had risen by 10%-35%.
Oatly also expected to serve 85%-90% of Starbucks’ store network in 2022 through a white-label model.
Oatly’s relationship with China Resources began in 2016, when the company received investment from China Resources Verlinvest Health Investment, a joint venture between China Resources and Belgian investment firm Verlinvest. According to the Financial Times in April 2021, China Resources held 30% of Oatly.
Oatly entered China in 2018 through specialty coffee and tea channels. By the end of 2020, it had reached more than 8,000 end points. Brands it had worked with included Starbucks, Manner, Tim Hortons, Peet’s, Costa and Heytea.
The investment logic behind many oat-milk bets was that Oatly’s business was mainly B2B and priced relatively high in China. Chinese competitors were seen as strong at price wars, operational efficiency and cost reduction, allowing them to enter at lower prices and take part of Oatly’s foodservice business.
That logic appeared plausible. After Heytea invested in YePlant, the two launched new products together, showing how quickly a local partner could replace Oatly in a beverage chain. Oatly continued to do PR collaborations with Nayuki, but that did not solve the fundamental issue.
If the oat-milk market proved profitable enough, a local Chinese brand could use price competition to squeeze Oatly’s share. A similar pattern was already appearing in coffee, where Luckin and Manner used lower-price strategies to pressure Starbucks in office-area stores.
The question was how much capital the market was willing to spend on that fight. A private company competing against a listed company can have some advantages: if a public company keeps losing money and cannot maintain high growth, capital markets will not be patient.
The article argued that if investors were willing to put significant money behind a Chinese oat-milk challenger, there was a chance to pressure Oatly’s share and break out as China’s No. 1 player. In many categories, local Chinese brands were already trying to take over market share from international brands; the question was how long it would take.
Oatly’s channels and supply chain may not look like high barriers if enough capital is available, but B2B markets work differently from consumer retail.
In consumer markets, heavy advertising can build brand momentum and drive volume quickly; growth can continue for a period even after advertising stops. In B2B, each customer and channel must be negotiated one by one.
Oatly operated in more than 20 countries. According to its prospectus, in 2019 one customer accounted for more than 10% of sales: Nordic supermarket chain ICA, at about 10%. In 2020, no customer accounted for more than 10%.
Even if Oatly lost China, or sold its China business to the largest local player, it would still have other global markets. Compared with players like Oatly, Chinese oat-milk challengers still had much weaker international expansion capability.
The article compared this with Vita Coco, which was preparing to list at the time. Vita Coco’s market was mainly concentrated in the United States, and its two largest customers, Keurig Dr Pepper and Costco, together accounted for 54% of sales. But Vita Coco had built some supply-chain advantage through coconut-farmer development and exclusive factory agreements across Brazil and Southeast Asia.
Oatly also had supply-chain barriers. Building global factories to support different regional markets is capital-intensive, and even with major capital backing, that capacity takes time to build.
Note: IPO, valuation, margin-target and 2022 guidance figures are historical and reflect the article’s November 18, 2021 context.