Vital Farms (shortened): An Analysis by Cristian Velasquez
(For an extended version, click here)
The Opportunity: Economies of Scale — Friend or Foe of the Food Industry?
“The problem of food is that it’s been a race to the bottom with price. We’ve spent less and less on food and at the same time healthcare costs have kept going up.” Matt O’Hayer, Vital Farms Co-Founder
Economies of scale have taught us to produce the optimal quantity of goods at the lowest possible price. Cost savings through mass production create lower prices but result in a negative externality. Our health, animal welfare, and the environment feel this effect.
Consumer preferences are shifting — moral and ethical standards influence product decision-making — not price, convenience, and taste. People want to interact with a company that cares about their beliefs.
The FDA gives recommendations on how food can be produced but the standards are minimal. Food-production companies generally produce at this minimum standard, but Vital Farms looks at food production differently.
“Every hen is humanely treated, every egg is pasture-raised and we continue to elevate our (and the industry’s) standards, continuing Matt’s commitment to ethics over profits¹.”
The Products
Vital Farms’ staple product is pasture-raised eggs. An experiment from 2010 concluded that pasture-raised eggs have higher health benefits than caged-eggs⁴.
In 2014, HFAC created the gold standard for pasture-raised egg production, the “Certified Humane® label. Vital Farms’ eggs are Certified Humane which requires:
- 1000 birds per 2.5 acres (108 sq. ft. per bird)
- Mandatory rotation of fields
- Hens must be outdoors year-round
- Protection from predators at night or inclement weather in the form of mobile or fixed housing
“Any product labeling terms that are important to consumers need to be clearly defined. The Certified Humane® labeling program is in place to assure a trusted product for consumers who care about how animals are raised and slaughtered for food.” Adele Douglass, HFAC’s Executive Director.
Newer products include pasture-raised butter, ghee, and egg bites. The 3 products continue to grow their combined 10% share of Vital Farms’ revenue⁵.
The Business Model
It began with a goal to produce food in an ethical way, a commitment to animal welfare, and a sustainable business model¹. In 2009, Whole Foods offered a $100,000 producer loan to Vital Farms and became their first major retailer². O’Hayer quickly realized family farms had an absolute advantage in egg production. This influenced the Executive Chairman to begin partnerships with egg-producing farmers instead.
The company and its 200+ partnering farms share a goal to produce eggs at the highest standard. Partnerships have enabled them to scale the business with less CAPEX, a similar strategy implemented by AZEK, a sustainable outdoor living products company.
Vital Farms has a single supplier with a network of pullet farms, where day-old chicks are raised until 18-weeks old, then shipped to the laying-hen farms⁵. A forward-contract requires Vital Farms to purchase all the eggs produced here⁵.
“…we require these farmers to build and equip their farms to certain specifications, which requires a significant upfront capital investment, and any inability of farmers to obtain adequate financing on acceptable terms would impair their ability to partner with us⁵.”
Laying-hen farms must be within the Pasture Belt. This region in the Southeast has a climate ideal for the hens to prepare themselves to lay their eggs. The top 10 egg-producing states in the US account for 60% of all egg production, and Vital Farms partners with #6, 8, and 9 on that list⁹.
Egg Central Station, Vital Farms’ 82,000 square-foot egg processing facility, packages 3 million eggs daily⁵. Brokers sell their eggs to distributors or retailers for the consumer to purchase from⁵. A broker-distributor-retailer network reduces the need for transportation and storage costs, which are generally handled by their brokers/distributors.
The Structure: Conscious Capitalism
“Our purpose is rooted in a commitment to Conscious Capitalism… Our business decisions consider the impact on all of our stakeholders, in contrast with the factory farming model, which principally emphasizes cost reduction at the expense of animals, farmers, consumers, crew members, communities and the environment⁵.”
As a B-Corporation, Vital Farms is required to consider the mission and profits when decisions are made, and those decision-makers are legally protected when doing so. Becoming a B-Corp requires an assessment that can take several months to complete¹⁰. In a recent Instagram interview, O’Hayer boasted that his company received approval upon its first application, highlighting a commitment to benefitting everyone and everything involved with the business.
Scoring for Vital Farms can be found here.
Egg Central Station was voluntarily placed as an SQF “Select Site” member. Being a member shows they are always ready for an audit, a testament to their transparency in their food safety and quality practices.
Ovabrite — Vital Farms’ VIE
Name an industry as wasteful as the egg industry, where half of their products are deliberately discarded before going to market…go ahead…I’ll wait…
“We estimate the value of wasted eggs — male and infertile — to be at least $440 million annually, with an additional $70-plus million in labor and energy to incubate and sex those eggs.” Paul Knepper, President, Ovabrite
Male chicks don’t produce enough meat at maturity, so as a way to save feed for hens, they are killed upon hatching.
Ovabrite, a variable interest entity (VIE) of Vital Farms, developed TeraEgg with their partner Novatrans¹¹. This proprietary technology detects gender in eggs before they are hatched, allowing the male egg to be used for consumption as opposed to being wasted¹¹. Couple Ovabrite’s technology with a consistent increase in household consumption of eggs in the United States, and you’ve created greater revenue streams for farmers using TeraEgg.
The Strategy
Well-timed entrance into the market, proper positioning, and informative/entertaining advertisements have helped the company become #1 in pasture-raised eggs with an 80% market share⁸.
“We intend to increase household penetration by continuing to invest significantly in sales and marketing to educate consumers about our brand, our values, and the premium quality of our products⁹.”
Since inception, O’Hayer hasn’t budged with his pricing strategy, helping Vital Farms become #2 in retail dollar sales. At nearly double the price of regular carton eggs, people have weighed the benefits and chosen to go with the more ethical, tasty, and healthy choice.
Interactive, informative, and entertaining marketing campaigns have helped justify the company’s price points and increase consumer awareness. “Bullsh*t Free,” a viral youtube clip surpassed 10 million views and their Traceability program gives you a live view of the farms your eggs come from.
The Channels
Vital Farms has surpassed 16,000 stores selling their products nationwide⁸, a majority of those stores being retailers. Long-term growth must go beyond retailers and new channels must be targeted. To capture and leverage this growth, they must continue to:
- surpass sales targets placed by their retailers
- increase product velocities (velocity = demand)
- achieve sufficient profitability for their products
Vital Farms also expects further growth through the foodservice industry.
“One example of our successful foodservice programs is with Tacodeli LLC, a popular chain based in Austin, Texas, which sells breakfast tacos made exclusively with our pasture-raised shell eggs across 11 restaurant locations and more than 60 points of distribution, such as coffee shops and farmers market stands, across Texas⁵.”
Foodservice partnerships are mutually beneficial relationships. Displaying the Vital Farms brand on menus will drive traffic and sales from health-conscious consumers familiar with the Vital Farms brand. Conversely, restaurants can help familiarize consumers unfamiliar with the Vital Farms brand, leading to future retail sales.
The Risk
- Overreliance on suppliers and co-manufacturers
- Volatile market for raw materials
- Elastic product
- COVID
The majority of revenue comes from products made in facilities not owned by the company⁵. 5 of their products (not eggs) have 6 different co-manufacturers, increasing the need for coordination of products and maintaining standards⁵. This standard was put to test in December 2019:
“In connection with the recall, our co-manufacturer elected to permanently close the affected production facility and move all production to a different facility, which did not have sufficient capacity to meet product demand. As a result, we were unable to supply customers with hard-boiled eggs for a period of time in the first quarter of fiscal 2020, which led to the loss of certain customer accounts for this product…⁵”
An absence of written contracts for 3 of their co-manufacturers implies a strain in the relationship, change in the price of resources, or market conditions can influence their ability to manufacture products for Vital Farms⁵.
Their single-supplier has a network of pullet farms just as Vital Farms has with egg-producing farms, but there is no long-term contract guaranteeing supply. This weakens bargaining power over their supplier (lower bargaining power = lower profits).
A 10% increase in the weighted-average cost of feed materials could increase the cost of sales by approximately $2.6 million over a 39-week period⁵. Having an elastic product will cap the companies ability to increase prices, potentially influencing customers to choose cheaper alternatives. In 2012, a drought lead to a volatile market for corn and soybeans which affected the company’s profitability⁵.
“We may not be able to increase our product prices enough or in a timely manner to sufficiently offset increased commodity costs due to consumer price sensitivity, or the pricing postures of our competitors and, in many cases, our retailers may not accept a price increase or may require price increases to occur after a specified period of time elapses⁵.”
The Pandemic
The pandemic resulted in:
- supply chain disruptions
- higher online sales
- enhanced household penetration rates
- repeat customers
Drops in demand and price for pasture-raised milk lead to a loss of several suppliers for the company⁵.
COVID accelerated demand for e-commerce options in their online retail channels⁸:
- Online fresh grocery sales at a key retailer increased 342% over a 24 week period
- “click & collect” sales at one national brick and mortar retailer surged 246% over a 26-week period
- last-mile delivery sales at a key partner increased 206% year to date through the week ended September 11, 2020
Stay-at-home orders from the government meant a stock-up on essentials, resulting in 440,000 new and 680,000 repeat customers during the stock-up period (8-week period ended April 19, 2020)⁵. 13,200 (30%) of the 440,000 made repeat purchases and 70% of the 680,000 made at least one purchase over the next 20 weeks⁵.
At a time when people were unsure about their financial status, job security, and health, they prioritized their health and values over convenience.
Recommendations
Here’s how Vital Farms will grow their business:
- Expand product offering
- Create new brand partnerships
- Expand further into the foodservice industry
- Expand suppliers/manufacturers network
Traditional methods of egg mass-production are more profitable but don’t align with the shared values of Vital Farms and their farmers. Farmers have other revenue sources (milk, cheese, meat, etc), so by working with the already existing partnerships, Vital Farms can benefit from:
- Expanded product-offerings from an existing partnership
- Use of existing transportation routes: Vital Farms or their shipping third-parties have trade routes already established, removing the need for new trade routes or partnerships to be established.
- Shared shipping methods: A freight already picking up existing products from this facility can pick up other items in the same shipment.
New brand-partnerships should be sought after. TikTok generates 100 million monthly users in the United States, with users from all age groups. Cooking/fitness/lifestyle influencers are growing in popularity, with their reach going beyond younger users. Current food shoppers can be introduced to products they already shop for, and younger shoppers can familiarize themselves with the brand as they grow and eventually become grocery shoppers.
Indoor dining restrictions alleviating gives rise to potential partnerships within the foodservice industry. McDonald’s announced a commitment to cage-free eggs by 2025. Many food-retailers are following suit, opening a possibility to work with companies with aligned values.
Relationships, contracts (and lack thereof), and third-parties are necessary but often are dependent on a single relationship to fulfill their supply chain. Growing the 3.6% household penetration rate for pasture-raised eggs will require a larger network, allowing them to become less dependent on singular relationships within their supply chain.
Conclusion
2020 was a year of major growth for Vital Farms, experiencing over 49% growth compared to 2019⁸. Third-quarter of 2020 saw a $7.6 million gross profit increase and 2x operational from a year before ($1.2M to $2.4M)⁸.
Vital Farms has established several moats in its business model and entered into a market at a time when it was needed. They have done so without deceptive business practices or scandalous behavior. Instead, they have established transparency in their business. Transparency — that’s the name of the game.
Check out my article on AZEK, a sustainable outdoor living product company.
Sources
[1] Vitalfarms.com
[2] SBJ Article https://sbj.net/stories/eggs-on-a-mission-vital-farms-leads-the-way-with-ethically-produced-eggs-from-springfield,62874
[3] Certified humane pasture-raised & free range defined
https://certifiedhumane.org/free-range-and-pasture-raised-officially-defined-by-hfac-for-certified-humane-label/
[4] Karsten, H.D., et al. “Vitamins A, E and Fatty Acid Composition of the Eggs of Caged Hens and Pastured Hens.” Renewable Agriculture and Food Systems, vol. 25, no. 1, 2010, pp. 45–54. JSTOR, www.jstor.org/stable/44490623. Accessed 27 Jan. 2021
[6] Forbes — O’hayer Interview
https://www.forbes.com/sites/chloesorvino/2020/08/01/vital-farms-blockbuster-ipo-proves-wall-street-has-an-appetite-for-sustainable-farming/?sh=534fc35b345b
[7] SQFI select site program
https://www.sqfi.com/why-get-certified/sqfi-select-site-program/
[8] Q3 earnings call
https://edge.media-server.com/mmc/p/snf53kcy
[9] United Eggs
https://unitedegg.com/facts-stats/#:~:text=U.S.%20table%20egg%20production%20totaled,produces%20294%20eggs%20per%20year.
[10] B-corp website
https://bcorporation.net/
[11] Ovabrite — Poultry times
https://www.poultrytimes.com/poultry_today/article_e7cdc252-b583-11e6-a1b3-83d7d5324b62.html
