Is The “Carvana of Steaks” Private Equity Gold?

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parking lot Ribeyes could disrupt the stodgy beef business

Signs hawking Parking Lot Ribeyes and Beef Truckload Sales might feel like weary artifacts of lockdown living. But the retailing of discounted meat, chicken, and fish in temporary locations is cutting a fresh retail channel through the American supply chain. And given today’s wobbly public markets, direct investments in such “temporary-retail” meats and fish could be a tasty bet.

Meats and fish sold from hastily erected venues were an early – and controversial – pandemic darling. As closed retail outlets rattled supply chains, enterprising retailers realized they could sell their wares, literally, off the back of trucks. Covid-created truck-sold brands like Essential Food Sales and Backyard Butchers seemed to open new locations weekly. Ads for 20 Ribeyes for $40 sprang up.

The response was brisk. Essential Foods now claims more than 65,500 followers on some social media platforms. Backyard Butchers boasts more than 105,000. 

Truck-sale events might have been popular during the height of the pandemic, but complaints grew right along with sales.

But as the parking-lot steaks popped up, so did the complaints. Taste tests of truck-sold steaks often revealed that hoped-for juicy ribeyes turned out to be thin, lesser-quality cuts. Quality varied. An unlicensed Backyard Butcher truck was shut down by regulators in Norton Shores, Michigan.

Emerging truck-event sales drove established direct-to-consumer steak purveyors into similar truck-sale events. Online retailer PrimeHouse Direct now operates 14 open-air locations. It’s worth noting that such mail-order meats have traditionally featured luxury cuts, stiff competition, and a particular marketing tone. Even Donald Trump has dabbled in the mail-order steak business. 

And mail-order steaks may be intensely debated as much as the former president.

The Price of Pricey Meat 

But then – probably by sheer accident – temporary-retail meat sellers found themselves set up in the most unlikely of positions: They became an unexpected proving ground for new ideas in the beef business as a whole. Here’s how it worked: The same pandemic that prompted meat to be sold from the back of trucks, also pushed profits for major beef producers into the top shelf. The top 4 beef processors, Tyson Foods (TSN), Cargill Meat Solutions,  National Beef Packers, and JBS USA, saw profits jump by 300%.

But smaller producers, who battle for the remaining 20% of the beef business, complained that the pandemic finally revealed inequities that have been developing in the beef industry for decades. Larger meat packers have slowly but steadily negotiated nonpublic direct contracts with retailers. Direct contracts both close out smaller producers and drive them into unstable cash or so-called “spot” markets. Spot markets offer tougher terms, slower deliveries, and tighter margins.

“Throughout the Covid-19 pandemic, when prices were depressed because of processing capacity, we started having a lot of conversations about price discovery and market transparency,” said Tanner Beymer, director of governmental affairs and market regulatory policy at the National Cattlemen’s Beef Association. 

Smaller beef producers began to circle the regulatory wagons.

No less than Iowa Republican senator Chuck Grassley pushed major legislation that aims to dramatically reorganize the beef business. Similar to how the telecom business was restructured in the 1980s, Grassley wants to slice up the beef industry into regional distribution areas that effectively break the lock of major producers. 

Republican Senator Chuck Grassley is making beef industry reform a central message to constituents.

The otherwise deeply conservative Grassley has not been shy to strike the tone of a heavy-handed regulator usually sent to Washington from a coastal state. 

Grassley’s restructuring bid for beef producers is tracking alongside a potentially foundational ruling about the pork business currently working its way through the U.S. Supreme Court. Large pork processors are arguing that animal rights legislation in California that guarantees livestock a minimum amount of space to be raised in will force producers in other states to work through costly upgrades.

“This comes down to Congress listening to the needs of our country’s cattlemen – not to the fear tactics of the Big Four packers,”  said Grassley at Senate hearings.

The Carvana of Steak

As enterprising meat producers sensed change coming to the beef business, the often shady truck-meat sales going on nearby became areas of innovation. Among the most interesting new ideas in the beef business is a web-based meat marketplace called ChopLocal. Started by fourth-generation Wayland, Iowa-based farmer Jared Achen, ChopLocal matches local producers and consumers through a low-cost web platform. 

Think Etsy for beef. 

ChopLocal shows promise as the “Etsy for beef.” With the right capital, it could deeply disrupt the changing beef business.

Certainly operations like ChopLocal show promise. Inventory is solid. The available mix of producers is deep, for some parts of the country. Service is reasonable, if a bit threadbare. But like all web start-ups, the devil is in the logistics. No matter how good a $2 ribeye might be, it can’t cost $20 to ship. Since there’s no Amazon-scale brand to fool the customer into believing that shipping meat is “free,”  ChopLocal must manage some tricky geospatial logic. 

It must discover a reasonable price for meat that factors in the cost to ship that beef to a customer. Distance matters when it comes to fresh meat. 

And to make matters worse, the nominally national ChopLocal must also compete with regional bespoke beef sales channels. Operations like FarmEats, ButcherBox, and Walden Local have established direct-to-the-web brands. 

All of which organizes up into a grisly challenge for the clearly-undercapitalized ChopLocal – and a delicious opportunity for patient capital ready to disrupt an evolving market. 

The Beef Goes On

Uncertainty about the global economy aside, this is still a world that likes its meat and fish. Market data for proteins is not as transparent as it should be. Some countries don’t report. Piracy is sanctioned. Foreign currencies are laundered. But estimates seem to float around $1 trillion worldwide. Some $500 billion gets spent on beef; fish fetches about $250 billion and chicken grabs about $200 billion in total sales. 

Earlier this year, U.S, exports for beef returned to pre-pandemic levels. The demand for U.S. beef was strong in spite of a relatively pricey American dollar. The USDA expects the beef industry to continue to work through pandemic supply shocks, mostly through larger producers speeding the number of livestock through processing. 

However, demand and supply are still out of sync in a global economy recovering from Covid uncertainties. There appears to be room for smaller operators like ChopLocal, if they can get big enough to compete with larger producers. 

What’s captivating about a new idea like ChopLocal is how little capital would be required to battle for a share in the evolving beef business. 

Farmers do not need pricey new chip-fab facilities to produce a steer or hen. So all invested capital could flow to the time-tested Web brand building tactics like deep discounting, pre-funding of producers, and the building of relationships with customers. For ChopLocal, the key would be something on the order of 500 delivery and retailing trucks. That’s roughly the fleet of vehicles that direct-to-customer retailer Carvana maintains to broker the sale of used cars. The fleet would solve for the spatial uncertainty of getting farm fresh beef to consumers at reasonable cost. A farm-to-parking lot steak would also be touched less, bolstering the argument that the ChopLocal beef might be safer for consumers than traditional retail. The trucks would transparently operate across all economic areas in the United States. High prices would be paid to producers and low prices would be offered to customers. 

That’s exactly how Amazon did it. 

A fleet of roughly 500 attractive, regulatory-compliant, well-managed retail trucks, like this one in Japan, should be enough to establish a web-scale, direct-to-consumer beef, chicken, and fish retail brand.

Back of the envelope, the funds required to get ChopLocal to scale, would be far less than the $100 million “mega-round” that’s considered the floor for establishing a new web unicorn. Now-defunct construction startup Katerra raised nearly $1 billion by selling nothing more than prefabricated housing.

The spatially aware supply chain tools that ChopLocal needs to match truck-sales to producers is an established technology. In 2016 retail giant Walmart paid $3.3 billion for spatial web retailer Jet. Even though Bentonville shuttered the operation in 2020, the technology has been woven into Walmart’s core supply chain. 

And, at least for now, betting on a start-up like ChopLocal is surprisingly low-risk when compared to bets on publicly traded beef and chicken companies. Market leader Tyson and chicken processor Pilgrim's Pride (PPC) both face a global economy flirting with a deep recession. Earnings are at a peak. Margins are getting squeezed. How much upside does a mega-meat processor have these days?

Compare that to the brand power of a Carvana of steaks, vehicle-sold affordable ribeye that actually tastes good: Uniquely sourced, perfectly delivered, then grilled over an open fire. 

One can only dream of the Scotch, cigars, and the solace. 

The quality and price for such farm-to-kitchen table meats may be hard to beat.