Oatly

Is there a moat under all the froth?

Nothing should be surprising at this point in 2020. Still, it was surprising that Swedish oat milk company Oatly raised $200 million at a $2 billion valuation from investors including Blackstone, Oprah Winfrey, and former Starbucks CEO Howard Schultz this week. To pay off, Oatly needs to increase distribution and build a differentiated brand. This is a tall order.

The 30,000 foot view for Oatly is encouraging. In the U.S., milk consumption has been steadily declining for decades while plant-based alternatives like almond, oat, and soy milk have grown in recent years:

Source: IRI InfoScan Reviews, CSPDailyNews.com, U.S. Census Bureau, and Economic Census/Mintel via The Milwaukee Journal Sentinel, “Americans love soda, fancy water and fake milk. Can the dairy industry keep up?”, February 11, 2020

A growing market is a necessary but not sufficient condition for Oatly to be a successful investment. High growth markets attract competitors. Competition means you need a moat. Total addressable market (TAM) alone won’t save you (more on that here and here). This is where Oatly’s outlook gets fuzzy.

Buy Commodities, Sell Brands

In Berkshire Hathaway’s 2011 Shareholder Letter, Warren Buffet wrote that:

“Buy commodities, sell brands” has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891.

A simple formula, but tough to execute. While Oatly has nailed the buy commodities part of…