Why you will ditch milk for Oat milk

Oatly, how it built a 10 billion dollar milk alternative

Hi friends👋,

This week’s issue is a bit more light-hearted comparing to my other posts on semiconductors or hydrogen energy. We’ll talk about the milk alternatives market.

I have a habit of drinking coffee in the morning. If I do not drink a cup of cappuccino (or black coffee while I’m trying to shed some extra weight) first thing after I wake up, I am a zombie all day. Recently, an interesting ingredient crept into my routine, oat milk, or more precisely, Oatly oat milk. Coffee shops often try to charge me a dollar more for these alt-milks, I shrug them off and thought to myself, what’s better than the ‘normal’ milk that was meant to be consumed by humans, rather than these artificially made plant-based milk. Plus, they didn’t taste right, I’ve tried coffee with almond milk, its nutty flavor overwhelms coffee’s natural aroma. The rough texture of soy milk also makes it a bad companion for a good cup of cappuccino. Coconut milk is too fruity. I gave oat milk a try recently, and it was different, the mild flavor and the smooth texture give it a unique advantage for expresso-based coffee, so it seems to me. These posts from the pros seem to suggest that I am right.

Anyways, this is not a barista coffee tasting blog, I looked into the oat milk business, if you care about what you drink each day, read on.

Also, I want to welcome the 37+ of you who joined us in the last past few days. If you have not signed up yet, join +467 smart, curious, and critical people by subscribing here:

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Lately, I have read a few books on the history of our world in the 40s and 50s right after the end of WWII. My primary motivation was to understand our world’s formation through the lens of its past because institutions matter and people matter. The most powerful institutions such as the United Nations were created then and the most powerful men today were very much products of that era.

Wars and sufferings shape our world. Humans are curious, and we tend to neglect things that worked out for us, brush them aside, take them for granted, but things that have hurt us, they stuck with us because we must make sense of them so we can avoid pains of the same sort. Not only that, we want our children to be free from the same suffering that affected us because we love them and we want the best for them. This pushes our world forward, generation after generation.

The most important event that shaped the world we live in today was WWII, 30 million death in USSR, 20 million death in China, around 7 million Germans paid their lives along with 600,000 Frenchmen, half a million British, and half a million Americans. Even on the tiny island of Singapore (together with Malaya), there were over hundreds of thousands of casualties.

Why am I talking about this? because when sufferings and pains are disseminated at a scale described above, it shapes the own world. It shapes an entire generation’s psyche. One of them is the shortage of food & security.

Animal milk was not always a staple on our tables. The US started to serve milk to their soldiers as a nutrition boost since WWI and the program was enhanced during WWII, this caused the boom in the milk industry. But, when the war ended in 1945, the milk industry suddenly had no customers. Great milk-drinking campaigns were launched to raise awareness for milk as an essential supplement to a healthy diet, also to break the stigma of milk as a drink for primarily young children.

You never outgrow your need for Milk!

So the poster says, in a bid to get more adults to drink milk. In 1946, National School Lunch Program in the U.S. required qualified students to be serviced with 5 cups of milk per week.

This officially started the consumer trend of drinking milk around the world.

In Singapore, for example, it implemented the School Milk Scheme (SMS) in 1974 to combat the underweight situation in Singapore, SMS was stopped in 1988 when obesity started to become a thing.

The less American-centric version of the story, of course, focuses on efforts of the developed nations, including England and Germany, to make their people, especially their young people, healthier, beginning the late 19th century (partly to prepare for war). The advancement of our understanding of nutrition also boosted the demand for a healthier diet. Milk, with its great balance of carb, protein, and fat as well as its accessibility became a natural go-to source of nutrition for many.

Since the milk industry was super boosted by circumstances of war and malnutrition and the need to stay healthy, its decline was also foreshadowed. Since the 1970s, starting with the western developed countries, lack of nutrition becomes a non-issue, in fact, the more important issue is that many in the developed countries now have too much nutrition.

In the US, milk consumption started to decline, so does the rest of the developed world. Newly developed countries like Singapore, South Korea, and Japan lagged behind the US in this trend, but as they developed more, the milk consumption also declined, in due time, the same trend will be in China as well.

But since we are talking about the alt-milk market today, I need to emphasize that the milk consumption turning point has not come yet. The industry is still growing strong thanks to the Chinese and Indians consuming them. India’s total milk consumption today is already 4x that of the US, 6x that of China, but India’s GDP is only one-fifth that of China, one-eighth that of the U.S., as India’s economy grows further, more milk demand will realize.

Lei Shi @LeiCreatives

Smth interesting I learned today. Indians drink lots of milk compared to the rest of the world. I am sure the delicious Indian food I had play a big part.

Further growth should be expected from the Asian markets including that of China, India, and the rest of Asia as indicated by a Mckinsey report.

The long-term deficit of milk for Chinese consumers is significant, right now milk consumption of Chinese per capita is at about 1/7th the consumption of typical U.S. audience, and the deficit is at -15 million tons for milk and alternatives.

This metric for the rest of Asia is even lower as the infrastructure deficit adds difficulties for milk and alternatives to be accessible to rural populations in South East Asia.

It is under this backdrop that we shall move ahead to analyze the business of Oatly, the rising star in the alternative milk market.

Oatly, how it broke the consumer stigma

If you are unfamiliar with the brand, it is not your fault, because Oatly is in the alt-milk commodity space, a milk alternative for lactose-intolerant people.

What does it mean to be a commodity?

A commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.

To me personally, I would regard milk as a fungible commodity. As long as it’s skim, I’m fine. The oat milk market was similar until Oatly came along.

Oatly was established in the early 1990s by food scientist Rickard Öste and his brother Bjorn Öste. In their early days, their packaging looked like this and they are mostly branded as an alternative for lactose-intolerant people.

It was a novel invention and the major differentiating factor of this product in the dairy market is that the product is made of oat and is good for lactose-intolerant people. However, there were already other alternatives for lactose-intolerant people!!! They are called soy milk, and they have been recorded for consumption in Chinese culture for over 2,000 years!

So as you can imagine, the beginning for Oatly was hard.

When industry professionals were asked about milk companies’ competitive advantage, they ranked consumer insight as to the least important. Hence, this is a market that does not really care about what consumers think of the brand, company managers focus more on how well it can get the product shipped and manufactured.

But boy were they wrong.

In the first 20 years of Oatly’s existence, their sales were flat, people like the idea of oat milk, but most of its popularity comes from its home country Sweden where it was invented.

Things only started to take off when Toni Petersson joined the company in 2012. The first thing they did was to completely rebrand Oatly. They want to start with explaining what oat milk is about.

Since oat milk is completely plant-based with no involvement of cow, and Oatly claims that it was “made for humans.” A super bold slogan for oat milk.

This strategy did well with the consumers because it had helped people notice the Oat milk category. The message was bold.

But, the Swedish dairy lobby noticed this and did not take it very well. They decided to sue Oatly for that. But they have chosen the wrong enemy. Once the lawsuit was launched, Oatly immediately published the legal document online, as transparent as possible. This not only was a big publicity moment for Oatly, but also showed Oatly’s audience what the company stands for.

The lobbyist won the lawsuit, but they lost people’s hearts.

Thus, Oatly has successfully positioned itself to stand for two things

1. a legitimate challenger of milk in terms of product offerings

2. an underdog that is bullied by the system but is going to fight until the whole world hears its message

And what was that message? That’s the third stand Oatly took. It is, in my opinion, their killer strategy that successfully bought Oatly from a regional niche player in 2017 to be a global giant. They have raised the most important question of our age, the environment.

3. Oatly is environmentally friendly that produces less carbon footprint.

With cow out of the loop, oat milk produces far less CO2 than its competitors.

I am against idolizing one man for a company’s success, but for Oatly, I think Toni added the spark needed for the industry to go from a small group of enthusiasts to mainstream.

This sentence captures Oatly’s brand well.

A new type of food company withcore values of health and sustainability, supported by an unconventional approach to brand, commercial strategy and organizational structure.

Marketing people like to tell stories with appealing narratives, but since we are an analysis letter, we shall not forget the capital power behind this shift. In 2016, “China Resources (state-affiliated) took a majority stake in Oatly in 2016 through a 50-50 joint venture with Belgium’s Verlinvest. The pair currently own 60% and will continue to appoint six directors to Oatly’s 14-person board, provided their combined stake remains above 30% after the offering”.

Oatly’s 200 million investment from Oprah and Starbucks founder is again another huge boost to the company’s industry power.

We should also take note of the grander shift towards healthier lifestyles with the rise of alternative meat (Beyond), alt milk (Oatly), and lifestyle brands like Lululemon.

The marketing of Oatly is genius no doubt, but genius marketing does need a huge capital to back it up.

Oatly’s business.

Oatly’s business has skyrocketed over the past few years, if you are in any of the cities, you probably have seen their product. Oatly’s revenue improved from 118 million in 2018 to 204 million in 2019 and finally 421 million USD in 2020, doubling every single year.

Not only that, Oatly’s strategic investors, Starbucks, and China Resources (which is a huge Chinese supermarket conglomerate) are also playing their part in helping Oatly break into their respective markets. Not surprising that Asia has the biggest growth (5x) over the past two years because Asia is the region with the biggest milk deficit.

By 2020, Oatly accounts for 53% of Sweden’s alt-milk sales. Within four years of entering the United States, Oatly products can be found in approximately more than 7,500 retail shops and approximately 10,000 coffee shops in the United States, and revenue from the United States was $100.0 million in 2020.

In Asia, primarily China, Oatly has a ‘presence’ in 11,000 coffee and tea shops and approximately more than 6,000 retail and specialty shops, including an exclusive, branded partnership with Starbucks China in over 4,700 stores.

As for the industry, the global dairy industry retail sales were estimated to be $592 billion in 2020 and are expected to reach $789 billion in 2025, global retail sales of milk are at 179 billion in 2020 which is around 1/3 of the global dairy market. Plant-based dairy accounts for around 3% of the global dairy industry at 18 billion dollars in 2020. Here is a comparison of the size.

So the upside for Oatly is huge. As long as Oatly continues to strike above its weight building its brand attitude and identity among mostly commoditized competitors, its opportunity is great, just 1% of the industry would mean 6 billion in revenue, which is 15 times its revenue now. The trend looks great for Oatly.

So, what have I learned?

• I had my first economics lesson in Junior College when I was 17, until this day, one of the most important concepts I learned is scarcity. In this context, food is not a scarce resource for the target audience of Oatly. To them, what is scarcer is status/meaning, they’d prefer a product that stands for something.

• It’s important to ride trends. Oatly had 3 things in its favor. 1, Millenials are continually looking for healthier options for their lifestyle. 2, millennials care about the environment, and 3, millennials are willing to pay for a statement or a status symbol. The third point partly goes to the concept of scarcity, for most of us living in the cities, milk, food, comfort is not scarce, they are in abundance, what is scarce is status, affirmation, & meaning.

• It’s incredibly important to have a priority in a company’s marketing strategy, particularly if the company is selling a commodity. A different CEO would have employed a traditional marketing manager to run Google ads, video ads, and so on, which would be fine, but Oatly would never be as successful. Creativity is rewarded, brand resonance is key.

That’s all for today, this is a more light-hearted analysis I’ve done comparing to my posts on semiconductors and the energy industry, most of us drink milk, and hopefully, this post will raise some awareness for oat milk, I’ve been drinking Oatly coffee recently, and it tastes great. Give it a try! I’m optimistic about this company.