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Is this thing Oatly’s Achilles’ heel?

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Source: Oatly
Source: Oatly

Since peaking close to $29 around 11 June, Oatly (NASDAQ: OTLY) now trades near $22, as I write. And I reckon there’s a strong chance the slide could continue.

The Swedish oat milk producer has yet to make a profit. Nevertheless, the IPO was greeted with enthusiasm across the pond. And the stock was driven up from the $17 per share initial public offering price.

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Oat milk’s all the rage

Now, I know there’s a bit of a fad going on these days and people are falling over themselves to buy plant-based milk alternatives. However, as a long-term milk-alternative user myself, I’ve been presented with many options for years when I shop in a supermarket. And the choices for buying milk alternatives keep expanding.

For example, I can easily buy non-dairy milk alternatives such as almond, coconut, soya, hazelnut, oat, rice, hemp and cashew. And others are available, although I’ve yet to come across them, such as pea, peanut, flax, walnut, macadamia, pistachio, pecan and banana.

Not only can I buy those products, but I’m often confronted with different brands offering the same thing. And more recently, the supermarkets have been undercutting the prices the big brands set by selling their own-branded offerings.

I think the whole issue of competition could prove to be Oatly’s Achilles’ heel — the major weakness in its business plan. After all, oat milk is starting to look like a commodity product. Would I be compelled to choose Oatly’s product over a competitor’s because of its brand? In a word, no.

For me, the price is perhaps the most relevant factor. And we all know what happened to the pricing of cow’s milk when the supermarkets monopolised its supply to consumers — it fell through the floor.

However, I do apply other considerations when purchasing. For example, some milk alternatives work better in hot drinks than others. Indeed, some products tend to curdle. And taste is another big factor for me. When I put milk alternatives on breakfast cereal, that’s a big one. I prefer cashew, hemp and coconut…

A long road to profitability?

My guess is Oatly may need to vastly expand its product range if it’s to build a consistently profitable business. After all, the company deals in fast-moving consumer goods. And big, successful names in that sector tend to have big ranges of products and multiple brands. I’m thinking of companies such as Unilever, Reckitt, PZ Cussons and Premier Foods. And it’s hard for me to imagine such an expansion without the company moving into other raw commodities as well as oats.

On top of that, I reckon Oatly may need to produce more complex products with additional added value. That’s perhaps one way the firm could maintain the value of its brand for consumers.

Until Oatly shines a clear light on a path to profitability, I’m avoiding the stock. However, I’m watching with interest. Meanwhile, one potential ‘outer’ for shareholders is the possibility of one of the fast-moving consumer conglomerates making a bid for the company and adding it to its own stable of brands. But I wouldn’t buy the shares just for that slim possibility.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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