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HBP# TB0646 A08-21-0015 Kannan Ramaswamy Got Milk? Te Evolution of the Plant-Based Milk Industry Today’s food system is broken and as a food company, we have a responsibility to change it for the better. Our marketing hasn’t been focused on selling products, but rather on initiating a bigger debate. It’s clear that today’s meat and dairy norm is unsustainable. We need to be able to talk about that in order to create change. Having an Oatly oat drink in the fridge has become a statement of personal beliefs, and we’re seeing a post-milk generation taking shape. Toni Petersson, CEO of Oatly. 1 According to Euromonitor, the global dairy industry retail sales were estimated to be $592 billion in 2020 (of which milk accounted for $179 billion) and were expected to reach $789 billion in 2025, growing at a compound annual growth rate (CAGR) of 5.9%. However, some analysts felt that this was wishful thinking and predicted a cumulative decline of 21% between 2015 and 2025. 2 Dairy milk sales had already dropped 13% between 2015 and 2019 according to these sources. According to the USDA, over 3,200 dairy farmers went out of business in the U.S. alone in 2019, the latest year for which data were available. By 2020, there were only half as many dairy farms in the U.S. as there were in 2003. 3 Exhibit 1 shows the decline in both milk consumption as well as licensed dairy herds used to produce milk. According to the USDA, the decline in milk consumption was part of a long-term trend spanning four decades, with every successive generation consuming less than the one before. Te rate of decline had doubled since 2010. Although some of the more recent declines might be attributable to the rise of non-dairy alternatives, a 2017 study by the USDA showed that only 20% of the decline in dairy milk could be traced to replacement by non-dairy products, underscoring that the decline in milk consumption was partly a secular trend. 4 Milk, once promoted as a healthy, wholesome beverage, had increasingly become quite unhealthy according to researchers. For example, Te Harvard University T.H. Chan School of Public Health reported that many of the constituents of dairy milk were related to higher rates of ovarian and prostate cancers, and its high saturated fat content was associated with increases in low-density lipoprotein (LDL), a dangerous form of cholesterol that increased cardiovascular risks. 5 Exhibit 2 shows the relative composition of dairy versus non-dairy milks. Te decline in dairy milk consumption, especially among the younger generations, was also accentuated by environmental concerns, and animal welfare practices such as the stigma associated with factory farming. 6 Environmentalists had long viewed the dairy industry as a major contributor to climate change, given its large land-use footprint, outsized demand for water, and release of methane, a greenhouse gas linked to global warming and climate change. Tey had also launched campaigns against alleged barbaric practices relating to animal cruelty ranging from tail docking, sequential impregnation, early slaughter, and cruel living conditions. 7 Collectively, these concerns, combined with societal changes, had begun to move consumers, especially the younger generations, away from dairy milk consumption. A group of dairy milk alternatives, plant-based milks (PBMs) had rushed in to fll some of that void by promoting the health benefts of their product and touting their more environmentally friendly credentials. Recent market research reports suggested that this segment of the industry was worth $20.5 billion in 2020 and was expected to grow at a CAGR of 12.5%. 8 Consumers had started embracing PBMs in large numbers and Copyright © 2021 Tunderbird School of Global Management, a unit of the Arizona State University Enterprise. Tis case was written by Professor Kannan Ramaswamy for the sole purpose of providing material for class discussion. It is not intended to illustrate either efective or inefective handling of a managerial situation. Any reproduction, in any form, of the material in this case is prohibited unless permission is obtained from the copyright holder. This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.

were expected to drive the PBMs to account for close to 24% of the overall milk market by 2025. 9 Exhibit 5 provides a look at the projected growth of both dairy milks and PBMs. Te rise of the PBM market was predicated on three key drivers. First, the increasing health awareness, especially in the economically advanced countries such as the U.S. and across Western Europe, was contributing to higher PBM sales. In a survey by Lightspeed/ Mintel, a market research company, 52% of respondents said that they preferred PBMs because they felt such milks were the healthier alternative, followed by taste (47%) and a general sense of well-being (36%). Second, the declining birth rate in many advanced economies translated into fewer homes with young children, the traditional mainstay of dairy milk marketers. Te newer households were geared more towards a young adult audience, both Millennials and Gen Zs, groups that favored PBMs given their more healthy and environmentally friendly image. Tird, the increasing focus on climate change, along with concerns about the impact of livestock on greenhouse gas emissions, water use, and land use, also drove more environmentally conscious consumers to search for non-dairy alternatives. A report by Our World in Data, a collaboration between Oxford University and Global Change Data Lab, reported that roughly 71% of the world’s agricultural land (approximately 140 million Km 2 ) was used to support livestock, accounting for 18% of global calorie supply. 10 Exhibit 3 provides data on land and resource use. Among consumers, 25–44-year-olds were the biggest buyers of PBMs. (Exhibit 4 provides age-segment data for PBM consumption.) Tis market segment had a fairly high disposable income coupled with a heightened awareness of both health and climate impacts of dietary choices. Tis segment also comprised a disproportionately larger number of people who had already eschewed meat products and considered themselves vegetarians or vegans, thus increasing their propensity to embrace PBMs. Consumers in the 25-44-year age group were also more willing to experiment with new PBM oferings and responded favorably to brands that were rooted in the sustainability and climate change context. Te willingness to explore alternative types of PBMs was partly responsible for the explosion of alternatives ranging from oats, almond, coconut, hemp, pea, sesame, cashew, and rice. In general, PBM buyers were focused on the taste profles of the milks as well as their nutritional value (see Exhibit 2 for a comparison of the nutritional values of some alternative PBMs). Brand awareness also played an instrumental role and had become more critical, especially due to the infux of private labels which constituted 15% of the PBM market. 11 New entrants such as Oatly, the Swedish oat milk manufacturer, had spent signifcant amounts of money to advertise their brands. Oatly had developed an almost cult-like following that included celebrities such as Oprah Winfrey, Natalie Portman, and Jay-Z, all of whom were seed investors in the company before its initial public ofering, which raised $1.43 billion in June 2021. Although the number of exclusive PBM consumers was increasing steeply, a majority of households could be characterized as hybrid users because they purchased both dairy and plant-based milk products. Soy milk and almond milk had traditionally dominated the PBM segment, but oat milk and other alternatives were challenging these established sources for supremacy. As with most agricultural inputs, the prices of soybeans and almonds were quite volatile. Soybean inventories had been on the decline since 2018 when they reached a peak. Te market was expected to tighten further, and 2020 had already been identifed as the second tightest market on record in the U.S. with stocks on hand representing just 3.1% of the national requirements (see Exhibit 7). 12 Soybeans had found a variety of uses with cattle feed topping the list accounting for 98% of production. Te rest was used in the food industry for manufacturing oils and food products such as tofu, soy milks, and related products. China was the world’s leading consumer of soybeans, followed by the U.S. Labeled as a nutritionally dense superfood, almonds were in great demand globally. Te U.S. was the major producer globally and accounted for 68% of world production according to the Food and Agriculture Organization (FAO). 13 Te major almond-growing region of California had been devasted by wildfres and droughts over successive years and had been radically changing the economics of growing almonds in the region. While farmers had resorted to micro-watering and new technologies to reduce water consumption by close to 30%, similar technologies had not yet taken root in countries like Spain, the second largest producer with 16% of the market. Despite the growing demand, prices in the U.S. had been depressed since buyers in Asia had begun sourcing their almonds from Australia and other countries in response to tarif increases set in motion by the Trump administration. Te price of California almonds had dramatically declined from $7,495 per metric ton in 2016 to $4,630 per metric ton by late 2020. Farmers worried that at those prices, they were unable to even recover their costs and found the prices unsustainable. Exhibits 6 and 7 provide historical data on soybean and almond inventories. A08-21-0015 2 This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.

allows us to deliver on a holistic set of product dimensions like taste, nutritional composition, and sustainability profle.” 19 Tis statement refected the crucial role that science and technology played in the business as well as the diferentiation advantages it could create for companies. Mintec, a procurement consultancy, reported that the input material costs for PBMs were quite similar to dairy milk. Dividing the array of PBMs into three categories, namely nut-based (macadamia, cashew, hazelnut, almond), cereal/legume-based (oats, rice, soy, pea), and coconut-based milks, its report concluded that despite the dizzying array of consumer choices, almost all PBMs consisted of 90-95% water, and 2% of diferentiated inputs, with stabilizers, sugar and sugar substitutes, emulsifers, color, and favorings making up the rest. 20 Te proliferation of PBM brands multiplied by the ever-expanding variety of source materials, such as almonds, oats, hemp, sesame seeds, macadamia nuts, and rice, had resulted in a war for shelf space at the grocery stores. Traditional milk shelves in the refrigerated sections of grocery stores had shrunk dramatically while the PBMs that had taken their place had grown exponentially. Tis resulted in fairly short half-lives for every brand but the most sought-after ones. Te churn in terms of the sources for alternative milks was also quite high among the new entrants. For example, although soy milk and almond milk were established category leaders, oat milk, hemp milk, rice milk, sesame milk, and a food of others had entered the market. Te power of diferentiation both within the PBM manufacturers as well as between PBMs and dairy peers was quite revealing. For example, the price of oat milk ranged from $5.99 for a 32-oz. pack (Elmhurst) to $2.40 (Oatly) and $1.95 (Silk). In comparison, the average price of soy milk was roughly $1.60 (Silk). Full-fat dairy milk averaged just $0.75 (Shamrock). Te price diferentials across the group of PBMs was not as large on average, although diferentiated outliers did attract a price premium. While the more popular PBMs such as soy, oat, almond, and coconut milks were priced within a narrow band between $2-$4, there were a few esoteric milks such as hemp milk which were priced at close to $13. Oatly had emerged as one of the most-talked-about new entrants into the world of PBMs and came with a global footprint. Oatly Enters the World of PBMs Sustainability is at the core of our business and actionable in our products: on average, a liter of Oatly product consumed in place of cow’s milk results in around 80% less greenhouse gas emissions, 79% land usage, and 60% less energy consumption. This equation is our primary mechanism for impact. Our products make it easy for people to turn what they eat and drink into personal moments of healthy joy without excessively taxing the planet’s resources in the process. Oatly AB. IPO Prospectus Oatly had been a well-kept secret for over three decades before it seemingly came out of nowhere to raise $1.4 billion in a resoundingly successful ofering of its shares on the New York Stock Exchange that valued the company at $10 billion. Te quirky Swedish company with a distinct environmental message had clearly arrived on the global scene. Oatly had its start in 1994, established by brothers Rickard and Bj ö rn Öeste, who were attempting to produce a dairy milk substitute for people who were lactose intolerant. Te company had been marketing an oat-based product that had quite limited distribution and market penetration until the current CEO, Toni Petersson, took over the reins in 2014. He had been engaged with the company since 2012 and was already focused on the environmental relevance of what Oatly was doing. Oatly had already been through the entrepreneurial and commercialization stages when its founders attempted to sell additives to the dairy products industry and license its process technologies. Unfortunately, there were few takers and, therefore, when Petersson arrived, the frm was in a consolidation phase where it was attempting to grow into a food company with a broader range of products. CEO Petersson brought a very interesting and rich background with considerable experience across a wide range of products and services that included everything from consumer retail brands to luxury products, night clubs, cafes, real estate, and lifestyle oferings. Born to Japanese parents in Sweden, Toni Petersson had followed a business track in his formal education with degrees in marketing strategy, fnance, and management, after a degree in the natural sciences. His various forays prior to Oatly had brought him a lot of global exposure in countries across Europe and parts of Central America. He seemed to have a rather unconventional approach to management as evidenced by his introduction to a global audience as the pitchman for an Oatly commercial that aired during the Super Bowl in the U.S. in 2021. Te spot was reportedly developed entirely by Petersson and A08-21-0015 4 This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.

featured him singing a song that he had written, playing the keyboard in the middle of an oats feld. Te idea worked for its quirkiness although it was panned for musicality. Te unique introduction was a long time in the making because Petersson was frst focused on burnishing the Oatly brand for a global audience. Petersson set his sights on taking the Oatly brand to the U.S., a market he believed was crucial in launching Oatly’s global ambitions. Te extensive buildup to that move required a redesign of its logo, packaging, and advertising message. Convinced of the product’s environmental credentials, Petersson became the brand’s evangelist. He chalked an unconventional entry strategy to gain a foothold in the U.S. market by completely circumventing the traditional grocery stores and chains where consumers typically purchased dairy milk. Instead, in 2016, Oatly entered into a deal with Intelligentsia, an elite chain of cofee shops that had a presence in fve cities across the country. Trough a series of in-café demonstrations, Oatly was able to convince the cofee-making cognoscenti, the baristas, that oat milk could be a viable if not desirable substitute for dairy milk. Te baristas found that the product performed much better than other PBMs such as almond milk and soy milk when it came to decorating lattes and had the additional positive quality of consistency in taste and texture. Tey were sold, and the Oatly boom was underway. Te company was able to double its sales almost every year since and attracted a sizable number of competitors along the way, a testament to the viability of oat milk as a leading PBM. By 2020, Oatly was sold through 60,000 retail establishments and 32,000 cofee shops. Te New Yorker reported that there was even a run on Oatly’s barista edition when cafes facing shortages were bidding up the price of a six pack to around $200, about fve times the typical price. 21 Oatly captured the attention of discerning buyers who were seeking an environmentally friendly alternative not only to dairy milk but to other PBMs as well. In contrast to soy and almonds, the cultivation of oats required six times less water and was hardy enough to compete against weeds, thus reducing the need for harmful pesticides and chemicals. Consumers were willing to overlook the higher carbohydrate (sugar) content of oat milk in favor of these virtues. Te company was clearly aligned with the urgent need to address climate change, which it had made its top priority. In an interview at Goldman Sachs, Petersson observed, “ I think for people today, sustainability is more of an ideology. It’s a structured belief system, almost like a religion. But in this case, it’s relied on what science says in regard to climate change and environmental issues. And I think we, as a company, have a license to take a place in that ideology—we just want to prove that you can be successful by doing good.” 22 In doing so, he had infused his organization with a sense of purpose and set about creating a culture that valued innovation, tolerated failure, and embraced the pursuit of environmental wellness as a central aspect of its strategic positioning. Petersson frmly believed in climate change as Oatly’s purpose and was even willing to compromise margins to do good in the world should it come down to it. Despite its very successful IPO in the U.S., 2021 was proving to be a challenging year. Oatly showed signs of being able to weather the COVID crisis quite well and had reported that sales lost due to restaurants and cafes shutting down were adequately balanced with increases in sales through grocery stores and direct consumer channels. However, an activist private equity investment company, Spruce Point Capital Management, fled a class action lawsuit in late July claiming that Oatly was not transparent with its capital expenditure costs, water usage at its New Jersey plant, and used suspicious accounting practices that overstated revenues and proftability. One of the more interesting points of contention was the claim that Oatly’s competitors, Califa Farms and Chobani, were taking away market share from the company and it was losing shelf space at the retail level, and was also engaged in signifcant price discounting in its online channels. Class action suits were generally considered par for the course. However, there was a noticeable impact on Oatly share prices with the share prices dropping well below the opening IPO price. Tere was no denying that competitors had emerged to challenge the meteoric rise of Oatly. Elmhurst, a competing branded player in the PBMs space, was even able to command a premium price on a unit basis compared to Oatly and so too was the midmarket player Pacifc Foods. Although neither had the share that Oatly commanded, their ability to move upmarket was impressive. Was oat milk the next soy? Would it follow the history of soy milk to become the beverage of choice among PBM consumers only to be let down when a new alternative appeared on the horizon? Quinoa milk, a relatively new entrant, was already showing signs of attracting consumers. With so many alternatives available, would PBMs consolidate around specifc inputs, or would the segment continue its ongoing pursuit for broadening the portfolio with very limited possibility of building the scale needed to emerge as a serious contender against dairy milk? Tese were some of the questions that the industry watchers were pondering. A08-21-0015 5 This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.

Exhibit 1. Trends in Milk Consumption and Licensed Dairy Herds Per capita (pounds per person) (2010-2019) 200 60000 53132 51291 177 49281 180 173 50000 160 169 46975 164 44809 158 43534 155 153 41819 140 149 40199 145 141 40000 37468 120 34187 100 30000 80 60 20000 40 10000 20 0 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Trend in dairy milk consumption in the United States (2010-2020): Trend in number of licensed dairy herds in the United States Source: USDA Exhibit 2. Comparing Nutritional Composition of Dairy Milks versus Non-Dairy Alternatives Product Calories Carbohydrates Sugars Fat Protein Whole milk 150 12g 12g 8g 8g 1% milk 110 12g 12g 2g 8g Skim milk 80 12g 12g 0g 8g Almond milk 40 1g 0g 3g 2g Soy milk 80 4g 1g 4g 7g Rice milk 120 22g 10g 2g 0g Coconut milk 50 2g 0g 5g 0g Oat milk 46 6.7g 4.1g 1.5g 1g Source: Krans, B., and Kubala, J. 2020. Comparing milks: Almond, dairy, soy, rice, and coconut. Healthline , March 5. https://www.healthline.com/health/milk-almond-cow-soy- rice. Oat milk comparisons from Oatly.com. https://www.oatly.com/int/products/oat-drink. A08-21-0015 7 This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.

Exhibit 3. Global Land Use for Food Production Earth's surface 29% Land 149 million km 2 71% Ocean 361 million km 2 10% 19% Barren land Glaciers 28 million Km 2 Land Surface 71% Habitable land 104 million km 2 13% Other Habitable land 50% Agricultural land 51 million km 2 37% Forests 39 million km 2 forms Global calorie supply Agriculural land 77% Livestock- meat & dairy 40 million km 2 23% Crops 11 million km 2 82% from plant-based food 18% from meat and dairy Global protein supply 37% from meat and dairy 63% from plant-based food 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Soure: Ritchie, H. 2019. Half of the world’s habitable land is used for agriculture. https://ourworldindata.org/global-land-for- agriculture. Data source: UN Food and Agriculture Organization. Exhibit 4. Age-Related Market Segments of PBM Consumers Based on PBM Sales 44.9% 37.7% 10.5% 6.9% 25-44 years 45-64 years 65+ years Below 25 yrs Source: IbisWorld. Soy & almond milk production. Industry Report. June 2020. A08-21-0015 8 This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.

Exhibit 7. U.S. Soybean Stocks and Stocks-to-Use Ratios (%) = 2010-2020 169 140 438 302 197 191 92 141 215 523 909 1000 22.9% 900 800 700 600 13.2% 500 10.2% Stocks held in bushels (millions) 400 Ratio of stocks –to-use % 7.2% 300 6.6% 5.4% 4.9% 5.0% 200 4.5% 3.1% 2.6% 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: FarmFutures. 2021. Soybean outlook: Bullish signals support 2021 expansion. https://www.farmprogress.com/story-weekly- soybean-review-0-30767. Exhibit 8. Trends in Market Share for the Major Players in the Combined Soy and Almond Milks Market in the U.S. 2015-2020 30.0 60.0 53.0 34.5 36.6 40.6 47.4 51.0 40.0 50.0 25.4 24.9 18.7 19.6 19.4 20.0 20.0 10.0 Blue Diamond Danone 0.0 2015 2016 2017 2018 2019 2020 Source: Ibisworld. A08-21-0015 10 This document is authorized for use only in Stephan Tseng's MARK2012 Marketing Fundamentals - T3 2023 at University of New South Wales from Oct 2023 to Apr 2024.