The flour market is ripe, ready to be disrupted. People are looking for alternatives, but not just gluten-free alternatives as some might think.
The most attractive flour would be a product that perfectly mimics regular white flour in baking and taste while also being healthy: organic, glyphosate free, a mixture of grains, higher in protein and dietary fibers, and higher in potassium versus sodium, to name a few properties. However, anyone who has tried alternative flours such as almond flour or rice flour knows that these flours as standalone products, while not bad products, leave much to be desired in the way of mimicking normal white or even whole grain wheat flour. If any new-and-improved flour product is going to take substantial market share from traditional white flour, it is going to have to behave and taste in a very similar fashion while improving in nutritional value. I believe that The Good Flour Corp. (OTCMKTS: GFCOF) (CNSX: GFCO) has the closest match to this elusive product that I’ve seen. This could make GFCO shares a good investment at just a ~$17 million dollar market cap.
Navigating the Gluten-Free Aisle
The gluten-free market is a mess. While it has become more mainstream in the past decade with many gluten-free options, online and brick-and-mortar stores are littered with messy gluten-free aisles with hard-to-navigate options. Many gluten-free options are delicious and have great nutritional value, but others simply fall short on both. While many people—about 25% of people according to one study—are avoiding it in their daily diets, only about 1% of people actually have celiac disease.
This general trend in food substitutions and healthy eating—cutting out overused foods like wheat where possible—is gaining traction around the U.S. but what is difficult is creating alternatives to things like flour that actually mimic the nutritional value, taste, smell, mouthfeel, and response in cooking and baking.
So what’s the issue? It really goes deeper than gluten/celiac, or GMO/organic. Many gluten-free options—foods that would otherwise contain gluten—are products that use processed ingredients such as texture additives or highly processed flour that lacks nutritional value and is essentially an empty calorie food that not only does not have nutrients, but often lacks fiber and protein, resulting in blood sugar spikes. This is leading people to purchase products like King Arthur’s unbleached flour or its measure-for-measure gluten-free flour, in an attempt to get gluten out of their diets. However, this flour doesn’t closely resemble—in taste or bake—regular flour quite like consumers might want it to, though it isn’t bad. King Arthur’s revenues in 2018 according to a Forbes article exceeded $140 million.
There is a significant loss of nutritional value from processing grains to be gluten-free. The protein removal from wheat in an attempt to make the flour gluten-free removes vitamins and minerals, too. Companies will add back in certain nutrients (enriched) to account for the removal of these vitamins and minerals (14 key nutrients including vitamin A and vitamin K, for example), but the problem is that this process does not replace lost fiber, protein, and other compounds like phenols/antioxidants that are important for one’s health. Because of this, flours that are less processed and varied are a better choice; for instance, coconut, almond, and buckwheat.
Additionally, some people are mistaking their “gluten allergy” for a simple intolerance to gluten, too much wheat, or other allergens from wheat. Albumin, globulin, and gliadin are other proteins contained in wheat that may cause allergy. While there may be undiagnosed cases of wheat allergy (including celiac), the gluten-free movement is driven by people who medically don’t need to adhere to this diet. People are moving to these diets in an attempt to feel better, where they apparently report less fatigue and bloating. What people may not realize is that these benefits may, for some, have less to do with gluten and more to do with altering the intake of fibers, nutrients, and carbohydrates.
https://www.bbc.com/news/magazine-33486177
The difficulty in adhering to this kind of diet is that the human population was built on wheat, and there’s simply no business interest for it to go away. Wheat penetrates many foods and is the cornerstone of many meals and is also inexpensive. For the last 80-90 years, key improvements have been in crop yield, improving the wheat crop’s chance of survival. But now, many people want to supplant some of that wheat intake with alternatives to vary their diets.
Health Instead of Fad
The bottom line is that the average consumer interested in healthy alternatives—celiac or not—will want flour products that mimic traditional flours in taste and baking performance, but is leagues ahead in nutrition. King Arthur has nice flour but doesn’t cut it in mimicking traditional flour, disintegrating easily and with a sandy texture. Crafting a wheat flour replacement is truly a work of finesse. Very few people are capable of coming close to a solution, mixing a variety of flours with additives like xanthan gum to produce a product that has the same texture, taste, and performance. This product (or set of products) is what The Good Flour Corp. has managed to produce and is now aggressively accelerating its production and distribution.
The Wheat Flour Opportunity
Most investors are familiar with Impossible Foods and Beyond Meat (NASDAQ: BYND) and the success they’re experiencing in the meat-alternative market, which aims to produce meat-mimicking products, with Impossible Foods and Beyond Meat taking significantly different approaches to meat replacement (adding heme for meat flavor) compared to smaller competitors such as Modern Plant Based Foods, Inc. (OTCMKTS: SUVRF) (CNSX: MEAT), Eat Just, or Tattooed Chef (NASDAQ: TTCF). Other companies have seen success with dairy replacement such as Oatly Group AB (NASDAQ: OTLY). But one of the biggest food markets that have been largely ignored is the wheat flour market, boasting over $160 billion in global sales.
https://cdn.shopify.com/s/files/1/0614/0143/2303/files/GFCO_Presentation_Feb2022.pdf?v=1643912307
The Good Flour Corp. (GFCO)
GFCO is all about disrupting the gluten-free and regular flour markets and making it about health and wellness (that is also gluten-free and non-GMO). The company is expanding the production and distribution of its top-performing gluten-free, non-GMO healthy flour products across North America from its humble beginnings in Vancouver. Most people haven’t tasted alternative flour like this before so on one hand, it’s almost like a blue ocean investment scenario since products like this basically haven’t been widely available before now.
The company started in the kitchen of Chef Jen Peters in 2012. Jen honed her skills as a protégé of Chef Bruno Marti, the esteemed fine dining cuisine chef in Canada. Under his tutelage, Jen became dedicated to high-quality food sources and ingredients, where she went on to work in Michelin-starred restaurants in the UK. Unfortunately for Jen, she found out she was gluten-intolerant—a heavy blow to suffer as an accomplished chef. Jen, determined to find a way to continue her culinary art then developed a gluten-free all-purpose baking blend so she could perform in the culinary arts without settling for low-quality alternatives. This recipe was perfected in 2012 and Nextjen, GFCO’s baking mix product line brand, was born in partnership with Chef Hamid Salimian, who in baking holds eight international gold medals.
The Good Flour Corp. baking mixes are not just good. They’re darn good. They are better described as nutrient-dense superfood blends that happen to have no gluten. Really, these products don’t just provide an alternative for those who have to or feel like they have to use a gluten-free alternative. They are healthy alternatives for anyone with a cooking or baking itch, with fantastic taste and nutritional value, along with baking performance and texture. GFCO’s all-purpose flour stands head-and-shoulders above other flour alternatives I’ve tried, and in nutrition (and seemingly gut bloating), it of course stands head-and-shoulders above regular all-purpose flour, but also select flour alternatives. These nutrient-packed blends are gluten-free, GMO-free, allergen-free, dairy-free, xanthan gum-free, sulfite-free, and—as the company puts it—hassle-free (not requiring buying separate alternatives and mixing them together yourself, which I know people who spend tons of time to do this!). It’s so much more than gluten-free, a 10-year-old trend that is no fun. It’s the right mouth feel and it’s downright healthy.
The corporate side of GFCO is what is taking these amazing flour blend products, including all-purpose flour, pancake mix, fish and chips batter, and others, to market. This is arguably the hard part. It takes knowledge and business acumen to make a dream product like this a widely available, affordable, and profitable reality.
The founders of Nextjen (the product brand before it was rebranded) used to hand make massive amounts of mix and sell it and were bringing in almost seven figures annually selling this flour to various entities including restaurants in the Vancouver area. This was an exhausting task. Taking the business from a start-up to a significant revenue generator for starters, is a monumental task. The production facilities have to be built out, but wholesale/restaurant distribution and sales have to be lined up for when production is ready to make for a seamless, less expensive transition. This includes supply sourcing, raw materials, blending, bagging, boxing, shipping, and distribution. Most gluten-free companies don’t ever take the steps to move to a larger scale like this because it’s expensive and requires lots of paperwork with the US FDA and Health Canada. The production facility has to be vegan, allergen-free, and gluten-free and has to undergo a rigorous permitting process.
The whole company has to be vertically integrated because taking the materials from sourcing to distribution of a (co)packaged final product is how the margins add up. Otherwise, companies find themselves squeezed out of turning a profit.
Manufacturing Ramps and Products Launch
The Good Flour Corp. recently launched its rebranded products online at goodflour.co for retail consumption. I have tried various Good Flour products such as pancake mix, fish batter, and all-purpose flour and each outperformed my expectations with flavor, texture and baking performance, and a lack of gut bloating after eating. However, the company’s primary strategy is to increase B2B sales such as restaurants or wholesale in North America. This kind of scale and quality control is impossible to achieve using artisan techniques and so Good Flour has put together a 7,000ft^2 production facility in Burnaby that is now in operation with a fully-automated production line. This automation line is expected to increase GFCO’s output by 8-10x, varying by the product SKU, with about 2,500 bags/hour. This is expected to be able to generate $5 million per daily work shift per year. The biggest part about this first automated facility is that it will enable GFCO to move forward with more commercial contracts where the company needs to be a large volume reliable supplier, able to fulfill demand.
Vancouver, British Columbia–(Newsfile Corp. – April 12, 2022) – The Good Flour Corp. (CSE: GFCO) (OTCQB: GFCOF) (FSE: 3KZ) (“GFCO”) is pleased to provide an update on its new 7,000 square foot production facility in Burnaby. The City of Burnaby has recently issued a Certificate of Completion for the construction work at the facility, which is one of the final major milestones prior to operations, which are targeted to commence in May. In addition, GFCO anticipates receiving its fully automated production line from Paxiom Inc., of Montreal, Quebec, in the first week of June and aims to be operational, post validation, by July of this year.
“I am pleased to report that the company is progressing on all levels with the completion and setup of our new gluten-free facility in Burnaby, BC,” explained Matthew Clayton, CEO. “We anticipate having our dry-goods manufacturing commence during May and will be utilizing our current semi-automated equipment and production line.”
Once operational, the automated production line from Paxiom Inc. will increase GFCO’s output by a multiple of eight to ten times depending on the product sku, and produce up to 2500 bags an hour. GFCO expects that a single shift will be able to generate an annual $5 million retail value in product with a single daily shift and an annual $10 million retail value in product with two daily shifts. This will greatly expand GFCO’s ability to serve and expand its food service and retail clients in the Canadian and United States markets. GFCO will also continue to operate from its current production facility but will make equipment changes and focus fully on its baked line of gluten-free buns and pizza shells for its growing customer base.
In the U.S., where copackers are large enough to yield profit margins in this business, GFCO has expanded the production capacity of its superfood-packed alt-wheat flours through an arrangement with a premier U.S.-based flour milling and ingredient company. This arrangement has the capacity to produce 40,000lbs/day, though production volumes will be based on consumer and food service demand. The point is that the production capacity is there to build out networks to supply the products. At competitive retail pricing of about $11/lb, this would equate to $110 million retail value of their products if assuming 50 40-hr weeks of annual production.
The company has also increased its marketing endeavors in Canada. Altogether, the company is making progress in ramping up its business but it is still in the very early stages. The products are fantastic so the company’s success will come down to execution on an operational level as well as marketing and sales contracts.
Valuation
Pegging a current valuation on GFCO shares is difficult since they just started ramping up production and generating sales, as well as increasing their network with larger food suppliers. Using some comparisons, we can find other health-focused companies that are well established such as Beyond Meat (NASDAQ: BYND), which produces vegan-friendly, plant-based meat. BYND shares trade for about 4x annualized revenues after a steep decline this year as the company has struggled to make money despite raking in $500 million in revenue. Beyond Meat trades at 4x 2021 revenues.
Magic Spoon (founded 2019), raised ~$90 million to date, has done about $9 million in revenue in 2021, and is worth an estimated $340-$510 million. This would be a reasonable proxy for GFCO if it can begin generating a similar magnitude of revenues in the next few years.
Another comparator for GFCO might be Midday Squares, which was founded in 2018. Midday Squares produces chocolate bar snacks that are GMO, soy, gluten, etc. free. They’re made with healthy ingredients, too, like chocolate, coconut or maple sugar, various plant proteins and nuts, and olive oil. The end result is a bar that sports a healthy serving of protein, fiber, and omega-3s, but tastes like a snack. It’s a great example of how to do something right, something that tastes incredible, but is much healthier for you. The company brought in $17 million in revenue last year and is supposedly on track for $36 million this year, with a “‘clear path’ to achieving $100 million in sales on its current product offering by expanding distribution and continuing to drive strong velocities in North America.” The company has a $35 million pre-money valuation going into its now-completed $10 million financing this year, or a $45 million valuation.
Lastly, Athletic Greens could be a comparator. This company makes powdered green drinks for people on-the-go to take ownership of their health, aimed at people who are tired of taking a multitude of pills that are hard on the stomach and hard to keep up with. Athletic Greens was founded in 2010 and has $150 million in revenue. The company was recently valued at $1.2 billion in a $115 million financing. Their vegan, keto, and paleo-friendly green powder drink is popular because of how healthy it is with wide range of vitamins and minerals from plants.
All in all with the exception of magic spoon, these types of companies tend to trade at 3-8x revenues. While it will undoubtedly take GFCO a while to make inroads with wholesalers and restaurants as well as gaining retail popularity, the company’s U.S. wholesaler, as we calculated, could generate $110 million in product value annually. In addition, the company has stated that its new equipment could generate $5 million per shift in annual product value. If GFCO’s product suite takes off in popularity, which it could from a quality standpoint, the company could be worth 3-8x sales, which could easily be in the tens or hundreds of millions. Addition of capacity from new product manufacturing sites could add more value. A hypothetical scenario would be that the company reaches the $30 CAD million sales mark, and trades at a $200 CAD million valuation with 136 million shares fully diluted, equating to a share price of $1.47 CAD, about 150% upside from current market prices. Of course, this will be a few years into the future, but the general flour market is definitely large enough and the alternative flour market is ready enough for this kind of disruption. The Good Flour Co. already launched its product in Sprouts Farmers Market and Heinen’s Grocery Store and in its first launched year recorded about half a million in sales. So, the revenue ramp has already started.
Conclusion
The Good Flour Corp. is in the early innings of its journey to disrupt the flour market. Compared to peers, the flour itself is of the highest quality and is the most desirable. However, the brand still needs to be built out and there is a long road ahead to build out the business, manufacturing, and distribution. CEO Matthew Clayton has a track record of success in a variety of business sectors and is already expanding distribution with corporations such as Panango Pizza through a national rollout of GFCO’s gluten-free pizza crust. The next few MD&A reports will help investors understand what kind of momentum the company is building with respect to sales, and a keen eye should be on the lookout for press releases of new business relationships GFCO is building. The stock appears reasonably valued at this time given the early innings of growth, with significant headroom for share price appreciation if the company can accomplish to distribute just a fraction of its manufacturing capacity.