Oatly eyes 'asset light' manufacturing in Ya YA Foods deal

Oatly was a pioneer in the oat milk category. In 2023, it is looking to usher in an alternative manufacturing model through a new partnership.

The news: Oatly signed a new partnership with contract food and beverage manufacturer Ya YA Foods that will create a new hybrid model for production. Through the $98.1 million deal, which is expected to close this quarter, Oatly is looking to shift its manufacturing to an “asset-light” model.

Here are the details:

• Ya YA Foods will assume the lease at Oatly’s manufacturing facilities in Ogden, Utah, and Fort Worth, Texas, while finishing construction in Fort Worth.
• Ya YA Foods will also acquire a majority of the assets in Ogden, including mixing and filling equipment.
• Oatly will still have operations in both locations, while retaining ownership of its proprietary oat base production lines.
• Oatly will receive $72 million, plus credits toward future use of shared assets in Ogden and for production in Fort Worth.
• The bottom line: Ya YA will take over a substantial portion of Oatly’s manufacturing, and the brand will no longer control and build these US production facilities.

Key quote: “We believe an increased focus on our oat base technology, innovation, branding and commercial execution will better position Oatly to drive profitable growth, while reducing the capital intensity of our future facilities, and ultimately convert more consumers to plant-based and create more products that are healthy for people and the planet,” said Oatly CEO Toni Petersson, in a statement.

What it means for Oatly: Oatly’s category creation and knack for eye-catching brand-building propelled runaway popularity since its 2017 US debut, and it now accounts for 22% of the plant-based milk market in the country. But there was a downside: The brand was among many that faced a mismatch of supply and demand over the last two years, leading to product shortages. Correcting those issues appears to be the subtext of this deal. Ya YA CEO Yahya Abbas told Bloomberg that Oatly “will never again miss demand.”

What it means for Ya YA Foods: The Toronto-based company is moving into the US for the first time. This deal will expand the footprint and raise the profile for Ya YA, which is a co-manufacturer that is also making a name in protein beverages, fruit juices, sports drinks and broths. “The two properties we are acquiring will increase our geographic profile and scale, allowing us to serve the vast majority of the United States and Canada,” Abbas said in a statement. Owning the facilities could unlock potential to make products for other customers at those locations, as well.

What it says about the supply chain:

The worst shortages are over, but brands still need long-term solutions. While the container ship backups we've heard so much about in recent years are easing up, supply chain challenges are going to continue to be present going forward. After all, raw material shortages, rising costs and climate change are still with us in 2023. This agreement shows that brands have a choice of whether they want to own production facilities or work with others. Oatly is splitting the difference: It chose to partner and transfer some of its operations, even as it will retain some operations that make it unique.

Partnership can bring production close to home. Another supply chain choice is where production will take place. While proximity is likely key for a beverage like oat milk, it’s still worth noting that Oatly is keeping domestic operations in place through this agreement. We may see more such decisionmaking in 2023 with the growth of nearshoring, in which brands and retailers move supply networks closer. According to a recent survey from Capterra, 88% of small and medium-sized businesses surveyed said they planned to or already had switched at least some of their suppliers closer to the US in 2023.

Owning less can bring more growth. While it won’t have US facilities in its portfolio, Oatly’s asset-light model could free it up for other kinds of expansion. As Petersson suggests, it can redirect investment into innovation and go-to-market activities that will help it reach new customers, which is especially important for a category-creating brand. In the end, all functions are customer-facing. Shoring up production also stands to increase consumer confidence that the brand's products will always be available in the dairy case.