Ian Cassel

About the Author Ian Cassel

Full Time Micro Cap Investor. Founder of MicroCapClub.com Founded in 2011, MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap). MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. MicroCapClub’s mission is to foster the highest quality microcap investor Community, produce Educational content for investors, and promote better Leadership in the microcap arena.

Where Food Comes From Will Help Save McDonald’s

Where Food Comes From (OTCQB:WFCF) is the North American market leader in food auditing, third-party verification, and traceability solutions in beef, pork, poultry, dairy, and eggs. Whether it’s verifying source and age, organic, humane treatment, gestation crate-free, cage-free, grass-fed, gluten-free, non-GMO, non-hormone, flax fed, and many more, Where Food Comes From literally audits producers to verify they are producing to these specific standards. WFCF currently third-party verifies ~10,000 producers. The company has been in existence for 19 years, and now finds itself in a dominant market position in an expanding market.

The biggest trend in food has been consumers increased interest in what they are eating. Consumers want to know where there food comes from, how the food is grown-raised, and that someone without conflict of interest is verifying all of these claims at the source. The only way to effectively do this is through third-party verification. There is one dominant market leader in third party verification, and this is Where Food Comes From.

This week, the company announced that McDonald’s (NYSE:MCD) selected Where Food Comes From as the lead third-party auditor for the restaurant chain’s Verified Sustainable Beef Pilot Project in Canada. “Our vision is to buy verifiable, sustainable beef in the future for all of our beef,” said Bob Langert, McDonald’s vice president, global sustainability. This means not just in Canada but in the United States and worldwide. To achieve this, a majority of beef producers are going to need to be third-party verified. Currently, only 1.2% of beef producers in Canada and the United States are third-party verified.

McDonald’s has been under fire recently due to sluggish sales forcing the company to revitalize its image with consumers. The world’s largest fast food chain has had eight straight months of worldwide same-restaurant sales declines and has replaced its CEO after one of the worst years in decades. Some of the issues stem from food safety problems in several Asian markets. This combined with consumers switching to more health driven fast casual brands such as Chipotle (NYSE:CMG) and Panera Bread Company(NASDAQ:PNRA), as well as increased competition in the burger arena from Five Guys, Shake Shack (NYSE:SHAK), Burger King, Wendy’s (NASDAQ:WEN), are forcing McDonald’s to make some changes. Consumers are voting with their purchases, and critics are telling McDonald’s that consumers want to know more about their food. McDonald’s is listening and focusing its efforts on areas such as the Verified Sustainable Beef initiative. The only way this initiative is possible is by partnering with Where Food Comes From.

Where Food Comes From is the dominant player in third-party verification in beef as well other proteins. In fact, most of the larger food companies on the cutting edge of healthy eating are customers of WFCF. For example, WFCF audits and verifies a majority of the beef, pork, and poultry sold into Whole Foods Market (NASDAQ:WFM). But it is easy to forget that Whole Foods Market represents a small fraction of the beef sold in the United States. Especially when you compare it to the buying power of McDonald’s, which buys1-2% of worldwide beef production. When McDonald’s adopts third party verification practices it is sending a message to the market. This will likely set off a chain reaction forcing other major food companies to adopt third-party verification. For example, Wal-Mart Stores (NYSE:WMT) and Sam’s Club are also founding members of the Global Roundtable for Sustainable Beef.

To put Where Food Comes From’s addressable market (just in beef) into perspective: WFCF is by far the largest third party verification company in beef, and they only verify ~10,000 producers. There are currently 68,500 beef producers in Canada and 729,000 in the United States. Another way to look at this is only 1.2% of beef producers are third party verified. Over the next several years, as major international food companies such as McDonald’s adopt third party verification in beef, I expect an avalanche of business to flow to WFCF.

In the most recent quarterly conference call, a normally conservative John Saunders, CEO of WFCF, said this about the business, “This is not so much a build-it-and-they-will-come strategy as it is a build-it-because-they-are-coming.”

Not only are large international food companies like McDonald’s adopting third party verification but also political legislation is driving WFCF’s business. The new Animal Disease Traceability Program was passed mandating that animals traveling interstate will need source-age verification. This will affect a meaningful percentage of the 729,000 beef producers here in the United States. If a conservative 10% of producers were phased in over the next few years, it would mean WFCF revenues increasing 300-500% just on this alone.

In conclusion, McDonald’s has partnered with this small company out of Castle Rock, CO called Where Food Comes From for a reason. WFCF is going to give McDonald’s complete and verifiable transparency in its beef supply chain. I would expect this relationship to greatly expand over the next several years across not only beef, but possibly other food groups as well. One of Peter Thiel’s key takeaways in his book Zero To One is the following: “Key is being a monopoly in a small market, and then expanding that market” This is exactly what WFCF represents.

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