Coke and Dr Pepper Look to Stevia to Stem Declining Soda Sales

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As news keeps piling in about the negative effects of consuming too much sugar, the beverage industry looks for a new sugar substitute to stem declining sales. Things may have gone from bad to worse for the industry when a new report came out that said there are risks associated with consuming even moderate amounts of sugar. A new Centers for Disease Control study concluded that just one 12-ounce can of soda per day adds enough sugar to boost the odds of developing heart disease by one-third.

The authors analyzed nutritional trends that tracked sugar consumption from 1988 to 2010 and found a link between consuming more than 15 percent of one’s daily calories from sugar-infused products and a higher likelihood of heart disease. The findings were the same across all age groups, dietary and fitness habits, and both sexes. Earlier studies showed that high-sugar diets led to obesity, diabetes, hypertension, and heart disease, but this new study shows that moderate intake of sugar can lead to unhealthy inflammatory changes even in people who are not overweight.

Health concerns are eating away at soda aales

The battle to reduce sugar has hit the soda industry the hardest, as Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) continue to witness soda sales decline. Last week Coca-Cola announced its fourth-quarter numbers, and while overall global sales volume rose 1 percent, soda sales in the U.S. dropped 3 percent. For the quarter ended December 31, revenue fell 3.6 percent, coming in at $11.04 billion, below the $11.31 billion Wall Street expected.

Coca-Cola still earned $1.71 billion, or 38 cents per share — in line with Wall Street expectations but below the same quarter last year, which came in at $1.87 billion, or 41 cents per share. While PepsiCo posted fourth-quarter earnings of $1.74 billion, or $1.12 per share, up from $1.66 billion, or $1.06 per share, a year ago, its soda volume fell down to the “mid-single digits.”

While high sugar in sodas has been blamed for its part in the obesity epidemic, the soda industry is also feeling the pressure as consumers continue to turn away from artificial sweeteners, as well. Diet soda sales have declined at a higher percentage than sugar-infused sodas. While expressing confidence that North American soda sales will grow, Coca-Cola CEO Muhtar Kent pointed out that the drop in soda sales was “largely due to softer Diet Coke volumes.”

Soda industry tests natural mid-calorie sodas with sugar-stevia mix

One reason Kent may be confident about the future growth of soda sales is that the company has been test marketing a naturally sweetened mid-calorie cola called Coke Life. If successful, Coke Life may be giving the public a glimpse of how sodas will be sweetened in the future. Today, a 12-ounce can of Classic Coke contains 140 calories and 39 grams of sugar; Coke Life, which is sweetened with a combination of sugar and stevia, has only 64 calories and 50 percent less sugar than Classic Coke. Rolled out in Argentina in August, sales of Coke Life rose in the high single-digits in the fourth quarter, according to Kent.

Coca-Cola is not the only company testing a sugar-stevia blend as a mid-calorie alternative. After failing to bring back soda drinkers with its 10 calorie “Core 4 TEN” beverage line sweetened with a combination of high-fructose corn syrup and artificial sweeteners like aspartame and acesulfame potassium, the third-largest soda maker in the U.S., Dr Pepper Snapple Group (NYSE:DPS), recently announced it would begin test marketing a sugar-stevia blend. Just like Coke Life, Dr Pepper’s sugar-stevia blend will be a naturally sweetened, 60 calorie beverage containing half the sugar.

Dr Pepper CEO Larry Young said in a press release, “Our R&D team has put together a proprietary blend with stevia and sugar that we’ve been very pleased with.” He added, “This will be a very limited test and the biggest thing is to get consumer insight.” Dr Pepper’s sugar-stevia sodas are expected to be in limited markets in the U.S. this year to test market the product line.

Wells Fargo analyst Bonnie Herzog commented on stevia after Dr Pepper’s announcement, saying, “Should this ultimately be launched more broadly, we believe the industry could see meaningful new products from all the major manufacturers come to market soon, which could have a positive impact on carbonated soft drink volumes in the U.S.”

New method for producing high-quality stevia could cut costs and lower sugar levels 

If both Coca-Cola and Dr Pepper are correct, stevia could indeed be the future of mid-calorie sodas and other sweetened beverages, including energy drinks, vitamin waters, and fruit juices. However, business is very competitive, and the cost of growing and producing the stevia extract is comparable to sugar — it is high compared to cheaply made artificial sweeteners. Adding to the costs of producing stevia is that the sweetest and best flavor profiles (of the 30 different steviol glycosides) that come closest to mimicking the taste of sugar are, unfortunately, found in such small quantities in the leaf that it’s not financially feasible to harvest these glycosides on an industrial scale. This is why today’s stevia products work best in a 50/50 blend.

However, that all may be changing — a new microbial fermentation method creating quality stevia extract at a much lower cost than conventional methods is being developed separately by two companies: the giant food manufacturer Cargill, which invested in a small Swiss fermentation company called Evolva, and a small, development-stage California agricultural biotechnology company called Stevia First (OTCMKTS:STVF).

Through microbial fermentation, any of the steviol glycosides will be able to be produced in large quantities.  What this means is that even the minutest glycosides found in the plant leaves can be created in any amounts needed, guaranteeing a reliable supply line. This is big news, because it means that stevia extracts that closely resemble the flavor of sugar can be produced cost effectively. In the future, we could see a soda with only a 20 percent sugar mix as opposed to the 50 percent being used in Coke Life and in the Dr Pepper line.

Adding to the benefits is that the costs to produce such high-quality stevia could be reduced by as much as 70 percent. Stevia extract via fermentation would be made in giant kettles, much like beer. Therefore the farming, purification, and production costs will drop. This stevia extract method could cost less than producing sugar and could compete price-wise with high fructose corn syrup and artificial sweeteners.

The numbers are compelling, and the way bottlers sweeten their sodas is changing. The World Health Organization estimates stevia will increase its share in the global alternative sweetener market to 20 percent, or about $15.5 billion, by 2016, and in the future could replace 20-30 percent of all dietary sweeteners. In 2012 the global market for sugar and sweeteners came in at about $77.5 billion and is projected to reach nearly $97.2 billion by 2017.

Soda companies are cautiously moving to a stevia-sugar blend, but will be in need of a reliable, low-cost quality product.  And that is what makes Stevia First an interesting play. In December, Stevia First conducted a public tasting, including stevia developed from its microbial fermentation process. Stevia First was able to demonstrate that its fermentation technologies were able to produce desirable and high-value steviol glycosides.

Also, Stevia First announced on February 18 that it identified a novel plant variant through its stevia field trials. The company was screening 50,000 plants and found one single plant that contained a natural gene mutation that produced a superior and very unique flavor profile. This variant will not only extend the company’s intellectual property but could play a significant part in the production of rare, next-generation stevia sweeteners.

Conclusion

Even though the soda industry has been hit hard lately, I see Coca-Cola, Dr Pepper Snapple Group, and PepsiCo as excellent long-term investments. All three are profitable companies that offer excellent dividends. Coca-Cola recently increased its quarterly dividend from 28 cents to 30 cents, giving the stock an annual dividend of $1.22 per share for fiscal 2014, up from $1.12 per share for fiscal 2013. In 2013, the company bought back $4.8 billion in shares.

Dr Pepper increased its dividend by 7.9 percent to $1.64 per share for 2014, giving the stock a dividend yield of 3.17 percent. In 2013, Dr Pepper also repurchased $400 million worth of stock, which means since 2010, it has bought back 62.5 million shares at a total of $2.4 billion. And PepsiCo intends to increase cash returns to shareholders by 35 percent in 2014 with share buybacks and higher dividends. Pepsi raised its dividend from 57 cents to 65 cents per share.

As a natural zero-calorie sweetener, stevia’s acceptance in the market seems obvious, and now that a fermentation method could soon bring to market a better-tasting stevia at price that can compete with artificial sweeteners, I can see stevia controlling the diet soda segment over the next few years. While one can’t invest in the future of stevia through Cargill, as it is a private company, one can invest in Stevia First.

However, it is a very small company with a market cap just under $32 million. According to a recent interview with CEO Robert Brooke, the company expects to have its first products on the market by year’s end. The stevia market is growing and the fermentation methods of developing stevia appear to be the future, and on an industrial level. That is why I can see Stevia First stock move higher and perhaps be the object of a partnership with a larger company, much like Cargill and Evolva, or a buyout for its IP alone.

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