For the past few quarters, reading an earnings report from
) has carried with it a sense of dÃ©jÃ vu as sales of the
flagship product in established markets continue to stagnate or
erode slightly while growth in emerging markets is strong, if
uneven. I believe that part of the reason for this is that we are
in the early stages of a "war on sugar" as the advanced world
struggles economically with the enormous health effects of a simple
carbohydrate-heavy diet. Coke and its chief rival,
), will struggle with the rising tide against sugar as the decade
wears on. This is why both companies are exploring new formulations
of their namesake drinks and expanding product portfolios to offset
lower volumes in their core products.
In Coke's latest earnings report, North American sparkling drink
volumes declined 4% while still volumes rose 5%. The simple
translation is that Coke is selling less Coke and more Dasani to
Americans. And while the company continues to show creativity in
extracting higher margins with shrinking soda volumes shipped --
revenues for sparkling beverages were up 1% -- this is a strategy
that will hit a wall at some point and revenue will eventually
Coke's growth is coming from emerging markets with increased sales
in places like Thailand (+24%), Russia (+11%), and Argentina (+7%).
Investors need to look to these markets for the company's future
In these growth markets, we have seen Coke and Pepsi tinker with
formulations before introducing them in their stagnant, but
cash-flow-generating, markets. The latest non-sugar sweetener to
get the test-market treatment is stevia, which is looking like it
may strike a balance between taste and lack of health
In March, Coke introduced a reformulated Sprite made with stevia,
which has 30% fewer calories, to Great Britain. Pepsi has been
experimenting with its Pepsi Next in places like Australia.
But Coke's latest venture is Coca-Cola Life, which is sweetened
with stevia and sugar, and has just 40% of the calories of a normal
Coca-Cola. The new formulation was launched in Argentina in July
with a distinctive green label and a fully recyclable bottle.
Product launches like this one have not been wildly successful and
it is likely that it has more to do with perception than taste.
When people want to drink a diet soda, they don't want the
experience of drinking a regular one. In the early days of hybrid
) could not sell the Insight because it looked too much like a
) struck gold with the Prius because it made a bold statement about
the person driving the car. For Coke and Pepsi to be successful in
creating a stevia-based version of a drink that would be half as
successful as either Diet Coke or Diet Pepsi, they will have to
ditch the weak product naming and give consumers the opportunity to
make a statement about their drink choice.
It doesn't matter that aspartame tastes awful and is arguably worse
for you than sugar. When a person orders a Diet Coke, they are
making a statement. Coca-Cola Life is the latest product that comes
close to doing so.
Both Coke and Pepsi are committed to stevia as their alternative
sweetener of the future. The supply chain for the plant extract is
still in its infancy. And this is where a small but ambitious
Stevia First Corp
(OTCMKTS:STVF) can come in and add significant value to the market.
Not only is the company working on a novel fermentation process,
which will convert uneconomic steviol compounds into the desired
ones -- Reb-A, Reb-D, and Reb-X -- it is also working on improving
the farming methods to increase gross yields.
Its latest project involves a real-world pilot project of
techniques proven in an academic setting to radically increase the
production of steviol glycosides, the sweetening compounds, during
plant growth. For an industry where growth and harvesting make up
the lion's share of production costs, enhancing glycoside
production would be a monumental step in the right direction.
The use of stevia in commercial products is currently growing
The WHO has forecasted stevia
to capture 20% of the alternative sweetener market by 2016. There
is a real need within the industry to improve not only production
methods, but also yields of the specific compounds that lead to the
best-tasting product. Stevia First is currently working on these
problems, from improving seeding techniques to lowering planting
costs to attaining higher yields of Reb-A and others from plant
I get the feeling that both Coke and Pepsi are still in the product
design phase while waiting for the technology and supply chain to
fully mature before deploying the full weight of their marketing
muscle behind their stevia-based replacements for their flagship
diet drinks. When that occurs, investors who are early to the party
will most likely be handsomely rewarded for their risks.
As Consumers Demand 'Natural,' Stevia Set to
Become Blockbuster Product