Stevia, the zero-calorie natural sugar substitute that has been the hottest sweetener product to hit the market in years, continues to gain momentum worldwide. In 2011 the global stevia market reached between $800 million and $2 billion with growth expected to rise significantly after regulatory approvals in markets like India and Indonesia. The World Health Organization expects stevia to one day control about a third of the $58 billion global sweetener market, which could make stevia an almost $20 billion product annually. Since 2009 sweeteners like Splenda, Equal, and Sweet'N Low have seen sales decline in the double digits, while stevia sales have risen. Truvia brand stevia, introduced in 2008 through a join effort by Coca Cola (KO) and Cargill, reflects sales that nearly tripled-- with annual sales of $90 million -- and is now the second most popular sugar substitute behind Splenda
According to the global market research company Mintel, stevia-based products have increased 400% globally between 2008 and 2012, with a rise of 158% from 2011 to 2012. Stevia has grown so much in demand that the world's largest alfalfa grower, California-based S&W Seed (SANW), began growing stevia with high glycoside yields for PureCircle (LN:PURE), the world's largest producer of stevia, in 2011 and on roughly 250,118 acres. Now some U.S. tobacco farmers have begun to switch from growing tobacco to stevia, as tobacco sales are sliding and stevia sales are growing.
MILLENNIALS: A DRIVING FORCE IN HEALTHIER FOODS AND BEVERAGES
While there are a number of reasons for stevia's growth since its 2008 approval by the U.S. Food and Drug Administration (FDA), one of the main reasons may well be the changing habits of the consumers who have become more aware of what they are putting in their bodies. And no group has become more aware than the tech savvy millennials -- the generation representing the estimated 80 million young Americans that were born between 1980 and 2000. These millennials are expected to outspend the baby boomers by 2017, with an estimated cumulative buying power of over $200 billion annually by 2017 and $1.4 trillion annually by 2020.
Millennials are changing the way both grocers and restaurants conduct business. According to a study by Brand Amplitude, 84% of the millennials questioned are trying to eat healthier. As a group they are shying away from fast food and supersized drinks and focusing on healthier options that include fresh and natural ingredients with less preservatives and artificial ingredients. The tremendous success of fast casual dining including Chipotle Mexican Grill (CMG) and the Panera Bread Company (PNRA), both which serve healthier and more natural food, may well demonstrate of how millennials have helped change the face of the industry, forcing companies like McDonald's (MCD) to develop healthier menu choices. The millions of millennials are also setting the foundation for how the generation after them will eat and spend money. And given that the current generation is more aware of the illnesses that excess sugar and HFCS are causing, consumers are more apt to purchase items that are sweetened with a natural zero-calorie sugar substitute. And while stevia appears to be the answer for a natural zero- calorie sugar substitute, there are still issues that the product as a whole must address in order to reach its expected potential.
3 ADVANCEMENTS TO ATTAIN ZERO-CAL SUGAR SUBSTITUTE DOMINATION
For an investor one must realize that stevia, as a sweetener, is still in its early stages. For the product to meet its potential there are three areas that I see stevia growers and producers must address before it can truly be the long-term powerhouse that the market expects. The first (and most important) is the flavor profile. Many stevia products still have a lingering slightly bitter aftertaste-- and its sweetness profile has not yet matched well with certain beverages-- most notably colas-- according to Pepsi' (PEP) CEO Indra Nooyi. And while there have been major advances in taste due to using lesser available but better tasting steviol glycosides, there is still need for improvement.
The second issue is keeping up with the skyrocketing demand. This is a big issue as bottlers and food manufacturers must have a reliable supply line of consistent product. Today most of the stevia is grown on small farms in China and South America. And while many farms grow to producers' specifications, unlike sugar there is no real infrastructure, and the food and beverage industry is a bit reticent to switch to a product that may not be able to meet the demands necessary for true growth.
The third issue is lowering the cost of producing stevia so it can compete against the cheaper artificial sweeteners along with sugar and HFCS. While growers like S&W Seed and producers like Pure Circle are working on developing stevia leaves with the sweetest strains from the 30 plus steviol glycosides, the issue remains that the more elite and preferable glycosides, such as Reb D and Reb X, are found in trace amounts making extraction not as cost effective as the more abundant and widely cultivated Reb A. To extract the trace amounts of the more desirable glycosides, a grower will need even more stevia leaves-- this means the grower will need more land, more water, more labor, and more production for extraction, all which will raise the costs considerably. While this process should make tabletop stevia a better tasting product, it will drive up the cost…making it even more expensive when compared to artificial sweeteners. It turns out, however, that there is an alternative method to develop a consistent stevia sweetener with a better flavor profile, at a substantially lower production cost.
STEVIA FIRST: A LITTLE COMPANY FACING THE CHALLENGES OF STEVIA
An alternative method for producing stevia sweeteners is being developed by a small agricultural biotechnology company based in California, Stevia First Corp (STVF). The method is a fermentation-based process that is currently in the pilot stage. And by producing a stevia sweetener through this fermentation-based process, Stevia First should be able to address all three issues required to drive stevia forward.
The fermentation process uses low-cost sustainable carbohydrate feedstock, like corn, as starting material to create steviol glycosides that are molecularly the same as the glycosides that are extracted via leaf production. Through this method Stevia First can recreate or even combine the best flavor profiles in the various steviol glycosides, from the most abundant to the minutest trace element, to produce a quality product. This method could conceivably yield individual flavor profiles for a number of different food and beverage products, including colas.
The bonus to this fermentation process is quality stevia product can be produced at as much as 70% less than compared to the conventional farming method. The lower cost would certainly make it cost effective for a stevia sweetener to not only challenge the entire artificial sweetener market, but should be able to cut into the sugar and HFCS market as well.
FERMENTATION METHOD MAY CREATE NEW BUSINESS ALLIANCES
Earlier this year the giant food processor, Cargill, partnered with the small Swiss company, Evolva (SIX:EVE), which was developing its own stevia-based fermentation process, also in the pilot stage. As noted earlier in the article, Cargill is in a partnership with Coca-Cola for Truvia, the bestselling stevia product on the market. The success of the Cargill/Evolva partnership could have big implications not just for Cargill and Coca-Cola, but also on the entire stevia and sweetener market. I further believe the success of the partnership could have a major impact on Stevia First. If Cargill's fermentation method produces a better tasting stevia product at a lower cost it would give Coca-Cola a considerable advantage over the other beverage bottlers, food manufacturers, and stevia producers. Such an outcome would force these companies to scramble to find a similar method in order to compete. There would be a very good chance that rival companies, in order to stay in the game, would have to turn to the other company developing a fermentation-based stevia product-- Stevia First. If that happens Stevia First's value would rise considerably.
STEVIA FIRST'S STOCK MOVING UPWARD
Stevia First's stock has seen a strong rise in the past three months, climbing 50% to close on Monday October 29th at $0.49 per share. I believe the reason for the rise in the stock price is that the company has had a number of recent press releases touting its advancements; and, most importantly, if the research and development efforts are successful, the company expects first revenues on sales of its stevia extracts sometime in 2014, according to the company's recent SEC filings.
On October 9th the company announced it entered into a retail distribution and marketing support agreement with GAB Innovations of Vancouver, Canada. GAB Innovations has developed an extensive network across Canada along with affiliate relations with U.S. marketers. The company represents a number of brands offering natural, vegetarian and dietary supplements, organic beauty products, nutrients, organic teas, and sweeteners.
According to Stevia First's CEO, Robert Brooke, the company aims to maximize the relationship with GAB in order propel its stevia product development and to increase the penetration of mainstream healthy messaging about sweetener use. But Mr. Brooke also commented on future goals:
"Ultimately, we hope to release an integrated family of stevia products that will challenge consumers to think about sweetener use in novel ways, help them use sweeteners more responsibly, and that demonstrate how mass market stevia retail products can rapidly enable sugar reduction and improved health."
In other news that helped drive up the stock, Stevia First announced in July that it entered into a non-disclosure agreement with GRAS Associates, LLC, to expedite the regulatory approval of the company's stevia extracts, most importantly the stevia manufactured through the fermentation-based processes. Stevia First is preparing the necessary regulatory and food safety documentation to submit to the state of California and the FDA. The company will also conduct its first public stevia tasting event this coming December showcasing the fermentation process, which it has named "Nature-Identical Stevia."
CONCLUSION
Stevia First is a small company, with a market capitalization of almost $27 million, but it is developing what may well be a billion-dollar method of producing the fastest growing natural zero-calorie sugar substitute on the market. And while I think that Stevia First has developed what should soon be a highly valuable product, I believe it will need to find a partner with deep pockets that already has a global distribution network in place if the company wishes to be a global player in the sugar substitute market. Though any development company, including Stevia First, is a high-risk investment, I think that the recent advancements with the company has lowered the risk and raised the chances of the stock continuing to rise.
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