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In Coca-Cola's (NYSE:KO) most recent quarter, revenue declined 3% as product volume shrank to just 1% greater than in the year prior. The problem that Coca-Cola faces is with aggressive new competition and its failure to innovate and cater toward a health conscious consumer. However, recent news reveals the company giving in to these changes, which could further spark an industry-shift.

What's the Problem?

Stevia is a natural product that is 200 times sweeter than sugar. According to market research company Euromonitor International, the switch from sugar to stevia is one of the top five packaged food trends in North and South America. The reason is simple: Stevia contains zero calories and does not have the health risks associated with sugar. Moreover, research suggests stevia can actually raise good cholesterol and lower bad cholesterol, along with lowering high blood pressure.

In a country where the federal government is limiting calories in school vending machines - New York City mayor, Michael Bloomberg, has been on a crusade against the soda industry, and Coca-Cola along with PepsiCo have become this generation's Phillip Morris-- soft drink companies are forced to innovate or be replaced.

In the past, Coca-Cola has been slow to embrace this change. Sure, the company does work with Cargill for its stevia product, Truvia, as an individually wrapped sweetener. But still, even Cargill is facing questions regarding the "naturalness" of its product. Thus, Coca-Cola has tested the waters in the stevia market, but has yet to jump in.

Pepsico (NYSE:PEP) has followed Coca-Cola in the rival's stevia marketing approach, partnering with Whole Earth Sweetener Company to produce PureVia, and could perhaps one day make a big splash by replacing all of its drinks with stevia.

What's the Change?

A few months ago, Coca-Cola announced that it would begin testing stevia-sweetened products in Argentina. Then about the end of June, Coca-Cola launched "Coca-Cola Life," a natural low-calorie stevia drink that is clearly marketed as a healthy-alternative to Coke. Reportedly, Life has just 64 calories and could most likely be sold in school vending machines.

If you're like me, you may wonder, "Why Argentina?" After thinking about it, I concluded that, yes, the market is small, but still large enough for Coca-Cola to get an idea of demand and for the company to work out any potential kinks. Coca-Cola can launch in Argentina, fail, and then make changes if needed. In the U.S., it wouldn't be that simple. However, with regulations becoming tougher for Coca-Cola, it seems necessity would dictate that the company will, in fact, have to launch such a product in order to stay dominant long-term.

As a $170 billion company, there's not much that Coca-Cola cannot acquire, and it seems almost laughable to be using words such as "stay relevant" when discussing this powerhouse. But unfortunately, water sweeteners such as Mio and products from historically unhealthy brands like Kool-Aid have Coca-Cola feeling the pressure to make such a change.

With this in mind, we could see a domino effect as PepsiCo, Dr. Pepper Snapple, Monster Beverage, Kraft, Green Mountain, Starbucks and so on, embrace industry changes. Some, more than others, have already begun to make these changes - Starbucks and Kraft are leading the way with healthy options - but in order to see a sizable impact, significant changes must occur.

New Questions For Coca-Cola

Perhaps the biggest question for Coca-Cola and PepsiCo is whether or not they can test new products, introduce them to the North American market, and have the ecosystem (acreage, producers and technology) to do so effectively. For example, China suppliers account for more than 80% of stevia production, which leaves logistical gaps for large scale production in the U.S. Yet, in a country that is best-suited for large-scale sugar production, how long or how expensive would a large transition to stevia be for a company such as Coca-Cola? And is it possible to make these changes in time for next year's harvest? Or harvest five or ten years from now?

Another issue is removing the aftertaste from stevia, or obtaining certain glycosides that have high purity rates, such as Reb A with its preferred flavor profile. Unfortunately, there are not many companies that have the technology to do so, with the few viable candidates including Stevia First (OTCQB:STVF) and possibly Cargill.

Stevia First has 1,000 acres in California's Central Valley dedicated solely to the production of stevia - and the company has a fermentation process, licensed from Vineland Research Innovation Center, that allows for removal of the aftertaste and the ability to produce only the sweetest parts of stevia. Thus, it allows the company to produce stevia and customize its taste to certain foods or drinks, which could be very valuable to large food and beverage manufacturers. It may be inferred that Stevia First has the potential to attain the production capabilities and the process available for wide-scale stevia usage.

Unfortunately, it is mostly the smaller companies that are focusing solely on stevia production and betting on its future growth. Judging by Coca-Cola's recent initiatives, it appears as though these small companies might be correct in doing so. Stevia Corp (OTCQB:STEV) is another candidate, but its farm management services are focused in Vietnam and Indonesia. Larger companies such as PureCircle and Ingredion (NYSE:INGR) also have problems.

PureCircle is the world's largest stevia producer and marketed and located in several countries. However, it does not grow stevia itself, but rather uses local growers. This could become problematic in negotiating or planning large scale U.S. production. Ingredion is a corn and corn-based company, but does have a stevia segment. The company could aid in the commercialization of stevia, or it could acquire smaller companies with land for stevia production. I view this strategy on behalf of Ingredion as viable if Coca-Cola does not acquire these smaller companies itself. Ingredion would then have the leverage to negotiate with the majority of good acreage in the U.S., mostly in Central Valley for stevia production.

Conclusion

Regardless of how Coca-Cola produces and integrates stevia, Coca-Cola Life is a clear indication that the company is preparing to make a change. The giant bottler is moving quickly on its trial in Argentina, and hopefully is working with local stevia producers in the U.S. to prepare for large-scale production. In terms of upside, I think smaller stevia producers have the most to gain, and we'll be able to judge Coca-Cola's entrance into the stevia market based on the guidance and industry outlook from these small stevia producers.

In regards to Coca-Cola, I think it is going through a bit of a transition, or a restructuring of sorts. We have to wonder how significant the implication of large soft drink bans - such as the one that almost succeeded in New York - will be for Coca-Cola, as surely it portends the beginning of a shift. We also have to worry about the fundamental impact of a 60 calorie 12 ounce limit in school vending machines, with a population notorious for drinking sodas. It is difficult to predict numbers for these developments; but unfortunately, these are just the first of a long list of rumored changes that could affect the soft drink industry.

In my opinion, stevia is the answer to Coca-Cola's problem, and as evidenced with testing in Argentina, it appears as though Coca-Cola agrees. The biggest hurdle will be in the production of stevia and in removing the aftertaste. Once Coca-Cola partners or acquires the small companies that have these capabilities, we should have a lot more clarity and feel better about the direction of Coca-Cola. Until then, we can only hope that Coca-Cola can evolve faster than vote-seeking politicians place regulations on the sale of its products. Either way, 2014 has the potential to be an interesting year for Coca-Cola and, hopefully, a transitional one.

Disclosure: I am long KO, OTCQB:STVF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Coca-Cola Makes Serious Changes To Stay On Top