Starbucks (SBUX), the world's largest coffeehouse chain, recently threw its hat into the $8 billion energy drink market when it unveiled its own energy drink, Refreshers. Refreshers, which come in three flavors, raspberry pomegranate, orange melon, and strawberry lemonade, joins a crowded market dominated by Red Bull GmbH, Monster Beverage Corp. (MNST) (formally Hansen's Natural), Coca-Cola's (KO) Full Throttle, and PepsiCo's (PEP) AMP and Rockstar, which they distribute for Rockstar, Inc. While most energy drinks contain the same base ingredients - carbonated water, citric acid, corn syrup, sodium, fruit juice, guarana, taurine, ginseng, caffeine, and sugar - Starbucks is taking a different approach. They're going low cal, natural, and they're going green-- green coffee extract that is. Caffeine and ginseng are what gives Refreshers its boost. The other ingredients are natural: carbonated water, fruit juice, and a natural zero calorie sweetener called stevia.
Stevia, a leafy plant native to Paraguay, has made loud rumbles as of late as the hottest natural zero calorie sweetener to hit the scene. Stevia is actually the entire plant, but it's the steviol glycoside found only in the leaves that are sweet. It is the steviol glycoside, which is then isolated and purified, that has been approved by the FDA as Generally Recognized As Safe (GRAS) for its use as a general purpose sweetener. There are a number of different steviol glycosides, but the one that is the focus of extraction is Rebaudioside A (Reb A), which is anywhere from 250 to 450 times sweeter than sucrose, depending on the plant. Being the first company to use stevia in an energy drink, Starbucks may have tapped into a segment of the market that has been ignored: consumers who want a natural low calorie energy drink. Cliff Burrows, president of Starbucks Americas, described the product as "an innovative extension of the coffee market," and "the perfect solution for customers looking for a boost of natural energy and thirst-quenching, delicious refreshment."
What is surprising is that Coca-Cola, Pepsi, and Monster all have products on the market that are sweetened with stevia. Coca-Cola, the Atlanta based beverage giant, and Cargill filed 24 US patents relating to stevia; and in 2008, the FDA approved Truvia, a Reb A sweetener developed jointly by the two companies. Coca-Cola has added Truvia to over 30 products around the world, including Diet Coke in Japan, and Sprite and Nestea beverages in France. Cargill markets Truvia to consumers in sugar packs and is now the number 2 sweetener behind Splenda. PepsiCo developed a competing stevia based product, PureVia, jointly with The Whole Earth Sweetener Company. PureVia can be found in Sobe Lifewater and Trop50, Tropicana's fruit juice beverages. Monster sweetens their Hansen's diet sodas with stevia. If Starbucks Refreshers become a hit, it would only make sense for the other beverage companies to rush in and add stevia to their diet energy drink line.
How does one invest in the growing stevia market? At this time, none of the major beverage companies are involved in the actual growing of stevia plants. They leave that up to small growers predominately in China and Vietnam. So the question is: Will these small farms in Asia be able to supply the growing stevia demand without sacrificing quality? Probably not, but that all may be changing as a handful of U.S. companies have seen the potential in growing high grade stevia on (and in) U.S. soil. It is with these micro-cap companies where an investor may cash in on the stevia boom.
Stevia First Corp. (STVF.OB) may have jumped ahead of the pack last week when it announced that the company has entered into an exclusive and worldwide intellectual property license with the Vineland Research and Innovation Center of Ontario, Canada. According to Stevia First Corp., the license encompasses compositions and methods for producing steviol and steviol glycosides through fermentation-based production methods. In addition to the license, Stevia First has entered into a separate consulting agreement with Vineland to assist with further development of the underlying intellectual property.
What makes this announcement significant is that currently it is estimated that 70% or more of the cost of stevia extract is directly attributable to the cost of stevia leaf production. Because the stevia leaf contains small quantities of Reb A, complex extraction and purification processes must be used, adding to the cost. Researchers at Agriculture and Agri-Food Canada were among the first to discover and characterize the natural biochemical pathways that are involved in the production of Reb A; thus it has become possible to produce stevia extract through fermentation-based technologies. These methods are capable of converting low-cost plant materials into sweet steviol glycosides through controlled fermentation methods, a process that could bypass or significantly diminish the need for stevia leaf production. Vineland currently controls intellectual property related to this technology. Robert Brooke, Stevia First Corp.'s CEO, commented on the licensing agreement, "In the stevia industry, which has grown tremendously over the past several years, there is still significant unmet demand from multinational companies for a supply chain that can consistently produce great-tasting stevia extract in large quantities. The technology we've licensed represents a potential solution for this need, and one that our scientific team is eager to commercialize."
Stevia First is a micro-cap development stage company based in Yuba City, CA with a market cap of $15.7 million. It recently leased 1000 acres of fertile farm land in the central valley of CA for developing and planting strains high in Reb A. That, along with their licensing agreement with Vineland, should make Stevia First a good long term bet at a minimum, even though the company has no sales to date. The company has enhanced its original business model from the seed, to production, to sale, and all is under its control. By signing the licensing agreement with Vineland, Stevia First Corp. is no longer a one dimensional company.
There are other stevia development companies out there, like Indianapolis based Stevia Corp. (STEV.OB), which recently announced a joint venture agreement with Tech-New Bio-Technology and their affiliates, resulting in technology and intellectual property transfers and the creation of Stevia TechNew Limited, a Hong Kong-registered company. TechNew was founded in 2008 and currently services more than 200 aquaculture farms in China. Stevia Corp. has also experienced its stock soar from $0.70 to a 52 week high of $2.75 when it announced the company entered into an Equity Purchase Agreement with the Ridgefield, CT institutional investor, Southridge Partners II, LP, for up to $20 million of the company's shares. Shortly thereafter, the stock came back down and now sits just below $0.30 per share. The company has invested their business with growers in Vietnam and Indonesia, and though costs are far less there than in the U.S., they are also dependent on how the winds of change can blow in the foreign markets for their business to succeed. And though stevia products are clearly on the rise, the caveat in the deck with this company is whether or not they can build a good business model and a quality supply line through the Asian markets alone.
As an investor, which company might give the best bang for the buck? It has been proven over the years the success of investing in the giants, Coca-Cola and PepsiCo, and that there is less volatility than the smaller growth stocks, like Starbucks and Monster. Monster, the smallest of the bottlers, has a market cap of $10.4 billion, and is trading around $57.25 a share, down from its 52 week high of $83.96 per share. It lost momentum on Aug. 8th when the company announced it missed the street estimated quarterly profits. Monster still has a very high P/E ratio for its sector at 32.08. Starbucks with $11.7 billion in sales last year, on the other hand, has a market cap of $37.7 billion and is trading just under $50.00 per share, also well off its 52 week high. Starbucks, with a P/E ratio of 27.43 is still considerably higher than the sector average. But Starbucks has over 9,000 company retail outlets and over 4,700 licensed stores around the world. And though Monster and Starbucks may begin to compete head to head at convenience stores and markets, Monster cannot compete with the retail coffeehouses of a Starbucks.
One other note to consider is that New York's attorney general, Eric T. Schneiderman, is investigating whether the energy drink industry is deceiving consumers with misstatements about the ingredients and health value of its products. In July, he issued subpoenas to PepsiCo Inc., Monster, and Living Essentials, LLC, maker of 5-hour Energy drink, asking for information on the companies' marketing and advertising practices. Investigators are looking into whether the addition of ingredients like guarana-another source of caffeine-violates laws that ban putting multiple sources of caffeine in one beverage without disclosing the overall amount. If energy drink makers are found to have violated certain New York state laws regulating food and drugs, they could be looking at civil fines and penalties, and would have to change their labeling and marketing. Starbucks, with their natural coffee-based Refreshers, will probably come out of this unscathed, if not given a boost. Therefore, when it comes to which beverage company may give the best return for the buck, Starbucks looks like the better long term bet of the two.
When assessing which development company appears to be the better investment one must remember they may be walking through a risky minefield, but with such risk there might be great reward. Stevia may be here to stay. In many cases, obesity, diabetes, and heart disease can be traced back to too much sugar. And artificial sweeteners made from chemicals are losing favor with the consumer. More and more companies are using stevia. If Starbucks Refreshers are successful, look for the other big beverage companies to fall in line and add stevia to their energy drink lines, which would mean a greater need for stevia growers and developers. With the announcement of the licensing agreement with Vineland Research and Innovation Center, Stevia First Corp.'s stock has risen 75% to $0.70 a share. The question is, will Stevia First Corp., with their seed development and abundant farmland, plus the positive results shown in the fermentation process, be able to position itself to be the future of stevia production? If they can, Stevia First is still a bargain.