White paper healthy trends in food and beverages sector by Beroe Inc

MARCH | 2011

Healthy Trends in the Food and Beverage Sector “Just as obesity has many causes, it can be solved only if all sectors of society do their part to help.” - Betsy D. Holden,Kraft Foods The increasing occurrence of obesity, diabetes, and other health related issues globally have led to the emergence of several healthy trends in the food and beverage (F&B) sector in recent years. Consumers’ interest in healthy products has spurred innovation and led to the development of various healthy substitutes for ingredients currently being used by the food industry. The ingredients discussed in this white paper, namely stevia, potassium chloride, carotenoids, and soy products, are four important healthy ingredients that industry experts believe will have a huge impact on the food and beverage sector in the coming years.

Stevia

China supplies close to 75% of global stevia leaf production, followed by Paraguay. Cultivation area is In December 2008, the US Food and Drug Administration concentrated in four Chinese provinces: Jiangsu, Anhui, (FDA) announced that Rebaudioside A (Reb A), a Shandong, and Heilongjiang. PureCircle is the leading molecule extracted from the stevia leaf, was Generally supplier of stevia extract. Recognised as Safe (GRAS) for use as a “generalpurpose sweetener in foods.” Industry experts viewed Stevia Applications this announcement as a key turning point in the search Food and Beverage Sector: Stevia’s low calorie content for a natural alternative to sugar. makes its consumption suitable for diabetic individuals. The current trend of consumers moving away from Stevia’s good thermostability and its compatibility with products perceived as unhealthy and artificial ensured frozen foods, added colors, and flavors, makes it ideal for Reb A’s smooth introduction into the market as a a wide variety of food and beverage applications. general purpose sweetener by companies such as Pharmaceutical Sector: Stevioside can be used as a Cargill (supplier to Coca-Cola), Whole Earth Sweetener sweetening agent in medicines, especially in diabetic Company (a division of Merisant), and PepsiCo. In its medicines. It is compatible with most ingredients used Q3 2009 report, PepsiCo stated that it had “benefited in medicines and can used in oral liquids or chewable from the extraordinary growth at its zero-calorie tablets. stevia sweetened line extensions.” Oral Hygiene Sector: Research indicates that microbes In 2011 and 2012, industry experts believe that stevia that hinder oral hygiene, such as streptococcus mutans, and stevia-based sweeteners will move from niche pseudomonas aeruginos, and proteus vulgaris, do not market status into the mainstream. Sugar (and other thrive when non-nutritive stevia constituents are present. sweeteners) is the second most important ingredient for This fact, coupled with its sweet taste, makes stevia the F&B industry after water, a USD 60 billion market. an ideal ingredient for mouthwashes and toothpastes. The global high intensity sweeteners (HIS) market size is USD 1.2 billion, of which stevia only has a 4% share (or USD 48 million). The stevia market is expected to “Demand for natural sweeteners in the US is being driven by concern over calories and obesity and the reach a market size of USD 10 billion in a few years. growing demand for natural products.”

Competing Products

- Zanna McFerson, Health and Nutrition Business Stevia is expected to grow at a high rate due to the Director at Cargill advantages it possesses compared to competing products. Product Sugar (technically known as sucrose) HighFructose Corn Syrup (HFCS) Artificial High Intensity Sweeteners (HIS) Stevia

Sweetener Type

Calories

Comments

Due to the high amount of calories present in sugar and price volatility (which makes it difficult to plan sugar procurement), stevia is an ideal replacement for sugar.

Natural

Despite being a natural substitute for sugar, studies have suggested that HFCS is contributing to obesity. In addition, the opposition to US subsidies for corn growers is a potential threat that could increase HFCS prices.

Artificial

Since HIS are artificial, there is a perception that these products are detrimental to health.

In addition to being a natural product, stevia does not possess calories. Furthermore, stevia is 200-300 times sweeter than sugar, which is helping it claim a larger share of the sweetener market.

Natural

Price Analysis

1. M ass production of stevia, which is expected to reduce the per unit cost

The price of a suitable sugar-equivalent (taking into reater demand and economies of scale, which can account that stevia is 200-300 times sweeter than 2. G be leveraged sugar) is projected to be in the range of 125-200 USD per kg. This price forecast is based on historical market 3. I mproved quality and quantity of the stevia leaf supply prices of sugar and the expected price of sugar in the 4. I ntroduction of major players in the stevia market, next few years. which will increase the pressure on farmers to reduce their profit margins and result in competitive Reb A Forecast Prices vs. Sugar Equivalent Prices pricing 250

5. I ntroduction of stevia leaf production in emerging countries, which could possibly lead to lower prices

USD/kg

200 150 100

US Stevia Market

The following developments have taken place in the US stevia market:

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1. C oca-Cola, in partnership with Cargill, developed Truvia, a stevia-based sweetener. Coca-Colaâ&#x20AC;&#x2122;s beverage brands Sprite Green and Odwalla are sweetened with stevioside.

Reb A Forecast Prices Lower Limit Sugar Equivalent Price Upper Limit Sugar Equivalent Price

Assuming the current lower limit sugar equivalent price 2. P epsiCo developed a stevia-based sweetener named is constant for the next few years, stevia prices are Purevia in partnership with Whole Earth Sweetener projected to be comparable to sugar prices by 2015. Co. and is using it in its SoBe soft drinks brand. However, stevia prices are expected to reach sugar price ome of the other prominent companies that have levels before 2015 because sugar prices (which are 3. S launched either a stevia-based sweetener or a volatile) are expected to be higher than the lower limit product containing a stevia-based sweetener are sugar equivalent price in the coming years. Hence, the Lipton, Kraft Foods, Zevia LLC, and Wisdom Natural price of Reb A is likely to be competitive in the coming Brands (makers of SweetLeaf). years, which makes it an attractive alternative for sugar. Stevia is currently being used in niche products and Cost Analysis has been met with widespread consumer acceptance. However, if stevia prices are comparable to sugar and Cost Analysis HIS prices in the coming years,the mass production of stevia could drive the use of the sweetener in mainstream 26% products.

Supplier Analysis Current Suppliers 74% Input Costs (as a % of price)

Currently, the major suppliers of stevia that have a global reach are PureCircle and Cargill. Apart from these companies, there are many smaller suppliers, such as Blue California, GLG Life Tech Corporation, Daepyung Co., Sweet Green Fields, DIC Lifetec Co Ltd., Morita Kagaku Kogyo Company Ltd., and Sunwin Stevia International Co.

Profit Margin (as a % of price)

Nearly three-fourths of the total market price of stevia is the profit margin. However, in order for stevia to deliver the same sweetness as sugar, it requires three times less land, water, labor, and total resources compared to sugar.

The main reasons why stevia prices are expected to fall Long-Term Outlook in the coming years are: Industry experts expect stevia to be the sweetener of the future, especially since the consumer preference for Copyright ÂŠ Beroe Inc, 2011. All Rights Reserved

healthier products is increasing. Large companies, such 3. I t is necessary to track the stevia market, especially as ADM, Tate & Lyle, Corn Products, and Bunge, are prices, on a periodic basis. The frequency of tracking likely to enter the market, either through organic or should increase as stevia prices near sugar levels. inorganic growth. The introduction of these players is 4. Opportunities in the market can be identified to expected to increase competitiveness and create a mass determine if there are any long-term strategic market for stevia, which could lead to lower prices. relationships, either with stevia plant growers or stevia sweetener producers, that can be established Action Plan for Potential Stevia Users which could be beneficial in the future. Alternatively, 1. Stevia can be used by various sectors, such as food the pros and cons of internally producing stevia and beverage, pharmaceutical, and consumer product to meet the companyâ&#x20AC;&#x2122;s own requirements can be goods. analyzed. 2. Companies that are considering using stevia 5. I dentifying the best practices and sourcing models sweeteners in the short term and/or long term should adopted by industry peers for stevia procurement understand and analyze various facets of the stevia can be useful to stevia buyers. market and its upstream and downstream impact.

OTHER HEALTHY TRENDS IN THE FOOD AND BEVERAGE SECTOR Potassium Chloride

analyzing the potassium chloride market is imperative for the effective replacement of salt in the food industry.

In April 2010, the Institute of Medicine Report on Salt 2010 instructed the food industry to reduce the sodium content in its products. The report recommended mandatory national standards for permissible sodium levels. Subsequently, the 17 major US cheese companies (such as Cargill, Chr Hansen, Kraft Foods, etc.) pledged to reduce the sodium content in cheese and increase consumer awareness on the benefits of less sodium in food products. In addition, in 2010, a number of major firms, including Kraft Foods, Heinz, and Unilever, were named among the signatories of the National Salt Reduction Initiative, a program launched to cut the level of salt in US packaged and restaurant foods by 25% over five years.

Relative Amounts of Dietary Sodium in the American Diet 6%

12%

Food Processing Naturally Occuring At the Table During Cooking 77%

Carotenoids

Potassium chloride has been identified as the closest alternative to salt (sodium chloride). Although it has an undesirable metallic aftertaste, masking agents and blockers can be used to hide the bitter taste. An increase in potassium intake, coupled with a decrease in sodium intake, provides vast health benefits.

Carotenoids are chemicals with nutritive properties that exist in plant and animal pigments. They are used to color food products. Growing consumer consciousness about better health and nutritional intake has led to an increase in the size of the natural carotenoids market, as natural carotenoids offer health benefits, An estimated 77% of total dietary sodium is unlike synthetic carotenoids. The global carotenoid contributed by the food processing sector. Hence, the market is expected to grow to USD 1.2 billion by use of potassium chloride is expected to increase in the 2015. coming years in place of sodium chloride. Tracking and Copyright ÂŠ Beroe Inc, 2011. All Rights Reserved

Natural carotenoids are expected to substitute synthetic carotenoids. Animal feed is the largest user of carotenoids; however, due to the increasing demand for natural products and natural ingredients, carotenoids are expected to be used largely by food segments. Lutein, lycopene, beta-carotene, astaxanthin, and cantaxanthin are the major types of natural carotenoids. Beta-carotenoids hold 32% of the carotenoid market. The United States and Europe account for the major share of sales in the carotenoid market. With the rising demand for carotenoids, however, Asian countries like China, India, Japan, and Malaysia are expected to enter the carotenoids market and cut into the share of US and European producers.

for existing products. For example, tofu may be used as a substitute for meat, and soy milk can be used as a substitute for cow or buffalo milk. Various secondary products can be derived from these products, like soy coffee/tea, soy ice cream, soy sauce, etc. All of these products are witnessing an increase in demand as consumers are aware of the health benefits that soy products offer. Soybean prices can be used as a base for soy products prices. US average soybean farm prices are expected to remain between 9.20-9.25 USD per bushel over the next 10 years. Due to the modest increase projected for the US soybean supply in the next 10 years (less than or equal to 7% per year) and competition from South American nations, such as Brazil, that offer soybean at low prices, the forecasted prices for US soybean are low. Companies that procure soybean products should take into account the volatility of soybean prices, supplydemand fluctuations, and the most favorable regions for soybean procurement.

Soy Products Due to its high protein content, soya bean has been a major ingredient used by the processed food sector. The demand for soy products is increasing day by day due to the growing health consciousness of consumers. Soy products could be consumed as a substitute

Source: PureCircle, Stanpack Pharma, bluecal-ingredients, USDA, nutraingredients

Author: Pratap Premnath Palagiri | Senior Research Analyst at Beroe Inc

Disclaimer : Strictly no photocopying or redistribution is allowed without prior written consent from Beroe Inc. The information contained in this publication was derived from carefully selected sources. Any opinions expressed reflect the current judgment of the author and are subject to change without notice. Beroe Inc accepts no responsibility for any liability arising from use of this document or its contents.

For more information, please contact info@beroe-inc.com.