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A sweet Asian fruit tempts the troubled soft drink industry

Cans of Zevia soda are seen in a supermarket in Los Angeles, California, December 18, 2013. REUTERS/Lucy Nicholson
Cans of Zevia soda are seen in a supermarket in Los Angeles, California, December 18, 2013. REUTERS/Lucy Nicholson

By Marina Lopes

NEW YORK (Reuters) - An obscure melon once cultivated by Buddhist monks in China to sweeten tea could give the $8 billion U.S. diet soda industry a shot at winning back consumers concerned about artificial ingredients.

You won't find monk fruit in any of the soft drinks at your local convenience store. So far, shaky supplies and limited demand have kept the expensive melon on the sidelines of the sweetener industry.

But some experts think the fuzzy green fruit, which ripens to the size of an apple, could be the ingredient soda makers have sought for decades: a natural product with great taste and no calories.

When "someone figures this out and gets a taste that is low-calorie and natural, it could really be a silver bullet that catapults that company ahead," said Ali Dibadj, an analyst at Bernstein who follows the soft drink industry.

Soft drink makers are increasingly desperate for just such a miracle ingredient. Once a booming sector, diet soda has become a laggard. In the United States, consumption fell about 7 percent this year and could shrink by 20 percent through 2020, according to Nielsen data.

Consumers, increasingly wary of the health risks of artificial sweeteners, are ditching diet sodas for juices, teas and naturally sweetened lemonades, according to a recent Wells Fargo analysis.

"We believe we are seeing a fundamental shift in consumption behavior as diet drinkers leave the category altogether," said Bonnie Herzog, an analyst at Wells Fargo Securities.

FLAVOR TESTS

Beverage companies have struggled to hold on to customers amid fears about the safety of FDA-approved aspartame, which has sweetened diet soda for 30 years.

The aspertame debate continues to rage on the Internet, even though the American Beverage Association says the artificial sweetener is safe for consumption.

Five years ago stevia, a low-calorie sweetener made from the leaves of a Paraguayan plant, was heralded as an ideal natural sweetener. But it has had only limited success in the marketplace.

Coca-Cola Co uses stevia in 45 products in 15 countries, including in Coke Life, a low-calorie alternative available in Chile and Argentina. PepsiCo uses stevia in Pepsi NEXT, a low-calorie drink it sells in Australia and France. But customers have complained that stevia's bitter aftertaste alters the sodas' flavors.

Now, some beverage manufacturers are pinning their hopes on monk fruit, which is already used in protein shakes, snack bars and brownies.

This week, Zevia, a premium-brand company based in Culver City, California, introduced a new recipe for its no-calorie sodas sweetened with a blend of monk fruit and stevia. The company's drinks, which sell in 12-ounce cans for about $1 each, were previously sweetened exclusively with stevia, which gave it a bitter kick.

"We feel like we've really cracked the code," said Paddy Spence, chief executive officer of Zevia, which sells its naturally sweetened no-calorie soft drinks at about 16,000 high-end grocery stores in the United States.

"Using the two side by side, we were able to get a higher level of sweetness without the bitterness," said Spence.

Zevia, which was founded six years ago, has seen its sales quadruple in the past three years, to $60 million this year.

"If you do detect any kind of taste, it is a fruity taste, which goes well with soda," said Linda Gilbert, CEO of EcoFocus Worldwide, a consumer research company focusing on green and sustainable trends.

Analysts say the company could be on to something because monk fruit neutralizes stevia's bitter notes.

Coca-Cola, which uses monk fruit in its Core Power protein drink, said it is exploring ingredient options but would not confirm that monk fruit is among them. Aurora Gonzalez, a spokeswoman for PepsiCo, said the company is not considering monk fruit but would not provide further details.

STEP BY STEP

Monk fruit has been consumed for centuries in southern China, especially by the Cantonese, but in recent years it has become popular across the country, where it is marketed in dried form and used to flavor soups and tea, and as a remedy for sore throats.

One gram of the fruit extract replaces eight teaspoons of sugar, allowing consumers to significantly reduce their calorie intake, according to Laura Jones, a global food science analyst at Mintel, a food and drink research firm.

While Procter & Gamble Co. patented monk fruit sugar extraction as a potential substitute for sugar in 1995, it wasn't until BioVicttoria, a New Zealand company, shepherded the fruit through the U.S. Food and Drug Administration approval process that it became available for mass consumption.

The FDA approved monk fruit for consumption in 2010, and the fruit has no reported adverse side effects.

Monk fruit presents a number of challenges for beverage makers. It is twice as expensive as stevia and is grown only in some regions of China. It's also not yet approved by European regulators for consumption.

Extracting sugar from monk fruit is a long and arduous process that further increases costs.

Meanwhile, Chinese law prevents monk fruit seeds and genetic material from leaving the country, according to BioVittoria, confining production to China.

At BioVicttoria, the fruit's top exporter, monk fruit is bred for maximum sweetness and is hand-pollinated. The company mechanically extracts its sugar content.

As public concern about artificial sweeteners has grown, demand for monk fruit extract has increased. Chobani recently launched a line of its popular Greek yogurt that is sweetened by monk fruit, and this year 91 public schools in Omaha replaced sugar in its flavored milk with monk fruit extract.

Supplies have also steadied since BioVittoria began producing monk fruit extract. The company has deals with local farmers to produce 60 percent of China's yield of 400 million monk fruits, distributed exclusively by global sugar and sweetener giant Tate and Lyle.

Ultimately, big soda companies may have to swallow higher prices to hold on to diet soda drinkers.

"I'm not sure they have much of a choice," said Dibadj, the Bernstein analyst. "The consumer is voting with their taste buds and concern for wellness. Investors realize that they have to shift their ingredient base not to be artificial and it is a tough combination to get right."

(Reporting By Marina Lopes; Beijing Newsroom contributed reporting; Editing By Jilian Mincer and Douglas Royalty)

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