Dieters of the world, watch out! Your supply of Splenda, the brand name for the no-calorie sucralose concoction, is about to be crimped. Tate & Lyle (OTC: TATYY.PK), the world's only sucralose manufacturer, says demand so far outstrips supply that it simply cannot make enough. And it's going to get worse before it gets better. Sucralose was previously banned in the European Union but is set to be introduced to the 25 member countries in 2005.
There are some other artificial sweeteners one can use if one doesn't want to use sugar. Aspartame is the main one, and it is the ingredient found in privately held Merisant's Equal brand of sugar substitute as well as investment firm J.W. Child's Nutrasweet. Aspartame was discovered by G.D. Searle before it was taken over by Monsanto (NYSE:MON), and it has been the primary sweetener used in soft drinks since the early 1980s. Other artificial sweeteners include saccharin, acesulfame-K, and neotame.
But that could change. Both Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) have introduced Splenda into their new low-carb drinks, C2 and Edge. It's a $1.5 billion market that aspartame currently has under lock and key, and while the shortage may put a crimp in Splenda's ability to gain a greater diet soda foothold, it is branching out into other products: Unilever's (NYSE:UL) Ben & Jerry's Ice Cream is putting sucralose into some of its frozen treats, and General Mills (NYSE:GIS) adds it to its Trix cereal. B&G Foods (AMEX:BGF), which recently went public in a bizarre IPO, adds sucralose to its line of Emeril food seasonings, Polaner jams and jellies, and Maple Grove syrups.
Tate & Lyle has acquired a manufacturing facility in Singapore to help expand supply, but it says it won't take on any new customers until production doubles at its Alabama plant, which is expected sometime in 2006. It says it will still meet the needs of its current customer base.
The $337 million market for sugar substitutes is now dominated by Splenda, which has a 48% market share. Equal, the former leader, has slid to 20%. As the only no-calorie substitute made from sugar, Splenda is sold to consumers by McNeil Nutritionals, a unit of Johnson & Johnson (NYSE:JNJ). Because of the popularity of such diets as Atkins and South Beach, demand for the sugar-sweet substitute has been rampant. That has translated into demand for its stock. The American Depositary Receipt (ADR) is up more than 80% from its February lows with hardly a look back. It also offers a 3.6% dividend yield.
Sales of Splenda in the U.S. have grown to $160 million at grocery and drug stores and mass merchandisers, and the market for low-calorie sweeteners grew 16% in the last year alone. They now make up 17% of the U.S. tabletop market.
Sweet!
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Fool contributor Rich Duprey is waiting for the day Krispy Kreme doughnuts are made with Splenda. He does not own any of the stocks mentioned in this article.
