How Sweet It Isn't At Nutrasweet

Holiday cheer is in short supply at Monsanto Co. Less than a week before Thanksgiving, the St. Louis chemical maker announced a major restructuring, including layoffs of 10% of its 32,000 employees, resulting in a $425 million fourth-quarter charge. Monsanto's troubled G.D. Searle & Co. pharmaceutical unit will bear the brunt of the cuts, losing 2,250 people--nearly 25% of its work force.

Now, just up the road from Searle's Skokie (Ill.) headquarters, another shoe is about to drop. Employees at Monsanto's NutraSweet Co. unit in Deerfield, Ill., are bracing for Dec. 14, when the lucrative U.S. patent for the artificial sweetener aspartame will expire, breaking NutraSweet's lock on the $700 million domestic aspartame market.

Losing the monopoly will have grave consequences for NutraSweet. For starters, prices will plummet by about one-third, from roughly $45 a pound to $30 a pound, figures Paul Leming, senior vice-president at Kidder, Peabody & Co. And there will be new competition in the U.S., which accounts for 80% of the world aspartame market. Holland Sweetener Co., a joint venture of chemical makers DSM in the Netherlands and Tosoh Corp. in Japan, has been making aspartame for Europe and Canada since Monsanto's patents began running out there in 1986. It plans to begin shipments to undisclosed U.S. buyers on Dec. 15, says Ken Dooley, Holland's vice-president for North American marketing.

R&D CAVITY. The patent expiration means wrenching changes for Monsanto, too. NutraSweet's cash flow has funded Monsanto's research budget and propped up its sales and earnings for nearly a decade. With the sweetener's best days behind it, some analysts speculate that Monsanto might sell all or a piece of the unit to Japan's Ajinomoto Co., its aspartame joint-venture partner in Europe. But it also may decide to invest little and continue to pull out cash--albeit less than in the past.

Even without competition, NutraSweet's prospects are iffy. Sales growth for diet sodas, which account for more than 70% of the sweetener's volume, has dropped by 50% in the past few years, to 3% annually, as consumers have turned to bottled waters, juices, and tea. And NutraSweet is essentially a one-product company. Its Simplesse fat substitute hasn't lived up to early hype, turning into strictly a niche play. In mid-November, NutraSweet closed down its Simple Pleasures fat-free ice-cream business and laid off 51 workers. The company is working on an egg with 90% less fat and cholesterol and a sweetener that's 500 times sweeter than aspartame. But both are years away from a commercial rollout.

NutraSweet is maneuvering to minimize the loss of its patent, at least for the next year or two. It has spent some $20 million a year to build consumer recognition of its logo, a red-and-white swirl, and will continue to do so, says President Lauren S. Williams. And it's promoting aspartame as a substitute for sugar, since after the price cut, the two will cost about the same for the same amount of sweetening.

While the company's dollar sales will sink along with prices (chart), its net income should hold up better. Many buyers have been delaying purchases of the artificial sweetener until the patent runs out, so profits may actually rebound slightly next year. Robert S. Reitzes, research director for C.J. Lawrence Inc., estimates that NutraSweet's profits will drop 20% this year, to $138 million, then rise 9% in 1993, to $150 million.

CRACKS IN THE WALL. NutraSweet also lined up long-term supply deals last April with Coca-Cola Co. and PepsiCo Inc., which buy 65% of all the aspartame made worldwide. But a Coke spokeswoman acknowledges that the soft-drink giant has signed a worldwide contract with Holland Sweetener, too. Industry sources say Holland could supply some of Coke's U.S. operations.

Holland already has about 35% of the European market for aspartame, thanks in part to antidumping penalties as high as $33.20 a pound on imported NutraSweet. To level the playing field, NutraSweet and Ajinomoto are jointly building an aspartame plant in France that will begin operation in late 1993.

On a practical basis, Holland can't give NutraSweet much of a run in the U.S. right away. Despite Dooley's stated goal of eventually achieving a 35% share, "they have limited capacity, so they can't sell a lot" to American buyers, notes Michael F. Weinstein, president of beverage producer A&W Brands Inc., who has held discussions with Holland.

Longer-term, NutraSweet may face a bigger challenge from alternative artificial sweeteners. Both Johnson & Johnson and Pfizer Inc. are seeking Food & Drug Administration approval for sweeteners, while others, including Coke, have been developing new options, too. And some of the alternatives purportedly don't share NutraSweet's major drawback--a tendency to lose sweetness when it is exposed to heat and high levels of acidity.Add it all up, and it's clearthat NutraSweet is leaving the folks at Monsanto with a bitter aftertaste.

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