(Removes incorrect reference to sugar in paragraph 10)
* Two-year delay seen as chance to amend recipes
* PureCircle, Tate & Lyle, Kerry Group likely beneficiaries
* Soft drink makers already open to changing formulas
By Martinne Geller
LONDON, March 18 (Reuters) - The British government'splanned levy on sugary soft drinks means more business forsuppliers of specialty ingredients that boost sweetness withoutadding calories and can mask aftertastes or add texture.
The surprise levy announced on Wednesday would go intoeffect in two years. That gives manufacturers includingCoca-Cola or PepsiCo and their UK partners suchas Coca-Cola Enterprises or Britvic time toroll out more low-calorie drinks.
Beneficiaries could include PureCircle, which sellsthe natural low-calorie sweetener stevia, Tate & Lyle,which sells sweeteners such as sucralose, and Kerry Group, which sells natural flavours and colouring agents.
Such companies are profiting from growing demand forlower-calorie foods and are free of competition from independentstart-ups or own-brand players, since they often supply allmajor manufacturers.
They are also high-margin, high-growth and have highbarriers to entry, said Neil Brown, investment manager of panEuropean equities on Alliance Trust's Sustainable Investmentteam. His fund has owned shares of Kerry and peers Chr. Hansen, Naturex and DSM for years.
"Obesity is a serious issue, and most of us are trying toeat more healthily," Brown said.
"We'd rather be in the company that gets the phone call totry and fix it, rather than the company that faces clearheadwinds."
U.S. firm Ingredion, which sells corn syrup andother ingredients, has seen "double-digit" growth in itsspecialty ingredients business in Mexico since that countryimplemented a tax on sugary drinks and foods in 2014.
"It created an environment for a company like ours to comeup with affordable, healthy solutions," CEO Ilene Gordon toldReuters recently.
"We quickly took formulations that we had in the rest of theworld, solutions from Europe, and we adjusted them for theMexican market, in flavour, taste and affordability," she said,citing as an example a Mexican yogurt that Ingredionreformulated using a less expensive starch.
WORK IN PROGRESS
For Investec analyst Nicola Mallard, the two-year windowbefore implementation of the UK levy is a sign the government wants manufacturers to reformulate drinks, rather than merelyraise prices, which can have limited effect if people get usedto the new price and eventually return to old habits.
"The easiest way to get people to consume less sugar is tonot put it in the product in the first place," Mallard said.
Yet Coke, Pepsi and others have been changing their productline-ups for the past decade, adding more lower-calorie juices,teas and water drinks as well as low-calorie versions of theirflagship colas, to match consumer demand.
"If you go back 20 years, the proportion of low- orno-calorie products on the market was 30 percent," said GavinPartington, director general of the British Soft DrinksAssociation. "Now it's about 60 percent," including bottledwater.
In January, for example, Coke announced a "one brand"approach to marketing its flagship cola that allows for theclassic full-calorie version in red packages, but also Diet Cokein silver, Coke Zero in black and most recently, Coke Life ingreen.
The variety means Coke never has to change the recipe of theclassic cola, said Liberum analyst Robert Waldschmidt, though ithas changed the recipe for Coke Life in the UK.
Instead of one-third less sugar as it had for its 2014launch, the new mid-calorie Coke Life has 45 percent less, dueto the addition of more stevia, which comes from a SouthAmerican shrub.
"Reformulation is biggest on new products because there's nopreset notion of what it should taste like," Waldschmidt said.
Brands are reluctant to change recipes too fast, he said,citing last year's rocky performance for Diet Pepsi in theUnited States after it replaced aspartame with sucralose.
Consumers complained of an unpleasant aftertaste in the newversion, which highlights the opportunity for a class ofspecialty ingredients that do not provide sweetness or flavour,but have functional benefits like masking an aftertaste,boosting a sweetness, or providing bulk or texture.
There will also be growing demand for ingredients such asTate & Lyle's Dolcia Prima, made from allulose, which has 70percent of the sweetening power of sugar but only 10 percent ofthe calories.
Allulose, which occurs naturally in figs, raisins andjackfruit, can be used in the United States, but has not yetbeen approved in Britain.
(Editing by Keith Weir)
