In late 1986, the Holland Sweetener Company (HSC), based in Maastricht, the Netherlands, was preparing to enter the European and Canadian aspartame markets. Aspartame, a low-calorie, high-intensity sweetener, had been discovered in 1965 by G. D. Searle & Co., a US pharmaceuticals company. After securing a number of patents on its discovery, Searle had gone on to develop markets for aspartame as a food and beverage additive.
By 1986, NutraSweet, the operating entity set up by Searle to build the aspartame business, had reached sales of $711 million. Now, NutraSweet’s patents in the European and Canadian markets were due to expire as of 1987, although the US market would remain protected until December 1992.
Winfried Vermijs, president of HSC, reviewed his company’s strategy for competing in the aspartame business. Price and volume forecasts had been prepared for the European and Canadian aspartame markets. Two price scenarios were being considered: “normal competition” and “price war.” Vermijs wondered which scenario was more likely.
High-intensity sweeteners have a long history. In Roman times, grape juice was boiled down in lead pans to produce sapa, a sweet compound used for everything from a food additive to an oral preventive. Concerns over the safety of modern high-intensity sweeteners unfortunately led to neurological damage or even death from the use of sapa.
Discovered in 1879, the oldest high-intensity sweetener still in use was saccharin, an oil derivative about 300 times as sweet as sugar (sucrose) of equal weight. In the 1960s, Abbott Laboratories developed cyclamate (30 times as sweet as sugar), but following studies suggesting a link to cancer, the Food and Drug Administration (FDA) banned cyclamate in 1970.
In 1977, the FDA attempted to ban saccharin as well, but the resulting public outcry caused Congress to intervene and declare a moratorium. However, manufacturers of saccharin were required to place notices on labels warning consumers of the potential increased cancer risk. Apart from the safety issue, many people found saccharin to have a slightly bitter, metallic aftertaste.
Aspartame is a white powder consisting of L-aspartic acid and L-phenylalanine, two naturally occurring optically active amino acids, together with a small amount of methanol. Professor Adam M. Brandenburger prepared this instance as the basis for class treatment rather than to exemplify either effective or ineffective handling of an administrative situation.
The case draws on a study by Peter Wetenhall (MBA ’92). Aid from Research Associate Maryellen Costello, Rena Henderson, and Research Assistant Julia Kou is appreciatively acknowledged.
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Acrimonious Competition: The Holland Sweetener Company versus NutraSweet (A)
Aspartame had the same caloric content as sugar of equal weight but was 180 times as sweet. Unlike sugar, aspartame did not promote tooth decay. The main drawbacks of aspartame were that it became unstable when exposed to high temperatures (as in baking) and that it had a limited shelf life in soft drinks.
Aspartame had been discovered by accident. In 1965, James Schlatter, a research scientist at G. D. Searle & Co., a pharmaceutical company based in Skokie, Illinois, was working on a project to develop an anti-ulcer drug. While experimenting with L-aspartic acid and L-phenylalanine, he happened to touch his finger to pick up a piece of paper and noticed a sweet taste. He later coined the term “aspartame” for the combination of amino acids.
NutraSweet/G. D. Searle & Co. was formed in 1908, although the company’s roots could be traced back to 1888. From its upper Midwest beginnings, Searle grew to become a Fortune 500 pharmaceutical company in 1968. Following its serendipitous discovery of aspartame, the company had an opportunity to strike out in a new direction. Searle secured two key patents on aspartame.
The “use” patent, obtained in 1970, covered any use of aspartame as a sweetening ingredient. The “blend” patent, obtained in 1973, covered combinations of aspartame and saccharin. Approval from the FDA for the use of aspartame as a food additive was sought the same year. After giving a green light to dry use of aspartame (tabletop sweeteners and powdered drinks) in 1974, the FDA withdrew its approval shortly afterwards, pending the results of further tests. Not until July 1981 did the FDA give the final green light for dry use of aspartame.
Wet-use blessing (soft drinks) came in July 1983, in the aftermath of regulatory holds. Searle sought extensions of its two patents and was successful in acquiring an extension of the usage patent – to 1987 in Europe, to December 14, 1992, in the United States, and to April 1993 in Australia.
An effort to widen the Canadian usage patent, which was due to run out in 1987, was unsuccessful. The blend patent was extended to November 4, 1996, in the United States.
To fabricate aspartame on a commercial scale, Searle turned to Ajinomoto, a major Japanese chemical and food company. Ajinomoto was a leading participant in amino acid research and production, dominating the monosodium glutamate (MSG) market. (For financial information on Ajinomoto, refer to Exhibit 3.)
Ajinomoto supplied a chemical yoke process for manufacturing aspartame as well as the L-phenylalanine input. (The other input, L-aspartic acid, was widely used in pharmaceutical applications and could be obtained from a number of sources.) Searle agreed to pay Ajinomoto royalties for access to the process technology, and the two parties further agreed to share information on subsequent process improvements.
A cross-licensing deal was also struck under which Ajinomoto was given sole access to the Japanese aspartame market, where it went on to sell aspartame under the trade names Pal Sweet and Pal Sweet Diet. Searle retained exclusive rights to the North American market.
Some information in this section is taken from “The NutraSweet Company: Technology to Tailor-Make Foods” (Harvard Business School Case No. 589-050) and Sweet Success: How NutraSweet Created a Billion Dollar Business, by Joseph McCann (Homewood, Ill.: Irwin, 1990).
Under FDA regulations, an applicant had to establish the “added value” of a new product. However, only the effectiveness of a new product, and not its cost, entered into the added value assessment. Thus, the standard for the approval of a high-intensity sweetening was that it be demonstrably superior to existing sweeteners as an aid to dieting.
Acrimonious Competition: The Holland Sweetener Company versus NutraSweet (A)
It took two to three years to bring aspartame production up to speed. Once operational, however, a facility had to be run at or near to planned capacity, as breaks in production were prohibitively expensive due to significant mothballing and debugging costs. Minimum efficient scale was of the order of 2,000 metric tons annual capacity, while plant construction costs exceeded $100 million.
With transportation costs for aspartame around 15-20 cents per pound, NutraSweet and Ajinomoto concentrated production in a limited number of facilities (see Table A). Table A: NutraSweet and Ajinomoto Production Facilities.
Beginning:
Annual capacity (metric tons): 2,000, 3,000, n/a, 2,000.
Chemical Marketing Reporter and Financial Times (assorted issues). Case writer estimations.
The NutraSweet-Ajinomoto method of fabricating aspartame was covered by process patents extending through the late 1990s. With a continuing plan of process improvement and capital investment in place, NutraSweet and Ajinomoto aimed to increase the efficiency of their manufacturing operations over time. By 1992, NutraSweet would be announcing that it had cut its manufacturing costs by 70% over the previous decade.
Market Development: Having spent about $80 million in start-up costs (excluding investments in plants), Searle launched its first aspartame product, the tabletop sweetener Equal, in October 1981.
At that time, the US tabletop sweetener market totaled approximately $110 million. It was dominated by one brand, Sweet ‘N Low, a saccharin-based product made by the Cumberland Packing Company of Brooklyn, New York. Although it was three times more expensive than Sweet ‘N Low, Searle’s Equal was an immediate success in the marketplace.
In December 1982, The NutraSweet Group was established as a separate operating division of Searle. Forty-year-old Robert Shapiro, Searle’s general counsel, was brought in as president. Educated at Harvard and Columbia Law School, Shapiro had served on several government advisory commissions and had then spent time in the private sector before joining Searle in 1979.
Following FDA approval for wet use of aspartame, Shapiro set in motion the now-famous “branded ingredient” strategy. Aspartame, under the trade name NutraSweet, was made available to any interested food or beverage manufacturer.
This was backed up with extensive advertising (estimated at $30 million yearly) of the brand name directly to end-users and by cooperative advertising with manufacturers. The company gave discounts of up to 40% off the list price of aspartame to manufacturers who agreed to use 100% aspartame as a sweetener (instead of blends of aspartame and saccharin, for example), to make NutraSweet their exclusive worldwide supplier, and to display the NutraSweet trademark and distinctive red-and-white “swirl” logo on their products and in their own advertising.
Acrimonious Competition: The Holland Sweetener Company versus NutraSweet (A) By 1986, the company was claiming that 98% of American consumers…
The soft drink market was NutraSweet’s primary focus in 1983. The US soft drink industry was dominated by two players, Coca-Cola and Pepsi-Cola, which, between them, accounted for something over 60% of shipments in an industry with annual sales of $26 billion at the retail level. The diet section accounted for 20% of the US soft drink market and was growing quickly. To date, saccharin had been used to sweeten diet soft drinks.
NutraSweet sold aspartame directly to major purchasers such as Coke and Pepsi via secret, negotiated, multi-year contracts. In 1983, the contracted monetary value was around $85-$90 per pound. Although this represented a significant premium over saccharin (which cost around $3 per pound) and even sugar (about 25 cents per pound), aspartame replaced virtually all the U.S. soft drink usage of saccharin within two years of its debut. Pepsi, first to use 100% aspartame in its diet drinks, used its head start over Coke to promote Diet Pepsi against Diet Coke.
The 1980s saw intense activity by Coke and Pepsi in the U.S. soft drink market. A memorable episode in the alleged Cola Wars was Coke’s 1985 reformulation of its 99-year-old Coca-Cola trade name, from which it beat a headlong retreat in the face of consumer opposition.
Pepsi responded to the reformulation with commercials proclaiming: “For 87 years Coke and Pepsi have been eyeball to eyeball. It looks like they just blinked. . . .”
Over time, NutraSweet expanded aspartame’s range of applications to include usage in powdery drink mixes, frozen sweets, masticating gum, toppings, cereals, and non-prescription pharmaceuticals, among other products.
However, diet soft drinks continued to be the main use, accounting for approximately 80% of total sales of aspartame. The tabletop market accounted for another 15% of sales, with other food and drink products the balance.
NutraSweet also looked to develop markets for aspartame outside the United States. Canada was an early target. In 1984, NutraSweet and Ajinomoto set up a 50:50 joint venture, NutraSweet AG, based in Zug, Switzerland, to market NutraSweet to European commercial purchasers and the tabletop sweetening (under the name Canderel) to European consumers.
As in the United States, the soft drink industry was the primary focus of efforts to sell aspartame internationally, and Coke and Pepsi were once again the major purchasers. Unlike the situation in the United States, however, Coke enjoyed a strong lead over Pepsi in most overseas markets. In Europe, Coke was estimated to have a 50% market share and Pepsi a 10% share.
In Asia, Coke’s share of the soft drink market stood at 40%; Pepsi again held a 10% share. In Latin America, Coke held a 55% market share and Pepsi a 20% share. Exhibit 1 depicts the growth of the worldwide aspartame market through 1986. In that year, worldwide aspartame prices were about $70 per pound.
Acquisition In the summer of 1985, Searle was acquired by Monsanto Corporation for $2.8 billion. Monsanto, headquartered in St. Louis, Missouri, was a leading U.S. manufacturer of agricultural products, plastics and specialty chemicals, performance materials (such as synthetic fibers), and industrial control equipment. (Exhibit 4 summarizes financial data on Monsanto.)
Curiously, the mission of the original Monsanto Chemical Works, formed in St. Louis in 1901, was to challenge the then German monopoly hold on the saccharin market. Now, with the purchase of Searle, NutraSweet became a wholly owned subsidiary of Monsanto.
Since the acquisition, Monsanto had been writing off the cost of the aspartame patents via a $173 million one-year charge against NutraSweet’s net income. The amortization charge would stop with the US termination of the usage patent in 1992.
The Holland Sweetener Company In April 1985, the Holland Sweetener Company (HSC) was formed in Maastricht, the Netherlands, as a joint venture between Tosoh Corporation and DSM to enter the aspartame market. Headquartered in Tokyo, Japan, Tosoh had begun business in 1935 as a manufacturer of sodium carbonate ash and acidic sodium carbonate.
The company had since grown to become a diversified maker of basic chemicals, intermediates, and downstream products, as well as scientific instruments and ceramics. Based in Heerlen, the Netherlands, DSM was a chemicals group with interests in plastics, synthetic rubber, fine chemicals, fertilizers, resins, consumer products, and oil and natural gas exploration and development.
The company had begun as “Dutch State Mines” around the turn of the century but over time had been migrating into downstream businesses. Since 1986, DSM had been publicly traded, with the Dutch government retaining a one-third interest. Exhibits 5 and 6 summarize financial data on Tosoh and DSM.
Tosoh brought to the hookup with DSM a patented process for manufacturing aspartame that employed a natural accelerator to solve the problem of achieving a precise bond between the aspartic acid and phenylalanine inputs. The Tosoh process was capable of using either L-phenylalanine or D.L-phenylalanine (a mixture of the D- and L-isomers) as base feedstock. (Exhibit 2 reports the process.)
HSC claimed that its method of producing aspartame would be less costly and more flexible than NutraSweet’s, although this was disputed. DSM’s contribution to the joint venture was raw material supply and traditional chemical processes (courtesy of its Fine Chemicals Division) and knowledge of the European market place.
Heading up HSC was Winfried Vermijs, a 50-year-old chemical engineer who had been with DSM since 1961. Vermijs had begun his career working on process development in DSM pilot plants. After a stint as a plant manager in the 1970s, he had returned to research and development activities for several years before taking on general management responsibility as president of HSC.
In February 1986, HSC began work on a 500-tonne aspartame plant in Geleen, the Netherlands, with a view to challenging NutraSweet in Europe and Canada once NutraSweet’s patents expired there in 1987. The company received a DFl. 35 million ($17 million) loan from the European Investment Bank toward the project.
In preliminary discussions with potential customers, HSC discovered that NutraSweet had signed Coke and Pepsi to exclusive, multi-year contracts. It decided to lodge a complaint with the European Commission, charging that the contracts were anti-competitive. Joining HSC in the complaint was the Irish company Angus Fine Chemicals.
New Sweeteners In addition to aspartame, saccharin, and cyclamate, several other high-intensity sweeteners were on the market or in various stages of regulatory review. Acesulfame-K had been discovered in 1967 and was now being sold in Europe. It was 200 times sweeter than sugar and was heat-stable, which gave it an advantage over aspartame in shelf-stable products and in baking.
Acrimonious Competition: The Holland Sweetener Company versus NutraSweet (A)
Acesulfame-K was manufactured by Hoechst, a major German company.
Sucralose, a heat-stable compound 500 times sweeter than sugar, was derived from sucrose by a patented chlorination procedure developed in 1976 by the British sugar company Tate & Lyle and researchers at Queen Elizabeth College in London. Johnson & Johnson, the U.S. consumer products company, had entered a licensing agreement with Tate & Lyle and, through its McNeil Forte Products division, hoped to market sucralose in the United States and Japan under the trade name Splenda.
Alitame, a heat-stable product 2,000 times sweeter than sugar, was made by the U.S. pharmaceuticals company Pfizer. A request for FDA approval was submitted in 1986. There were also several naturally derived high-intensity sweeteners. Stevioside, made from the leaves of the South American Stevia plant, was in demand in Japan.
Thaumatin, genetically engineered to replicate proteins found in berries of certain West African plants, was being used as a sweetener in Japan, Brazil, and the U.K. Neither sweetener had yet been approved in the United States.
One trend expected to strengthen if a wider range of high-intensity sweeteners became available was blending. Researchers had found that combining sweeteners could have a synergistic effect: the blend was sweeter and might have a better taste profile for certain applications than either sweetener individually. U.S. health authorities also encouraged a multiple-sweetener approach on the grounds that it reduced the health risks from any one product.
