01 - Combine flour, sugar, yeast, and salt in a large bowl or stand mixer. Add warm milk, egg, and softened butter. Mix until a soft dough forms, then knead for 8 to 10 minutes until smooth and elastic.
02 - Divide dough into three portions: 60% for red flesh, 25% for white rind, and 15% for green skin. Add red food coloring and watermelon extract to the largest portion, kneading until color is even. Fold in chocolate chips as seeds. Leave the medium portion plain for white rind. Mix matcha powder or green coloring into the smallest portion.
03 - Shape each dough portion into balls and place in separate greased bowls. Cover and let rise for 1 hour until doubled in size.
04 - Punch down each dough portion. Flatten red dough into a log the length of your loaf pan. Wrap white dough around the red log, then flatten and wrap green dough around both layers to create a three-layer loaf. Pinch seams tightly to seal.
05 - Place loaf seam-side down in a greased 9x5-inch loaf pan. Cover and let rise for 30 to 45 minutes until puffy.
06 - Preheat oven to 350°F. Bake for 30 to 35 minutes, tenting with foil if the top browns too quickly.
07 - Cool in pan for 10 minutes, then remove to a wire rack. Cool completely before slicing to reveal the watermelon pattern.