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This Week: Always Coca-Cola? Breaking into a monopoly supply chain.
TLDR: Power Leaves Corp. is a company that is turning Coca-Cola’s monopoly on coca extract into an oligopoly.
Tags: Agriculture, Company, Coca, Food/Beverage, Regulation, Flavors and Ingredients
What is it?
Anyone who has had a Coke implicitly knows “decocainized” coca extract as a chemical partly responsible for Coca-Cola’s distinct flavor profile. Others may be more familiar with its illicit “cocainized” alkaloid flavor profile….
Either way, the raw coca leaf responsible for these legal and illegal components is itself is a Schedule One, globally banned substance under the 1961 UN Single Convention on Narcotic Drugs. The net result is that growing coca leaf is illegal in all jurisdictions subject to the convention, which covers everywhere where coca can grow, namely the high-altitude tropics of South America and South Pacific.
Exceptions are granted at the discretion of individual governments to protect indigenous rights – a key consideration here.
How does Coca-Cola procure coca extract if coca is illegal? Carefully, legally and monopolistically through its supplier: Maywood Chemical Works of New Jersey, now owned by the Stepan Company (Ticker: SCL). Maywood and now Stepan have a US government granted monopoly on the importation of raw coca leaf since the Jones-Miller Act made coca imports illegal in 1922; coca already being highly regulated by the Harrison Narcotics Tax Act of 1914.
Nice work if you can get it and Maywood got it (along with Merck for a brief period) by working closely with Coca Cola and the US Government to keep tight control over coca and opiates. It turns out that Coca Cola’s third president, Robert Woodruff, had a knack for creating monopolies having successfully made the fortunes of the White Motor Company during World War I by lobbying the US Ordinance Department to mandate a truck design that only White Motors could fulfill.
Despite efforts by others to break this grip on coca extract, the relationship remains intact to this day.
How does Power Leaves navigate this terrain?
First, like Stepan, by sourcing coca leaf exclusively from indigenous farmers that have been granted government exemptions to grow coca legally. While Coke works in Peru, Power Leaves has focused on the Nasa community of Columbia.
Second, unlike Stepan, by using novel technology to process these coca leaves into coca extracts in-country. Then shipping the legal extract, which is Generally Recognized as Safe (GRAS), instead of the illegal leaf to the US (and elsewhere). The coca alkaloids are destroyed on-site, by the Nasa, which is an important legal precondition to production. A moat for sure.
Side note: Coca is not to be confused with Cocoa – the dried seed of the Cacao tree, which brings us chocolate. Cocoa and its future is another briefing for another day.
Why is it interesting?
“Competition is for losers: If you want to create and capture lasting value, look to build a monopoly” – Peter Thiel
Instead of challenging Coca-Cola’s legal advantage directly, Power Leaves has cleverly used its patented technology to maintain but exploit the protections afforded Coca Cola. We are big fans of maintaining margin, which is extremely difficult to do in commodities and basic materials.
The total global food and beverage market is ~$7.2T in size sporting a 7.3% CAGR. Yet, the majority of non-sugar substitutes are chemically synthesized with zero, if not negative, nutritional value (see. Aspartame and Stevia). Power Leaves checks all the right trend boxes: socially responsible, clean label, non-GMO, natural, high-protein and low calorie. If it taste hits, it’s hard not to see coca growing exponentially.
But how does it taste? Power Leaves claims coca extract is 40% less sweet than sugar with a mint and berry profile. Functionally, it can decrease sugar use while cutting bitterness in beverages while offering a full stand-alone flavor profile. This is where our focus lies and where we will be spending time to figure out, in the advertising of Coca Cola, if there is “real magic” here. If anyone has already tasted the product (or can get us a tasting, please let us know!)
What does it cost, and can it scale? Saffron, vanilla, black truffle and kopi luwak are also amazing ingredients but are cost prohibitive for mass consumption. Alarm bells go off when upstream harvesting is done by hand and downstream production is located deep inland, at high altitude, under guard, in a country known for instability (though rapidly and admirably stabilizing, hopefully with the help of Power Leaves).
Yet, we remain optimistic, given that the local supply for illegal alkaloid coca extract seems unconstrained in the face of decades of increased global demand. So much so that coca leaf cultivated for illicit purposes is in oversupply in Bolivia, Columbia and Peru, reducing the price (and other) threats to exempted crops that are being cultivated by the Nasa.
Power Leaves is in the market raising capital. We have no position or affiliation with the company or opinion on the value based on our quick take. We will continue working on this trend, though, and will keep you posted as it develops.
Have a great week! Keep in touch.
-Bill
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