Learning Something Every Day

Have you heard of a business called Stepan. I had not either. It is a manufacturer of specialty chemical products with a design section that helps others create such materials. It is 89 years old and has listed shares worth more than $2 billion. It is still run by family.

I don’t think I would value it highly as an investment but it is fascinating. I will dig more and keep it in the maybe pile.

What’s interesting about it?

It has been a key supplier to Coca-Cola since inception. How many business have a supplier relationship that long? What do they do that is so unique and how do they do it?

The Coca-Cola name refers to the initial ingredients in their product. Coca leaves and Kola beans. The somewhat bitter taste is masked by sugar or now high-fructose corn syrup. Since 1929, the product has contained no cocaine but it still needs the coca leaves for flavour. The coca leaves with cocaine extracted were made available by Maywood Chemical Works in New Jersey and that business was acquired by Stepan in 1959

Stepan is the only business in the United States licensed by the DEA to import coca leaves. They process them to extract the cocaine which is sold to the pharmaceutical industry and is used in some local anesthetic materials. The spent leaves go off to Coca-Cola.

How much goes there? About 100 metric tonnes. That is 220 thousand pounds. I cannot find the dollar value of those leaves but I suspect it is not 50 cents a pound.

What we can learn.

It is nice to have a monopoly product even if it is in a tiny market.

The specialty chemical business is an interesting one. I have had clients in that business and the product sells for many times its cost to produce. It is not unusual to find the container the material goes into costs more than the product itself. I know of one that retailed years ago for $2.99 per unit and cost less than three cents to make. As one math-challenged colleague mentioned. “That 100% markup makes a nice business.” You will see examples all over your world. From Armor All to Windex, From Chanel #5 to WD40. Specialty chemicals are an important part of our lives.

From a business standpoint they are about “Break Bulk” You don’t make Windex a liter at a time. You make ten thousand of liters very inexpensively and then package it for convenience. There is little challenging inĀ  e chemistry and the packaging in convenient containers is where the value added appears.

Marketing and distribution are the essential costs.

The takeaway

Even if you could reverse engineer the Coca-Cola recipe, you couldn’t compete because you would have no access to the Coca piece. Kola bean doesn’t look too hard.

Specialty chemicals can make a very good business. You don’t have to $2 billion a year like Stepan. If someone has connection i the retail world, and is willing to work very hard in the beginning, $2 million a year of sales at a 30% profit margin can provide a nice living and money to use for expansion. You design a formula, find a business to make it for you, have them ship to another business who will put it into bottles and boxes. From there you need some shipping labels and trucking company.

The 30% profit margin may turn out low.

It’s much easier to get established in a small business with little fixed overhead and large margins than it is to invent something that needs much infrastructure, like Facebook. You need to be willing to work hard and have a product that customers want. If someone is detailing their $50,000 car, do you suppose they care if Armor All costs $3.99 or $13.99?

If you go to McDonalds, I think it is a fair guess that the cup, the lid, and the ice costs more than the Coke.

Help me please. If you have found this useful, please subscribe and forward it to others.

I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

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