Nathalia Arruda, Beau Jewell, Julio Mota,

Gustavo Perez Ara, Allison Schuster

April 2014

STUDENT

CASE

STUDY

TerraCycle:

Towards an Environmentally Friendly Expansion

For the exclusive use of the Course B236

Strategy and Innovation in the Evolving Context of International Business

Nathalia ArrudaBeau JewellJulio Mota Gustavo Perez Ara Allison Schuster

TerraCycle: Towards an Environmentally Friendly Expansion

I. Introduction

Tom Szaky, CEO and Founder of Terracycle, thought back on all of the progress his company had made over the last few years. It had not been an easy path as the company had to make many pivots along the way, initially starting in the fertilizer A.K.A. “Worm Poop” business before eventually branching out into other sustainability focused areas such as company-sponsored waste recycling and upcycling. While Tom truly believed in eco-capitalism and thought that Terracycle was making much progress, the question was how to scale the business from here in order to do as much good for the environment as possible…while still focusing on growth and profitability. Along with its products, Terracycle too had to be sustainable.

The company had begun looking at international expansion in Brazil, however, Tom questioned whether it would be better in the long run to grow his company more organically so as to not stretch its resources too thin. Other avenues the company was pursuing was that they had become adept at finding socially responsible business models and venturing further from traditional recycling, into areas such as recycled art or home goods, which could present another opportunity for growth.

As Tom thought about the future he wondered how he should weigh the issues of profits vs. social responsibility. Growth would be beneficial to both, but in which way should the company grow?

II. Household Waste Production, Recycling and Upcycling

Solid Waste Production and Disposal

The US Environmental Protection Agency (EPA) classifies solid waste (i.e., garbage or trash) as: (1) hazardous, (2) industrial solid waste, and (3) municipal solid waste. 1

Hazardous waste is the byproduct of manufacturing and industrial processes as well as common household products (e.g., paint thinners, batteries, used motor oil). Disposal of hazardous waste is controlled and not 2

normally permitted in landfills. Industrial solid waste consists of waste materials and byproducts from manufacturing, industrial processes and construction, including non-hazardous chemicals, construction

1 U.S. Environmental Protection Agency. “Wastes” 11 Dec, 2011. http://www.epa.gov/epawaste/basicinfo.htm2 “Hazardous Waste Listing—A User-Friendly Reference Document, Draft, March 2008,” EPA

1

For the exclusive use of the Course B236

materials, food byproducts and medical waste.

The category of interest to TerraCycle is municipal solid waste (MSW) which results from everyday consumer and household activities. In the US, fifty-five percent is produced by residential households, the rest by commercial and institutional entities. Every day, the average American generates 4.3 pounds of waste, 3

resulting in 251 million tons annually. (See exhibit 1 for composition of MSW, and exhibit for waste per 4

capita in select countries)

Other advanced countries are close to the US in per capita waste produced. Brazil, on the other hand, 5

produces less than half the MSW per capita than the US—2 pounds for waste per day on average (71.2 million tons annually). The amount varies greatly however among regions, with urban areas producing roughly twice per capita as rural regions. Despite producing less waste, the growth in per capita waste in Brazil increased 1.3% CAGR since 2000 while in the US, per capita was production has declined 8% from a high of 4.7 pounds per day in 2000.

In the US, 12% of municipal solid waste is burned to reduce landfill volume as well as to generate energy. Thirty-five percent (or 87 million tons annually) is recycled or composted. Fifty-four percent is dumped in one of 1,908 landfills. In Brazil, 60% of MSW ends up in open dumps, waterways and other irregular 6

destinations. Even the majority of the remaining waste is deposited in “controlled” landfills, which are in substandard to fully-lined, “sanitary” landfills. The composition of MSW in Brazil also differs from the US, 7

with 57% being organic material (vs. 28%) and 34% being plastics, metals and glass (see exhibit 7).

Recycling

Recycling in the US has boomed since 1985, when only 10% of municipal solid waste was recycled. Rates improved to 26% in only 10 years (1995) and hit 35% in 2012. While European countries produce similar amounts of waste per capita as the US, their recycling results are significantly better. The UK recycles at the same rate as the US, but Sweden, Austria and the Netherlands recycle half of their municipal waste, and Germany and Belgium are recycling almost two-thirds of their waste.8

Of the 87 million tons of recycled municipal waste, 75% is post-consumer material; the rest is food, yard clippings and other organic matter. Paper/cardboard accounts for the largest amount of recovered material (44 million tons annually); it also has one of the highest recovery rates—65% is recycled. In terms of products, packaging is the most recycled (39 million tons) and has the highest recovery rate (52%). (See exhibit XXX for recovery by material, and exhibit XXX for recovery by product)

In Brazil, only 13% of MSW is recycled. There is little curbside collection and sorting for recyclable materials, 9

3 U.S. Environmental Protection Agency. “Municipal Solid Waste in the United States: 2009 Facts and Figures.” Dec, 2010. http://www.epa.gov/waste/nonhaz/municipal/pubs/msw2009rpt.pdf4 U.S. Environmental Protection Agency. “Municipal Solid Waste Generation, Recycling, and Disposal in the United States: Facts and Figures for 2012.” Feb, 2014. http://www.epa.gov/waste/nonhaz/municipal/pubs/2012_msw_fs.pdf5 Harmony Enterprises, Inc. “Trash and Recycling Trends Infographic” 20 June, 2012. http://harmony1.com/trash-and-recycling-trends-infographic/ 6 U.S. Environmental Protection Agency. “Wastes” 22 Nov, 2013. http://www.epa.gov/epawaste/basic-solid.htm#industrial7 Bianchini, Alberto and Carlos Silva Filho, “Waste Management in Developing Countries: Present Conditions and Foreseen Paths - A Brazilian Overview.” http://www.iswa.org/uploads/tx_iswaknowledgebase/619864_Paper.pdf8 Harmony Enterprises, Inc. “Recycling and Trash in Europe - Infographic” 25 April, 2013. http://harmony1.com/recycling-and-trash-in-europe-infographic/ 9 Pires, Cristine. “Brazil recycles only 13% of its waste”, Infosurhoy, 23 February, 2012

2

For the exclusive use of the Course B236

so only 10% of that amount is through government action. Most recover is done by “pickers” who comb landfills for valuable materials. They successfully recover 96% of aluminum (which has a value of $2000 per ton) and 79% of paper. (See exhibit 7 for rates of other materials)

Recycling is a $500 billion industry globally, with the US accounting for half. According to a 2001 EPA study 10

“the recycling and reuse industry consists of approximately 56,000 establishments that employ more than 1.1 million people, generate an annual payroll of nearly $37 billion, and gross over $236 billion in annual revenues.” Forty percent of US recyclable waste is exported generating $39 billion in revenue. 11 12

Another study by the State of Missouri finds that the economic benefits from recycling “seem negligible at the front end of the supply chain [i.e., saving from less demand on landfills], but as materials flow further downstream the value of the commodity increases, as do the wages and skilled labor required to render the commodity into an end product.” 13

Upcycling

Upcycling is the process of using waste materials to create new useful or artistic products of improved quality. “Recycling takes consumer materials — mostly plastic, paper, metal and glass — and breaks them down so their base materials can be remade into a new consumer product, often of lesser quality.” 14

Regulation

There is little formal regulation or requirements for recycling. Extended product responsibility (ERP) is the 15

most common legislation. Manufactures of certain classes of waste are held responsible for the end-state of those products, generally by paying fees used for proper disposal practices. In the US, ERP varies by state (see exhibit XXX). Legislation in Brazil centers on: (1) requiring municipalities and states to set up new practices for waste management and recycling, (2) ending use of “irregular” landfills and dumps, and (3) extended product responsibility. There is also increasing federal and local funding for waste management and recycling.

III. TerraCycle History

During the summer of 2001, Tom Szaky had a business idea to address a major environmental issue. The idea had come from a visit to a friend who owned a terrarium. Worms in the terrarium ate solid waste and transformed it into compost. Observing this phenomenon, Tom started to consider whether he could produce large quantities of compost for fertilizer using a larger amount of waste . While studying at 16

http://infosurhoy.com/en_GB/articles/saii/features/main/2012/02/23/feature-0110 Note: industry figures include not only recycling of municipal solid waste (MWS) but also of industrial solid waste and hazardous waste. 11 US Environmental Protection Agency, “Results of the National REI Study”, July, 2001 http://www.epa.gov/wastes/conserve/tools/rmd/rei-rw/result.htm12Minter, Adam. “5 things that would blow your mind about the recycling industry. New York Post, 9 November, 2013, http://nypost.com/2013/11/09/5-things-that-will-blow-your-mind-about-the-recycling-industry/ 13 Bellamente, Mike, “Recycling in the United States”, Environmental Improvement and Energy Resources Authority, March 2011 http://www.macogonline.org/archive/other/MMDP_Recycling%20Industry%20Analysis.pdf14 Hipcycle, “What is Upcycling Anyway?, http://hipcycle.com/what-is-upcycling15Product Stewardship Institue, “Exended Producer Responsability State Laws”, January 2014, http://productstewardship.us/displaycommon.cfm?an=1&subarticlenbr=28016 Strauss, Robert. “But the Employees are Really Spineless. New York Times, 10 April, 2005.

3

For the exclusive use of the Course B236

Princeton, Tom got authorization from the schools administration to collect organic waste from Princeton cafeterias and convert it in quality fertilizer that he named as “worm poop”. After four years of struggling for funds to produce and market his product, Tom closed his first major deals with The Home Depot and Wal-Mart in the Canadian market. Wal-Mart placed an order of Tom’s fertilizer for every store in Canada, which was four times bigger than TerraCycle’s combined sales for all of 2004 . 17

One of the unique features to the fertilizer was its packaging. Not having enough money to purchase containers, TerraCycle collected used bottles, which proved to be a major innovation that would change their core business from producing fertilizers to upcycling. The company was not only processing organic waste, but it was converting negatively valued commodities into valuable products. With this idea in mind, TerraCycle proactively searched for disposable items that could be transformed into valuable products within its existing customers. Soon after, the company was offering an array of different items such as the Urban Art Pot made from electronic waste and the Rotary Composter made out of old wine barrels. The business model was gradually changing under a new concept of sponsored waste. TerraCycle would partner with Consumer Packaged Goods (CPG) manufacturers to manage programs that pays consumers to collect non recyclable packaging to be then recycled or upcycled into valuable items.

Despite these developments, the American market still needed to be addressed. The following years were dedicated to expanding domestically and by 2006, the fertilizer products could be found in Wal-Mart stores all across the US and TerraCycle was on its way to becoming a million dollar company. They developed new product lines and progressively increased their sales. Parallely, the media was also catching up with TerraCycle’s growth. By 2007, the company was featured in publications within the Wall Street Journal, New York Times, Associated Press and Businessweek. Tom received.

By the year 2008, TerraCycle had gained strength in the American market having partnered with Pepsico to collect their Frito Lay bags and negotiating new deals with top American brands such as Capri Sun and Oreo. They had also consolidated their partnerships with the biggest American retailers, having access to the best distributors to make their products available for customers nationwide. Nevertheless, much more could still be done and TerraCycle had to decide how to continue in their path towards becoming the leader in the collection and reuse of non recyclable waste while being sustainable.

IV. TerraCycle Innovation and Business Model

In its initial stage, TerraCycle’s core business was its organic fertilizer. The eco-space lent itself to innovation and to reduce costs TerraCycle began collecting used soda bottles to re-use as packaging. As the number and size of the fertilizer orders increased, TerraCycle needed a way to source larger quantities of soda bottles. This was the beginning of the “Bottle Brigade.” TerraCycle worked with schools to develop a recycling education program. As part of the program, students collected used 20-ounce soda bottles. Once a certain amount of bottles accumulated, the waste was mailed to TerraCycle. In addition to teaching environmental education, the program served as a fundraiser because TerraCycle donated approximately $0.05 to the school for each bottle collected . The Brigade program successfully addressed the bottle 18

sourcing issues while also engaging the broader public in TerraCycle’s mission to eliminate waste. In 2008, Tom met Seth Goldman, the founder of Honest Tea, and their meeting catalyzed the expansion of

17 Koenig C. and Kurz, S . “TerraCycle: Turning Trash into Cash.” William Davidson Institute and Cornell University. April, 2009.18 Koenig C. and Kurz, S . “TerraCycle: Turning Trash into Cash.” William Davidson Institute and Cornell University. April, 2009.

4

For the exclusive use of the Course B236

the Brigade collection model. At the time, Honest Tea was introducing a new product, Honest Kids. Honest Kids was a beverage sold in a juice pouch made of plastic and aluminum, a combination of materials that is nearly impossible to recycle. Tom explained, “What most people don’t realize is that most flexible plastic is not recyclable, and the combination of flexible plastic and metal is killer.” Without an economic way to 19

recycle juice pouches, virtually all ended up in landfills. The Honest Tea brand promoted sustainability and Seth was worried about the amount of waste that would be created from the juice pouches and wondered if there was an alternative to the landfill. This was a key moment for Tom as he realized that, “what concerned him [Seth] was that Honest Kids juice pouches would wind up being litter. Mangled and dirty. Brand-specific waste is important to a company because their logo is plastered all over it.”20

TerraCycle could address the branded waste problem by offering companies a “premium” recycling service where waste would be recycled or “upcycled” into new products. A deal with Honest Tea to led to the creation of Juice Pouch Brigades. However, these brigades also started collecting Capri Sun juice pouches. Capri Sun is a brand of Kraft Foods, Inc., and when Tom realized that such large quantities of Capri Sun pouches had been collected, he called Kraft. TerraCycle and Kraft reached a licensing deal, which brought TerraCycle a new level of attention and credibility. Other deals with major brands like Nestle Purina, Sara 21

Lee, General Mills, and Frito-Lay soon followed. By 2011, brigades around the country were collecting millions of pieces of trash through 45 different sponsored waste collection programs. Juice pouches alone 22

accounted for about 1 million pieces of trash sent to TerraCycle every two days. Anyone can participate in a 23

Brigade by signing up for free on the TerraCycle website or joining an already existing collection location. When a certain quantity of waste is collected at a location, the collector prints a free shipping label from the TerraCycle website in order to mail the waste. For every trash item returned, TerraCycle donates two-cents to a school or non-profit of the collector’s choice. Although TerraCycle’s broader mission is to eliminate waste, it is equally concerned with making a profit and so it only collects waste that it is paid to collect: branded waste streams that have a brand sponsor. The waste is then either reused, upcycled, or recycled. Some waste streams, like batteries and ink cartridges can be reused, while other waste, like the juice pouches can be upcycled into new products like backpack and lunch boxes. Of all the waste collected, reuse and recycling are suitable for about one percent and four 24

percent, respectively. TerraCycle recycles the remaining 95% of the waste using its own proprietary plastic recycling processes. Though recycled plastic offers relatively low margins, it can be sold for use as industrial plastics.

V. Challenges and Threats

International Expansion:

While international expansion provided a tempting growth opportunity, particularly for a business model such as Terracycle’s, which relies on environmentally concerned individuals and institutions, there are many risks and challenges associated, though not unique to Terracycle. Besides being cash intensive, opening international operations pose important challenges such as finding talent, overcoming language barriers,

19 Szaky, Tom. Revolution in a Bottle. 1999.20 Ibid.21 Ibid.22 Szaky, Tom. “What If We Just Tell Everyone to Send us Their Waste.” New York Times. 7 July, 2011. 23 Ibid.24 Interview, Tom Szaky. https://www.youtube.com/watch?v=iV8mRnqb3ME

5

For the exclusive use of the Course B236

adapting to tax and legal regulations, culture and values (particularly in relation to the environment), among others. Perhaps the biggest problem is developing revenue streams after deciding to make the investment. Terracycle attempts to mitigate these risks by partnering with a corporate sponsor prior to deciding to move into a new market, which is still not a surefire way to eliminate problems. Another issue that Tom worries about most is finding General Managers capable of running each new location. On Terracycle’s online blog Tom states: “The key challenge with G.M.’s is that the job changes quickly. Initially, these new offices are one-person shops, and the G.M.’s have to do everything — get the deals, manage them, handle the accounting, and provide customer service. It’s highly entrepreneurial and highly stressful. Then, as the office expands and more staffers are hired, the job evolves into a managerial function” .25

Core Business Growth:

Since Terracycle’s core recycling business is based on collection by Individuals and “Brigades” along with sponsorship by corporations, expansion is based on demand from brand sponsors and the availability of input sources to gather sufficient waste quantity. Though the company has been successful in increasing supply of materials alongside its growth, its difficult to see how this could continue on a much larger scale due to their ‘homegrown’ model.

Attracting brand sponsors is continuously a main challenge to sustain Terracycle’s revenues and growth. When TerraCycle reaches out to sponsors they often use CSR as the entry point, but because corporations’ marketing departments have a much larger budget, most of TerraCycle’s revenue is currently coming from the sponsors’ marketing groups. Marketing the benefits for the sponsor’s brand image of a partnership with Terracycle thus becomes essential for Terracycle’s sustainability.

Adding New Business Lines:

TerraCycle has to be able to find a recycling solution for all the waste it collects, which is a huge R&D challenge. Once they have determined a way to recycle the waste, they go to different vendors - plastic processors – to do the actual recycling. Balancing demands of certain wastes for the type of products that Terracycle is sponsored to recycle is both a blessing and a curse. Free raw materials shouldn’t be discounted but as they say ‘pickers can’t be choosers’ and this is the primary reason that Terracycle’s business lines have diversified in the way that they have. If Terracycle chooses to continue on this path then marketing and sales become more difficult along with securing enough input materials. This could also lead to relationship issues with customers and create a very difficult to manage supply chain. However, if organic growth in its existing business lines stalls, adding new lines and products may be the only path to expand operations.

VI. A Dilemma or an Opportunity

As Tom reflected on his company's growth and his vision for the future an email came across from PepsiCo Brazil. They had heard of Terracycle's involvement with upcycling while partnered with Frito Lay in the U.S. and were very impressed. Further, they proposed a partnership with Terracycle to set up consultants in Brazil to manage a similar venture. While this was an amazing opportunity, Tom wasn’t sure if this was the right direction to pursue. Should he insist on setting up a subsidiary in Brazil to more fully manage the process? Tom wasn’t even sure if his board of directors would like the idea of international expansion at this time. This expansion could really spur the growth that Tom was looking for, but would it be too much for the small company to handle? Should TerraCycle continue focusing their efforts and investments in the American market instead?

25 Quote extracted from “The Risks of Expanding Into Australia”, March 3, 2013, by Tom Szaky.

6

For the exclusive use of the Course B236

VII. ExhibitsExhibit 1

Exhibit 3 Waste Production / Waste Recovery

Exhibit 4Seven Categories of

Plastic by Plastic Identification code

(PIC)

#1 (PET) Polyethylene terephthalate is what a soda bottle is made from. Because it is high in value and typically clear in color, and it is used for many products,it is the most recycled plastic in the world.

#2 (HDPE) High-density polyethylene is used in everything from water pipes to milk jugs and it is the second most recycled plastic in the world.

#3 PVC Polyvinyl chloride is used in blister packs, plumbing pipes, and vinyl records.

7

For the exclusive use of the Course B236

#4 (PE-LD) Low-density polyethylene is flexible and strong and is used in things like frozen-food bags and squeezable bottles.

#5 (PP) Polypropylene is popular packaging for yogurt and margarine and is used inmany disposable cups and cutlery.

#6 (PS) Polystyrene is used in similar applications as #5 plastic

#7 (Other) Used for a range of products form contact lenses to DVDs

Exhibit 5

Exhibit 6

Composition of Brazil’s Municipal Solid Waste

Exhibit 7

Brazil Waste Production and Recycling Waste

8

For the exclusive use of the Course B236

Exhibit 8

9

For the exclusive use of the Course B236

10

For the exclusive use of the Course B236

11

For the exclusive use of the Course B236

VII. Endnotes / Sources

Bellamente, Mike, “Recycling in the United States”, Environmental Improvement and Energy Resources Authority, March 2011 http://www.macogonline.org/archive/other/MMDP_Recycling%20Industry%20Analysis.pdf

Bianchini, Alberto and Carlos Silva Filho, “Waste Management in Developing Countries: Present Conditions and Foreseen Paths - A Brazilian Overview.” http://www.iswa.org/uploads/tx_iswaknowledgebase/619864_Paper.pdf

“But the Employees are Spineless. New York Times, 10 April, 2005.

Harmony Enterprises, Inc. “Trash and Recycling Trends Infographic” 20 June, 2012. http://harmony1.com/trash-and-recycling-trends-infographic/

Harmony Enterprises, Inc. “Recycling and Trash in Europe - Infographic” 25 April, 2013. http://harmony1.com/recycling-and-trash-in-europe-infographic/

“Hazardous Waste Listing—A User-Friendly Reference Document, Draft, March 2008,” EPA

Hipcycle, “What is Upcycling Anyway?, http://hipcycle.com/what-is-upcycling

Interview, Tom Szaky. https://www.youtube.com/watch?v=iV8mRnqb3ME

Koenig C. and Kurz, S . “TerraCycle: Turning Trash into Cash.” William Davidson Institute and Cornell University. April, 2009.

Minter, Adam. “5 things that would blow your mind about the recycling industry. New York Post, 9 November, 2013, http://nypost.com/2013/11/09/5-things-that-will-blow-your-mind-about-the-recycling-industry/

Pires, Cristine. “Brazil recycles only 13% of its waste”, Infosurhoy, 23 February, 2012 http://infosurhoy.com/en_GB/articles/saii/features/main/2012/02/23/feature-01

Product Stewardship Institue, “Exended Producer Responsability State Laws”, January 2014, http://productstewardship.us/displaycommon.cfm?an=1&subarticlenbr=280

Quote extracted from “The Risks of Expanding Into Australia”, March 3, 2013, by Tom Szaky.

Szaky, Tom. “What If We Just Tell Everyone to Send us Their Waste.” New York Times. 7 July, 2011.

Szaky, Tom. Revolution in a Bottle. 1999.

U.S. Environmental Protection Agency. “Wastes” 11 Dec, 2011. http://www.epa.gov/epawaste/basicinfo.htm

U.S. Environmental Protection Agency. “Municipal Solid Waste in the United States: 2009 Facts and Figures.” Dec, 2010. http://www.epa.gov/waste/nonhaz/municipal/pubs/msw2009rpt.pdf

U.S. Environmental Protection Agency. “Municipal Solid Waste Generation, Recycling, and Disposal in the

12

For the exclusive use of the Course B236

United States: Facts and Figures for 2012.” Feb, 2014. http://www.epa.gov/waste/nonhaz/municipal/pubs/2012_msw_fs.pdf

U.S. Environmental Protection Agency. “Wastes” 22 Nov, 2013. http://www.epa.gov/epawaste/basic-solid.htm#industrial

US Environmental Protection Agency, “Results of the National REI Study”, July, 2001 http://www.epa.gov/wastes/conserve/tools/rmd/rei-rw/result.htm

13