Business Fundamentals Applied to Sustainable Companies: TerraCycle Case Study

 

Abstract
This paper demonstrates that sustainability can be profitable for small startups, as well as for large, well-established corporations. This paper analyzes TerraCycle — a start up company based on upcycling — by reviewing the company’s business strategy, marketing approach, community involvement, leadership, and profitability. It compares TerraCycle’s strategy with other upcylcing companies such as Ecoist and Simple Shoes. It also explains that the economics of going green is becoming more compelling, as demonstrated by the Dow Jones Sustainability Index performance, the 2010 Global 100 Corporate Sustainability Benchmark study, and Newsweek’s Green Raking of the most sustainable companies. This paper concludes that sustainability is not only good for business but is also an imperative as natural resources become scarcer. Finally, regardless of company size or approach to sustainability, solid business practices are necessary to enable a company to achieve ongoing profitability.

Introduction
The sustainability and corporate responsibility movement of the past decade has raised the question of whether sustainable businesses can be profitable and to what degree.  Several startup companies, such as TerraCycle, Ecoist, and Simple Shoes, are working to capitalize on this movement.  In addition, well-established firms are integrating sustainability into their end-to-end business practices, including GE, HP, Microsoft, and Procter & Gamble.  In all cases, good business practices are required for a company to remain viable.  These fundamental business practices include expense management, producing a product consumers will purchase, product focus and revenue generation.

Founded in 2001, TerraCycle is a start up company created by two Princeton students who designed and sold one of the first commercially-available products made entirely from garbage (Burlingham, 2006).  CEO Tom Szaky was 19 when he created TerraCycle while competing in a business plan contest.  His first TerraCycle product was a fertilizer made of worm poop packaged in used water bottles.  In the past decade, the company has expanded into a full-scale upcycling company selling a variety of products.  Upcycling is the process of converting garbage or other discarded items into products of higher value (Miller, 2010).  Today, TerraCycle sells 50 products, such as backpacks, messenger bags, kites and insulated coolers made from candy wrappers, drink pouches, and potato chip bags destined for a landfill.  Since its inception, TerraCycle has salvaged 10 million drink pouches, 50,000 energy bar wrappers, two million bottles, and one million cookie wrappers (National Geographic, 2010).  It recently began making clocks out of discarded computer circuit boards and vinyl records.  In the summer of 2010, TerraCycle plans to release its newest product: a 30-gallon garbage can made from discarded pens (TerraCycle, 2010).

TerraCycle has achieved this progress in 10 years through the combination of a clear mission, outstanding community involvement, social marketing, big box partnerships, strong talent acquisition, and visionary leadership.  The company’s mission is simple: to eliminate landfill waste by finding innovative and unique uses for materials that others would deem as garbage, then sell it at a price at or below the competition.  “We want to be the Wal-Mart of garbage,” says Szaky (Feldman, 2009, para. 3).

One of the financial advantages on which TerraCycle capitalizes is extremely low raw material costs.  Groups called brigades formed at schools, churches, and non-profits collect the garbage, and are paid two cents for every item collected.  Corporate sponsors such as Kraft Foods, Kellogg’s, and Nabisco pay for this donation, plus shipping costs to transport the collected garbage to TerraCycle.  In 2010, over 30,000 schools participated in the program (Latchford, 2010).  This approach to material acquisition also promotes social marketing.  When a student collects garbage to send to TerraCycle, and then purchases a TerraCycle product, they are buying something they helped create.  (Roth, 2010).

TerraCycle has also demonstrated strong community ethics.  The TerraCycle website offers access to a free curriculum series developed by the Cloud Institute targeted to three grade ranges with lessons on material cycles, biomimicry, and the difference between recycling in Nature and human-created garbage (TerraCycle, 2010).  TerraCycle also placed its factory in inner city Trenton, NJ, to capitalize on abundant labor and inexpensive real estate, but with the added benefit of providing employment in a depressed community (Burlingham, 2006).

Szaky also followed a risky product placement strategy that may be paying off.  Instead of selling to small garden stores and local retailers, he relentlessly pitched his products to big box retailers, such as Home Depot, Wal-Mart, Target, and Petco.  In 2004, he landed his first major deal selling worm poop fertilizer to Home Depot (Castellitto, 2009).  Shortly thereafter, companies interested in a more sustainable image contacted TerraCycle to request to have their discarded materials turned into products.  “This is a test of how consumers’ environmental concerns might translate into sales of sustainable products” (Brat, 2010, para. 4).  TerraCycle’s unique business and success landing big name deals propelled it into the media spotlight.  TerraCycle received the cover of Inc. Magazine in 2006 and was named “The Coolest Little Startup in America” (Burlingham, 2006).  TerraCycle was also featured on The Tonight Show, Oprah, and became a National Geographic series called Garbage Moguls (TerraCycle, 2010).

Finally, Tom Szaky is a visionary leader who inspires others to join his quest.  Eric Smith, TerraCycle vice president of sales says, “There’s an aura almost when you met the guy.  He makes you believe” in the company’s mission (Barlyn, 2007, para. 18).  In fact, Szaky was able to convince 12 seasoned business leaders to join his executive team, usually at a significant salary reduction.  (Burlingham, 2006).  “The key is having [executive candidates] believe in the dream of what you want to accomplish,” Szaky says (Barlyn, 2007, para. 15).

Despite TerraCycle’s many strengths and positive impact on the environment, the company remains unprofitable and has been on the verge of bankruptcy since its inception.  In 2006, TerraCycle raised more than $4.3 million in angel funding (Burlingham, 2006).  The company lost $4.5 million in 2008 on sales of $6.6 million (Brat, 2010).  Finally, in 2009, TerraCycle had to raise an addition $4 million to say afloat.  Szaky’s questionable business fundamentals account for some of these losses.  For example, ReTote, sold at Target stores, was TerraCycle’s highest grossing product in 2008.  However, all 142,000 units were sold at a loss (Feldman, 2009).

In addition, TerraCycle has pursued a wide range of product lines and a large number of distributors and partners.  This diversity and lack of focus contributes to expenses, driven by product design, production, sales, marketing, and material storage.  As an example, for Earth Day 2010, Wal-Mart created a nationwide Earth Zone themed display, placing racks of Capri-Sun juices next to TerraCycle Capri-Sun pouch backpacks.  Despite this sizable order, an abundance of donated materials waiting for orders fills six TerraCycle warehouses.  TerraCycle is hoping that the Wal-Mart promotion will translate into a consistent flow of orders, which it desperately needs to reach profitability.  “The pressure is as high as I can think of,” says Szaky (Brat, 2010, para. 3).

TerraCycle is not the only upcycling company trying to turn garbage into products that consumers want to buy.  Ecoist, founded in 2004 by the Marcoschamer brothers, has a more focused business model of designing and selling stylish handbags and accessories made from candy wrappers, food packages and soda labels from Coca-Cola, Mars, Frito-Lay, and Disney (Ecoist, 2009).  While the private company would not disclose revenues, the owners state, “At the beginning, we were at unhealthy margins.  Now, we are at reasonable margins” (Lluch, 2007, para. 6).  Another upcycling company, Simple Shoes, has focused exclusively on creating shoes from discarded and sustainable materials.  Founded in 1991 and acquired by Deckers in 1994 for $1.5 million, Simple Shoes uses plastic bottles for shoelaces and tires for outsoles.  It has evolved to becoming a closed-loop system, using organic cotton, hemp, cork, and sewed vs. glued seams, plus 100% post consumer boxes and bio-bags.  Simple Shoes believes “how we make shoes is just as important as why we make them.  We’re committed to making our products 100% sustainable” (Simple Shoes, 2010).

It is not only small start up companies that are working to turn sustainable practices into profitability.  Large, well-established companies with long histories of unbridled consumption and purely economic motivations are learning that environmental stewardship and social responsibility enhance economic viability.  To reflect this movement, Dow Jones established several Dow Jones Sustainability Indexes (DJSI) in 1999 to track the stock performance of sustainable companies around the world.  John Prestbo, Editor and Executive Director of Dow Jones Indexes, explains, “Sustainability is no longer the domain of a small group of socially minded investors and foundations.  It’s now a bono fide investment strategy.”  Criteria such as climate change strategies, energy consumption, human resource development, and stakeholder relationships determine what companies appear in the index.  Companies with demonstrated corporate responsibility and sustainability practices such as Microsoft, General Electric, and Procter & Gamble are included.  Since inception of the DJSI in 2005, it has returned 6.53%, slightly outperforming the S&P 500 at 6.37%, demonstrating that sustainability is profitable as well as beneficial to society and the environment (Dow Jones, 1999).

Similarly, ranking large corporations in terms of sustainable practices is an emerging trend as consumers demand responsibility from the corporations from which they purchase products.  Corporate Knights, a magazine for clean capitalism, conducts an annual benchmark study of the world’s most sustainable companies, called the Global 100.  Using 10 key performance indicators, Corporate Knights ranks global corporations in terms of proactive environmental management, social responsibility and approach to governance (Corporate Knights, 2010).

Figure 1. Ten sustainability key performance indicators plus an 11th “Transparency” rating which depicts the company’s willingness to disclose information. From the Global 100 Most Sustainable Corporations in the World: Criteria and Weights by Corporate Knights. Copyright 2010 Global 100.

Even mass media is publishing company sustainability rankings.  Newsweek’s 2009 Green Ranking rates the 500 largest U.S. corporations.  In partnership with KLD Research & Analytics, Trucost and Corporate Register, Newsweek evaluated each company on environmental and social aspects, such as actual resource usage, emissions, policies, and reputation (McGinn, 2009).

Sustainability enhances profitability but does not replace the need for required business fundamentals.  As natural resources become scarcer, sustainable business practices are an imperative (“Deloitte,” 2009).  Small startup companies, such as TerraCycle, are developing innovative products and solutions to take advantage of the sustainability movement.  Large companies are also integrating sustainability into existing business practices.  Regardless of a company’s size or approach to sustainability, solid business fundamentals will always be a requirement, as every company itself must be self-sustaining.
References
Barlyn, S. (August 20, 2007). Running the show; big fish, smaller ponds: To hook executives of large companies, entrepreneurs try a variety of recruiting tactics. The Wall Street Journal, p. R.6. Retrieved from http://proquest.umi.com/pqdweb?index=6&did=1322391341&SrchMode=2&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1274643271&clientId=13457

Brat, I. (May 3, 2010). Startup seeks profits in mounds of garbage — as trash piles up in it’s warehouses, TerraCycle tries to find market for products made from hard-to-recycle materials. The Wall Street Journal, p. B.8. Retrieved from http://proquest.umi.com/pqdweb?index=0&did=2023416331&SrchMode=2&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1274643271&clientId=13457

Burlingham, B. (2006). The coolest little startup in america. Inc., 28(7), 78-85.
Castellitto, L. M. (July 27, 2009). TerraCycle founder’s journey started with worm poop. USA Today, p. 5b. Retrieved from http://0-www.lexisnexis.com.shoen.iii.com/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T9398616361&format=GNBFI&sort=RELEVANCE&startDocNo=1&resultsUrlKey=29_T9398616364&cisb=22_T9398616363&treeMax=true&treeWidth=0&csi=8213&docNo=8

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Abstract

This paper demonstrates that sustainability can be profitable for small startups, as well as for large, well-established corporations.  This paper analyzes TerraCycle — a start up company based on upcycling — by reviewing the company’s business strategy, marketing approach, community involvement, leadership, and profitability.  It compares TerraCycle’s strategy with other upcylcing companies such as Ecoist and Simple Shoes.  It also explains that the economics of going green is becoming more compelling, as demonstrated by the Dow Jones Sustainability Index performance, the 2010 Global 100 Corporate Sustainability Benchmark study, and Newsweek’s Green Raking of the most sustainable companies.  This paper concludes that sustainability is not only good for business but is also an imperative as natural resources become scarcer.  Finally, regardless of company size or approach to sustainability, solid business practices are necessary to enable a company to achieve ongoing profitability

About the Author
Theresa Martin Theresa Martin has 23 years of operations management leadership at Fidelity Investments and Procter & Gamble.  As a vice president at Fidelity, Theresa led a diverse array of organizations such as manufacturing, call centers and information technology.  Her passion is renewable energy and sustainable business.  She obtained a Green MBA focused on renewable energy from Marylhurst University in Portland, Oregon. Theresa also has a BS Computer Science from the University of Illinois.

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