TerraCycle: At a Crossroads

Tom Szaky, CEO and Founder of TerraCycle, a company that sought to eliminate the very idea of waste, was wondering what he should do in light of ongoing financial concerns that were threatening the survival of the enterprise. The recipient of numerous awards and a poster child for eco-capitalism, TerraCycle had redefined the limits of what a business’ vision could represent. But the ultimate test was whether a company with such ambitions of eliminating waste could do so in a way that was profitable and self-sustained. Doing so would illustrate the power of business as a solution to some of society’s most vexing problems. Much was at stake!

Company Background

Located in Trenton, New Jersey, TerraCycle was a small privately owned business, founded in 2001 by Tom Szaky. Its mission was to “Eliminate the Idea of Waste”. Tom came up with the idea of the business when he visited his friend Pete in Montreal during the fall break from his studies at Princeton to find that their once struggling cannabis plants were flourishing after Pete began feeding the plants worm poop from the worms’ consumption of compost from kitchen scraps. Tom thought about using worms to produce plant fertilizer from organic waste, which would be really cheap to do and in the process would address a major environmental problem associated with fossil fuel-based fertilizer use. Tom and his Princeton classmate Jon Beyer learned that US consumers spent close to $40 billion on gardening and lawns in 2001. Six billion dollars of that was spent on fertilizers and other products used for growing plants, with annual expected growth holding steady at 5%. A boon for the environment, feeding the waste to worms removes organic waste from landfills that would otherwise produce methane gas. In addition, worm poop was a top-notch fertilizer because it provided the necessary nutrients for plants and improved the quality of the soil.

It was at this point in 2001 that TerraCycle was born. Using a poop-producing treadmill, the worms would be placed on a conveyer belt and would make their way to the centre of the belt while leaving their castings (poop) behind to be collected by TerraCycle. But Tom and Jon still had to find someone to buy the fertilizer. A friend named Robin had a background in marketing and suggested that they liquefy the worm poop and package the fertilizer in spray bottles. They made the first bottle and called it TerraCycle Plant Food.

Yet Tom was very short on cash and was only able to survive by entering and winning several business competitions at Princeton. Then came an opportunity to win $1 million in The Carrot Capital Business Plan Challenge. Despite feeling like they had no chance at winning, they decided to stay for the free meal and attend the awards dinner, only to learn that they won the competition. But when putting together the specifics of the prize, Tom learned that Carrot Capital was less interested in the environmental benefits of what TerraCycle had to offer and was instead more interested in tapping into the organic nature of the product because of the anticipated growth in organic fertilizer in the market. Because of this, Tom decided to decline the $1 million prize money.Because cash flow constraints made it difficult to pay for the empty spray bottles, Jon thought about using the over 200 billion soda bottles that Americans threw in the trash as a temporary measure. Realizing that this would mean that the entire product (bottle and fertilizer) would be made from waste, Tom’s vision of TerraCycle shifted to a company that only used waste to produce its products. Unlike recycling which uses energy in ways that erodes the value of the waste (e.g. plastic bottle is broken down into pellets), upcycling adds value to waste (e.g. worm poop converted into a household fertilizer). This fundamental premise underlined the early stages of the TerraCycle business model. Tom explained:

Waste is an entirely human concept. There is really no such thing in nature as waste. Everything is used; everything decomposes to become the building blocks of something else. More than that, the concept of waste is entirely a modern human idea. Basically, it didn’t exist until the twentieth century with the invention of plastic and complex petrochemical materials. ... The basic paradigm of eco-capitalism is that an object can have components that are waste and components that are valuable. The idea is to focus on what is “waste” and find a way to use it[1].[1] Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York: Portfolio, Penguin Group, 2009, p. 78 [1].​

With the financial backing of Martin Stein in the amount of $500,000, they approached large retail brands. It wasn't long before TerraCylce's fertilizer was outselling the competition on HomeDepot.com selling a wide range of plant fertilizers including TerraCycle Plant Food, TerraCycle African Violet and TerraCycle Orchid Plant Foods. And with 35 employees in 2004, they received a Wal-Mart order worth $250,000 or 100,000 bottles.

But collecting used bottles was something that TerraCycle didn’t have the resources to do. So, in 2006, they launched the “Bottle Brigade”, which was an initiative that saw TerraCycle partner with schools where children collected reusable plastic bottles and received a nominal fee ($0.02) from TerraCycle per bottle collected. By 2007,

TerraCycle had sold over $1M in fertilizer products in reused soda bottles and expanded into related products such as concentrated fertilizers, seed starters, and potting mix.

As the worm poop fertilizers generated revenue, Tom thought about what to do next. He knew that Americans paid $1 trillion annually to dispose of 14 billion tons of wasteThe biggest export in the US was waste where consumers generated 250 million tons annually.

“We had always been dumpster diving for our office furniture, but that was the first time we realized that greatly expanding our dumpster diving could fuel our production line. We had discovered that contemporary America is a vast dumpster of industrial products that manufacturers are constantly throwing away or recycling – even when they’re in perfect condition. That opened the floodgates for TerraCycle[2]

They realized that going beyond worm-poop fertilizer meant that they’d be competing in the waste industry, particularly recycling. Because of that, they first needed to understand what this industry was all about.

The Recycling Industry

According to a 2011 SC Johnson Survey of American attitudes and behaviours associated with going green, Americans were recycling twice as much in 2011 than they were in 1990. Yet, the survey also found that more than 3 out of 5 Americans agreed that if a product was not easy to recycle than it should have ended up in a landfill. Although a majority of Americans (68%) believed recycling was the right thing to do, this percentage decreases as age decreases (78% of adults 65 years of age or older versus 62% of adults 18-34 years of age).

A typical company in the recycling industry collected and separated recyclable materials into distinct categories, refined those materials into recycled commodities and then sold them to third parties. Whereas small companies might take on only small parts of this supply chain, large companies were vertically integrated in that they were involved in collection, transport, processing, disposal and monitoring of waste material. The services offered by players in the industry were undifferentiated, which intensified rivalry.

Recycling was a very labor and capital intensive industry as employees spent enormous

amounts of time sorting and cleaning recycled material. Machinery made up $0.33 for every dollar spent on labour and was necessary to melt material. Because of this, the larger players did well because of the access they had to more sophisticated machinery that produced higher quality recycled materials. For instance, these facilities might have used thermal de-polymerization to convert plastic materials ba ck into petroleum. Other technologies included infrared and x-ray sensors to spot and mark different recycling materials, conveyor belts to divert materials into different streams based on weight, magnetic pulleys and eddy currents to sort different materials[3] and programming robots to spot valuable materials on the recycling conveyor. According to the Economist (2016), the 9,800 municipal recycling facilities in the US followed different rules and were often incompatible with local systems and were not designed to handle changes in waste composition, particularly the decline of paper waste and the monumental rise of plastics. Industry analysts estimated that it would cost $1.25 billion to modernize US recycling facilities[4].

Revenue in the industry came from both the collection of recycled goods and the selling of commodities processed by the recycling process. Thus the decision to recycle a waste stream depended on whether the combined revenue gained from its collection and the sale of its recycled form was greater than the cost to collect and process the waste stream. Waste streams could therefore be categorized according to how profitable they were where, on the one end, glass and soda cans were highly recyclable because of how cost efficient it was to do so while, on the other hand, complex products like coffee cups or running shoes, both of which possessed components joined with adhesives, were too cost prohibitive to attract companies to recycle them. To illustrate this continuum further, it’s useful to consider plastics. Plastics were categorized into numbers, with municipalities often involved in recycling easier categories of 1 through 6 and more boutique recyclers recycling the more difficult categories of number 7.

Over the last couple of decades, the industry’s ability to cost effectively (i.e. make a profit) recycle complex waste streams had grown. Fueling the industry was the growing sales of recycled material, now representing 36.9% of industry revenue in 2015 with industry growth expected to grow at an annualized rate of 5.5% over the next five years to reach $6.6 Billion[5]. This growth in recycled material spawned the growth of small recycling companies, resulting in a highly fragmented competitive market with large players only capturing up to 20% of the total market. Also fueling the industry was increasing funding at the municipal level as a result of growing health concerns of garbage and growing public awareness of environmental issues. Although it is rumored that municipalities could start to creep into the boutique recycling space, it meant that these municipalities needed to develop the necessary chemical and engineering expertise to work with more complex products; which could be very cost prohibitive.

TerraCycle: Going Beyond Fertilizers

While talking to his friend Seth who produced organic juices, Tom realized that many companies pay someone to dispose of their waste. Because these juice boxes were not recyclable, Honest Tea felt responsible for its disposal. Seth told Tom that they had developed a program where children would return pouches to the company. At about this time, the CEO of Stonyfield called Tom looking to find a way to properly dispose of their yogurt cups. But the problem was that these two companies only held a small slice of the total drink pouch and yogurt cup markets respectively. Inspired by a unique model in the Phillipines called PREDA where teens collected, produced, sold and shipped items made from waste juice pouches, TerraCycle administered a drink pouch brigade where TerraCycle would organize collection from its growing school brigade program and pay them $0.02 for each

pouch collected. Seth loved the idea. Recylced drink pouches could be upcycled into pencil cases, backpacks, and lunch boxes while yogurt cups could be used as planting pots, which would complement their fertilizer line. The CEO of Stonyfield liked the idea.

By 2008, over 5,000 participating school brigades were collecting drink pouches, yogurt cups and energy wrap bars. Then retailer Walgreens placed a huge order for upcycled products that would require approximately 10 million drink pouches. TerraCycle found that although Honest Tea was the primary sponsor of recycled juice pouches, most of the pouches collected by the brigades were Capri Sun, made by Kraft Foods. TerraCycle was not permitted to use their pouches until they got Kraft Foods’

permission. Fortuitously, at around this time, Kraft was growing concerned that it didn't have a means by which to deal with unrecycled packaging. When Tom approached Kraft to sponsor the waste of their drink pouches, they explained that TerraCycle would be very helpful in creating the end-of-life solutions through consumer recycling of their products. Kraft liked TerraCycle’s business model. The partnership made TerraCycle a key component of Kraft’s sustainability endeavors. At the same time, Kraft became a credible waste partner for TerraCycle.

The relationship with Kraft Foods precipitated important changes throughout the supply chain. For packaging, this meant that Kraft needed to consider how to optimize product design, use the right source materials and figure out up front what to do with it after consumers were done with it. One example of this was how TerraCycle influenced the design of the packaging for Kenco coffee beans, which were 100% Rainforest Alliance Certified. TerraCycle helped design the packaging and worked with consumers to collect used eco-refill bags to be upcycled into new consumer products.

The notion of upcycling waste was starting to catch on. In 2008, TerraCycle partnered with Target and ran a campaign on the cover of Newsweek’s Green Issue convincing close to 50,000 readers to send in their plastic Target bags to TerraCycle to be upcycled into the world’s first reusable tote bag made from plastic bags. By 2010 the drink pouch brigade had collected and recycled over 50 million drink pouches, resulting in over USD 1 million in revenue to schools and NGOs in the process. By 2011, TerraCycle’s brigade program collected waste for 30 new products. Once word got around that the Capri Sun category was receiving positive public relations and positive feedback from consumers, other categories sought to get involved like cookie wrappers (Nabisco Cookies), lunch kits (Oscar Mayer) cheese packaging (Kraft), the aforementioned drink pouches (Capri Sun, Kool-Aid, and DelMonte), Tang pouches, Kenco eco refill bags, and gum packaging (Trident). TerraCycle also expanded partners to Frito Lay (PepsiCo), Stonyfield Farm, Mars, Wrigley and others. Geographic

expansion began in 2009 into Canada, Brazil and the UK and by 2013, TerraCycle was present in Norway, Spain, Germany, Israel, Ireland, Switzerland, Belgium, Argentina, and the Netherlands, Turkey, Hungary, Peurto Rico, Australia and New Zealand. This resulted in 120,000 brigade locations and over 2 million people collecting post-consumer waste globally.

Since 2004, TerraCycle and Tom received numerous awards. In 2004, CBC shot a documentary to feature the company and in 2006, Tom was featured on the cover of Inc. Magazine as the #1 CEO in America as part of their “30 under 30 awards”. In 2011, Brand Packaging named Tom the brand innovator of the year. In 2012, TerraCycle received the UN Leader of Social Change Award that profiled how TerraCycle facilitated the diversion of 2.5 billion pieces of waste from landfills while donating $6 million to schools and charities with the assistance of 40 million participants around the world.

With a majority of TerraCycle employees’ values and beliefs aligned so closely with the mission of TerraCycle the company had a very strong culture. Although employee commitment to sustainability varied, all of them adopted a habit of doing the little things right, and promoted environmentalism. Employees enacted a supportive and positive work environment with high levels of teamwork and creativity. There was a great sense of pride for what TerraCycle was trying to accomplish and because of that they have created a collective ego fueling their noble undertaking. Visitors to TerraCycle immediately get wrapped up into their cause.

The Upcycling Industry

The notion of upcycling was becoming a popular topic by 2015 and a growing number of companies were emerging with a value proposition of upcycling within a particular product category. For instance, Echoes in the Attic was a Canadian based company that upcycled reclaimed textiles diverted from landfills to make hand-made handbags. Echoes had a solid pulse on the handbag market and had become quite good at upcycling textiles into fashionable accessories. Upcycle Products Inc., based in the US, specialized in Upcycled Rain Barrels using barrels that were originally used to ship food overseas to markets in the USA. Food manufacturers considered these barrels scrap once emptied out because recycling them costed more than dumping them into a landfill[6]. Hipcycle is another company that retails for upcycling companies specializing in traditional home décor, jewelry and fashion[7]. Although these

companies were inspiring, very few of them were profitable due to the immense back operations needed to secure their raw materials. These inputs were typically inconsistent and varied substantially in terms of quality, leaving the companies without the necessary negotiating power to secure both the volume and quality required to turn a profit.

Revenue Streams

By 2016, TerraCycle had three main product/service lines (see Exhibit 1 for a summary). The first was the aforementioned sponsored waste (brigade) program. Consumer packaged goods (CPG) companies payed an annual fee upfront to TerraCycle for collecting and shipping their packaging waste after consumers used the product in turn for carrying TerraCycle’s logo on their product and for positive public relations exposure. TerraCycle then absorbed the cost associated with storage, waste processing, upcycling, and sales and marketing costs. By 2016, partners included Capri Sun, Nespresso, Colgate, L’Oreal, Tassimo, Materne and MOM brands whose programs make-up 44% of the total Brigades revenue. Collectors in the form of schools, churches, and community groups were brigades and received a small payment from TerraCycle for each unit of waste collected. The challenge though was that if a CPG company was on board for a particular product package, TerraCycle had to find a way to upcycle it. This involved substantial costs because TerraCycle staff needed to familiarize themselves with a wide array of product categories, come up with a product design, and then find the market that would buy it. This meant that TerraCycle had to quickly become an expert in a wide variety of product-market categories across several geographic regions. So while some of the waste was used as materials to make tote bags, pencil cases, and backpacks, orders were not sufficient to turn a profit. Losses as a result amounted to $4.5 million with revenues at $6.6 million in 2008! By 2016, revenue from the brigade program accounted for 75% of TerraCycle’s revenues but had been in decline (revenue was 80% in 2015). Margins (income after cost but before expenses) averaged between 35 and 40%.

A second and growing segment for TerraCycle that departed from the brigade business was zero waste boxes. Unlike the brigade programs where CPG companies paid Terracycle to collect and process the waste from their products, Zero Waste Box Initiatives targeted individual consumers and businesses who paid upfront to buy a dedicated box to collect specific waste streams such as K-cups, hair, ball pens, action figures, chewed gum, etc. and then sent them back when the box was filled. The upfront rate to TerraCycle covered the shipping, return shipping of the box, the sorting of the waste and the storage costs associated with waiting until sufficient volume was generated to turn a profit. That said, the upfront rate did not include upcycled product design or the marketing and sales expenses needed to sell the upcycled product. Due to the premium paid for processing fees, the more varied the materials in a waste stream, the higher the price of the box e.g. kitchen waste boxes retailed for more than the human hair box. In return customers could use the TC logo. Customers could also

ask for customized boxes with their logo printed on the boxes. Naturally, some of the Zero Waste Boxes performed better than others. By 2016, K-Cups represented the highest volume in all the Zero Waste Boxes, accounting for more than 45%. Fascinatingly, 9 billion K-cups were sold in 2014, most of them ending up in landfills[8] while 20 million American homes have coffee pod machines[9]. At the same time, there has been growing awareness of a “Kill the K-cup” campaign[10]. The Zero waste boxes grew 10% month-over-month in revenue, or 152% from 2014 to 2015. Margins (income after costs but before expenses) averaged around 50%. Initially implemented in 2014, the initiative grew to generate $2.2 million in revenue for 2016 representing 12% of total revenue up from 5% in 2015. Profit levels were impressive (as much as 20% on revenue) largely because of the low overhead cost associated with executing the program.

Although upcycling was the ideal goal, most of the waste collected by TerraCycle was processed and sold to commodity buyers. This represented their third service line and generated approximately 10-15% of their revenue. Any waste from the brigade and zero waste programs that could not be upcycled was sold to manufacturers to make recycled products. Processing of the waste was outsourced to aforementioned recycling companies and turned into recycled materials (pellets) that could be sold to manufacturers to make products made from recycled materials. TC utilized approximately ten recycling facilities in the US and ten internationally to process the waste collected. In order to lower their fixed costs, TC did not own any recycling facilities but instead owned one warehouse in Trenton, NJ and leased warehouse space as needed in the US and internationally. TC was committed to never sending collected waste to a landfill or an incinerator. Subsequently, waste streams that have low-volumes or have not found an upcycled or recycled solution were often stored in their Trenton warehouse. These unique waste streams could be stored indefinitely (with a cost), or until their R&D department determined how to process the waste and/or economies of scale could be leveraged. Higher-volume waste streams that could be processed were strategically organized and sold by TC’s operations team.

Growing Concerns

TerraCycle as a business had evolved. Thinking back, TerraCycle was considered a consumer products company that sourced raw materials from post-consumer waste to create organic plant fertilizers. But more recently, TerraCycle evolved into an organization that managed and repurposed unconventional waste from drink pouches, used flip-flops, cigarette butts, and K-cup capsules, diverting 2.5 billion pieces of waste from landfills. Operating now in over 20 countries (See Exhibit 2), engaging over 60 million people to redirect waste, and generating more than 18 million in revenue, TC was defining themselves as “an innovative recycling company that has become a global leader in recycling hard-to-recycle waste”[11].

The income statement from 2010 to 2014 is shown in Exhibit 3 below. Although TerraCycle showed promising revenue growth from 2010 to 2013, revenues in 2014 and 2015 plateaued and the company had yet to turn a profit. TerraCycle’s strategy to this point, in retrospect, had been about growth – aggressive growth. The company had a growth rate of 103% since 2011. As Tom explained:

“Until 2008, the more we grew the more money we lost. ... There is an explicit expectation of aggressive revenue growth. ... It hasn’t always synched with that other very important line on our profit-and-loss statement: the profit"[12].

TerraCycle’s operating income from 2010 to 2013 had been negative. Once you included expenses in this total, Terracycle had been losing in the range of $550,000 to $2.6 million per year from 2010 to 2014. In 2014, sales revenues grew by only 1.3% and 2015 revenue projections indicated sales revenues would again be flat or even decline to $18.1 million. Although Tom attracted investors quite successfully, the profit wasn’t quite there. A common theme throughout TerraCycle’s history was their need for cash. Cash from operations, since its inception, had been non-existent, which meant that TerraCycle had always been dependent on debt and investors (see Cash Flow Statement in Exhibit 4). In 2010, TerraCycle borrowed $1 million USD in long-term debt and issued $1.9 million in equity. But investors were growing impatient and Tom wasn’t sure how much longer banks would loan them cash.

Tom was wondering how he should move the company in a more financially sustainable direction while staying true to its vision of eliminating waste. An Initial Public Offering (IPO) was not something Tom was considering. Tom thought about what business they were in. Wasn’t it to eliminate waste? Was that a business? Was this the right business model to make a difference while demonstrating profitability?

Exhibit 1

Exhibit 2

Exhibit 3

Exhibit 4

[1] Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York: Portfolio, Penguin Group, 2009, p. 78.

[2] Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York: Portfolio, Penguin Group, 2009, p. 102.

[3] IBIS World US, 2015. http://www.ibisworld.com/industry/default.aspx?indid=1518. Accessed November 8th, 2016.

[4] Economist, 2016. In the bin: http://www.economist.com/blogs/democracyinamerica/2015/04/recycling-america. Accessed November 2nd, 2016.

[5] IBIS World US, 2015. http://www.ibisworld.com/industry/default.aspx?indid=1518. Accessed November 8th, 2016.

[6] http://www.upcycle-products.com/static.asp?path=2887

[7] http://hipcycle.com/good-things-to-know-about-hipcycle-products/

[8] A brewing Problem, James Hamblin, The Atlantic, March 2, 2015

[9] 9 billion Keurig K-Cups likely ended up in landfills last year, Elif Koc, Mashable, Mar 07, 2015

[10] YouTube video 839,859 views, Twitter hashtag #killthekcup, killthekcup.org

[11] TerraCycle website: www.terracycle.com/about. Accessed July, 2016

[12] Szaky, Tom. “Choosing between profits and growth.” The New York Times, 25 August 2011. <boss.blogs.nytimes.com/2011/08/25/choosing-between-profits-and-growth/> (accessed 26 October 2011).