IMD-3-2286 26.04.2012

TERRACYCLE (K): BRANDED WASTE

Research Associate Philippe In 2001 Tom Szaky, a Princeton freshman, founded TerraCycle in the Margery prepared this case hopes of starting an eco-capitalist company built on waste – worm under the supervision of waste to be exact. Tom and his minimal management team had little Professors Jan Lepoutre of experience in building up a business, but all had a desire to live as Vlerick Leuven Gent entrepreneurs. Eventually, Tom dropped out of Princeton to pursue his Management School and Stuart dream of eliminating waste. Read of IMD as a basis for class discussion rather than to Surviving on the goodwill of family, friends – both old and new – and illustrate either effective or a tremendous amount of dedication, the team had to constantly keep ineffective handling of a developing new ideas for their business to keep it from bankruptcy. business situation. This case is Eventually, the company moved into sponsored waste, whereby based on interviews. companies would pay TerraCycle to set up collection sites, or brigades as TerraCycle called them, for used packaging associated with their This case won first prize in the products. TerraCycle would take this challenging-to-recycle packaging Social Entrepreneurship track and turn it into affordable, high-quality products. of the 2012 oikos Case Writing Competition. In 2008, as TerraCycle’s CEO, Tom contacted , just as the food giant was looking for ways to help divert packaging that could not be recycled from going to landfills and influence their consumers to make better choices than simply throwing non-recyclable material into the bin. Tom first approached Kraft with a specific need in mind: upcycling waste, and more specifically pouches across the USA. TerraCycle was receiving a significant number of them in the drink pouches brigade sponsored by Honest Tea and was making pencil holders out of them. However, even though they were waste, Kraft Foods still owned the brand. Tom’s enquiry to the Capri Sun team was directed to the Corporate Sustainability team within Kraft.

In August 2008 TerraCycle and Kraft Foods signed a partnership agreement. Kraft Foods had become TerraCycle’s most important branded waste partner, and TerraCycle had become a key element in Kraft’s sustainability. What caused Kraft to work with TerraCycle, what makes the partnership work, and what might future collaboration look like?

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Background: Kraft Foods and Sustainability

On the Kraft corporate website, the page on sustainability leads with the following text: “Sustainability is about preserving our world – land, air, water and people. At Kraft Foods, our sustainability journey has put us on a path that is making a real difference.”

Although sustainability was not new to Kraft Foods, there had been an increased sense of focus in the years leading up to Tom’s telephone call. Kraft had worked hard on building sustainability into its business strategy and on changing its corporate culture. A core team devoted to sustainability provided strategic direction from the very center of the company. It helped provide focus, direction and leadership, but ultimately, it was up to the business leaders of each of the company’s categories to decide on and execute specific projects that impacted their business.

Kraft’s view of corporate sustainability was helping the company to meet the needs of the present while being mindful of the future. To the company, sustainability had three components: social responsibility, economic responsibility and environmental responsibility, with sustainability at the intersection of the three.

In an interview, R. Jeff Chahley, Senior Director, Sustainability, Kraft Foods, reflected on how the sustainability initiative had come together within Kraft:

Whatever the business, there are sure to be lots of opportunities for improvement. Thankfully, more employees than ever “get sustainability” and want to make a meaningful difference. A number of companies are doing great things – and what they all have in common is focus, willingness to partner and a guiding vision. Our team’s biggest challenge has been keeping up with the demand from enthusiastic employees and business teams.

When we set out our approach to sustainability, we decided to focus on those areas where we could make the biggest difference. We came up with six sustainability focus areas – packaging, agricultural commodities, energy, water, manufacturing waste and transportation/distribution.

Kraft began implementing its corporate sustainability strategy on a limited number of products, looking to expand the scope gradually. By May 2011, Kraft had expanded the number of products in its sustainability targets to include Cadbury and Lu, acquired since 2007, focusing mainly on energy utilization, carbon dioxide emissions, water usage, waste generation and packaging reduction.

The objectives, set in 2010, were clear. The firm wanted to achieve the following by the end of 2015:1  Increase sustainable sourcing2 of agricultural commodities by 25%  Reduce energy use in manufacturing plants by 15%

 Reduce energy-related CO2 emissions in manufacturing plants by 15%  Reduce water consumption in manufacturing plants by 15%  Reduce waste at manufacturing plants by 15%

1 As measured against total production. 2 Sustainably sourced is defined by third-party certification or verification. - 3 - IMD-3-2286

 Eliminate 50,000 metric tons (100 million pounds) of packaging material  Cut 80 million km (50 million miles) from the transportation network.

In 2011 the company also added transportation and agricultural commodities to what it would be measuring. Jeff noted:

Sustainability is now part of how we do business. It’s a priority across our organization, including (but not limited to) general management, marketing, operations and R&D. It’s a priority from the senior-most levels down. Each business unit has goals, roadmaps and projects. Each business unit is held accountable. Our vision is to make sustainability part of every business decision at Kraft Foods.

The Kraft Foods-TerraCycle Partnership

TerraCycle’s business model was in line with Kraft’s ambition to rethink how packaging was used and how it could reduce its environmental impact. Kraft’s approach was to reduce the quantity of material in its packaging. It was working to maximize the product to package ratio, minimizing head space and thickness. It also looked at using materials that better lent themselves to being recycled, although it had no control over how much recycling would actually be done, as that was in the hands of the consumer. However, image was an issue; Kraft did not wish to see its packaging adding to landfills or lying around in the streets of American cities. This is where TerraCycle could fit in. Jeff noted:

We were working hard to optimize end-of-life solutions and find ways to encourage the right behaviors such as recycling. One way we found to do so was to partner with innovative companies like TerraCycle which had solutions for non-recyclable packaging and rewarded consumers for sending it to them rather than putting it in the trash.

Of our six focus areas, our greatest impact was likely to be on agricultural commodities and packaging. That was based on our ability to influence these areas, and how big they were to us. Packaging was also important as it was one of the first and last experiences consumers had with our products. Our decisions about packaging sourcing, design and disposal had a direct impact on how our consumers interacted with our packaging – from cart to can.

When they met Tom, Kraft’s Corporate Sustainability team liked what they saw in this young, eager entrepreneur. He seemed confident, aspirational, customer-oriented, creative, somewhat experienced (for a 27 year old) and projected a strong can-do attitude. The Corporate Sustainability team could see TerraCycle playing a key role in the packaging end- of-life strategy, and recommended that the Capri Sun team take a chance sponsoring the young company’s work. Jeff commented:

We weren’t afraid to take a chance on a smaller partner or an upstart with the right know-how, because the results can be huge.

TerraCycle’s size made starting a partnership with it somewhat of a risk for Kraft, but the potential for success was there. Kraft felt that TerraCycle had a unique business model that educated people and rewarded them for doing the right thing. Also, TerraCycle already had experience working with retailers such as Home Depot with its Fertilizer product. So, once senior management was convinced of the program and its merits, approval to proceed was obtained and Capri Sun struck a deal with TerraCycle. - 4 - IMD-3-2286

It was not long before Capri Sun was benefiting from positive PR, including on TV and in print. Seeing the success Capri Sun was enjoying with the program, including positive feedback from consumers and the grassroots involvement that TerraCycle promoted, other Kraft Foods brands decided to get involved.

By 2011, Kraft Foods brands were involved in collection brigades for drink pouches (sponsored by Capri Sun, Kool-Aid and DelMonte), cookie wrappers (sponsored by Nabisco Cookies), cheese packaging (sponsored by Kraft Cheeses), lunch kits (sponsored by Lunchables), packaging, Kenco Eco Refill bags, Tang pouches, and gum packaging (sponsored by Trident). TerraCycle was in multiple countries by now and had grown its range of partners to include Kraft’s peer companies like Frito Lay (Pepsi), Stonyfield Farm, Mars Wrigley and many others.

Kraft became the largest sponsor of TerraCycle brigades, supporting them in Argentina, Brazil, Canada, Ireland, Mexico, Sweden, Norway, Denmark, the UK and the US with plans to launch in more markets in 2012.

Kraft became the key partner for launching the TerraCycle program in most new markets. Together with TerraCycle, it developed a scorecard to track progress that included countries, brigades, number of locations, units of waste diverted through consumers’ actions, tons of waste diverted from factories, PR hits and impressions, and so on. By 2011, Kraft Foods had more than 120,000 locations around the world with around 2 million people in total collecting post-consumer waste. Working with TerraCycle had enabled the company to divert more than 130 million household packages and 3,800 tons of manufacturing waste away from landfills or incineration.

Bringing Waste Management into Design

Following the initial successes, starting in 2010 TerraCycle was also bringing new ideas to Kraft’s marketing teams in the various regions in which the two companies had partnerships. The relationship with TerraCycle had evolved from “waste-centric” to “growth-centric” – from managing Kraft’s non-recyclable waste to working with Kraft as a marketing partner. And it rapidly became clear to Kraft that the biggest impact of working with TerraCycle came from the holistic investigation of the supply chain that the partnership demanded. For packaging, this meant optimizing product design, using the right source materials and figuring out up front what to do with it after consumers were done with it. It was also about the source ingredients and the impacts all the way up the supply chain.

The Kenco coffee brand in the UK became one of Kraft’s biggest success stories. Kenco coffee beans were already 100% sourced from Rainforest Alliance Certified™ farms. TerraCycle helped Kraft design the packaging and work with consumers to collect used Eco Refill bags to be upcycled into new consumer products. As a result, this was the first offering in the Kraft product line to meet the 2015 sustainability objectives.

For both firms the successful results raised new questions. The initial TerraCycle agreement had covered just the upcycling of existing packaging, yet the relationship was already extending far beyond that. What more could the two do together? How should each firm participate in new initiatives to rethink packaging, materials and supply from the start of the process? What might the business model look like between them?