The Bottom of the Barrel
By: Samantha Juman
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
In Spring 2015, oil prices fell from $120 a barrel to $50, resulting in rejoicing consumers and distress in commodity-dependent countries. However, one particular industry has stayed away from the spotlight: recycling. Recycling is currently a multimillion dollar business with $706B worth of opportunity that could be unlocked with the key of a circular economy: an industrial economy that is producing no waste or pollution. A multitude of issues, however, from technical complexities in the recycling process to overall lack of education about recycling practices, have created roadblocks for the industry to realize its true potential.
With the recent collapse of oil prices, manufacturing industries dependent on the commodity have been affected. Plastic is made from petroleum, and the fall in oil prices has dragged down with it the cost of producing virgin polyethylene terephthalate, a type of plastic known as PET. When oil prices are high, it has historically been more economical for manufacturers to purchase recycledPET (rPET), compared to the higher price of virgin PET. With oil below $50 a barrel, the cost of virgin PET dropped to 67 cents per pound, 7% less than the recycled form. In turn, companies using plastic in manufacturing their products, usually consumer packaged goods (CPG), abandoned rPET for virgin plastic while prices were low.
WM: Avoiding Wasted Value
Operating throughout North America via subsidiaries, Waste Management, Inc. (WM) collects, transports, recycles, and disposes waste. Despite tripling the overall recycling rate in the US to 30% since its inception in 1998, WM’s profits for selling recyclables dropped 50% in 2015, likely due to decreased demand from low oil prices. Cheaper oil means less business for WM as customers switch from purchasing recycled to virgin plastic. Being North America’s leading environmental solutions provider, WM has been hit hard, shutting down 10% of its recycling process facilities. Although only 10% of its revenue is attributed to recycling, WM is the overall market leader, and any changes in the recycling industry cannot be ignored.
WM must encourage and capitalize on overall industry growth. US demand for post-consumer recycled plastics is forecasted to rise 6.5% annually to 3.5 billion lbs in 2016. This increase is driven by a growing emphasis on sustainable packaging, advancements in processing and sorting technologies, as well as an improved collection infrastructure to raise plastic recycling rates. Although WM’s recycling revenues have shrunk by $200M since 2010, its overall strong financial performance is evidenced by its 2014 net income of $1.2B and free cash flow of $3.4B, which is amongst the highest in the industry. Its market leadership and financial resources can be used to galvanize support from key stakeholders.
Sowing Shareholder Advocacy
In recent years, corporate social responsibility (CSR) has had an increasing role in corporate decision making, driven by the growing prevalence of shareholder advocacy. One non-profit organization in this field is As You Sow (AYS), whose mission is to promote environmental and CSR initiatives through the influence of shareholders. Since its inception, AYS has swept the corporate world, influencing companies in a variety of industries such as McDonald’s, Hewlett-Packard, and Coca-Cola. Recently, engagements with Coca-Cola, PepsiCo, and Nestlé Waters resulted in commitments to recycle 50% of their plastic bottles in North America. In 2014, continuous shareholder advocacy efforts triumphed with Colgate-Palmolive. The company made the pledge to phase out non-recyclable packaging in three of four operating divisions by 2020, and use 50% recycled content in packaging containing PET and polypropylene.
WM should follow the same route and target shareholders of CPG manufacturers. Institutional investors with CSR mandates or receptiveness to long-term sustainability should be targeted over individual shareholders with less influence. These shareholders can be identified as those who engage in socially responsible investing (SRI). SRI has experienced dramatic growth since the 1990s, and as of 2014, one in six dollars under professional management in the US is involved in SRI. The growth of SRI indicates a sizeable market of SRI institutional investors that Waste Management could target.
Despite WM’s industry control, its lack of marketing experience calls for a strategic partner who can successfully connect with institutional shareholders. AYS’s success in mobilizing shareholders as a vehicle for achieving sustainability makes it a suitable partner for WM. AYS will provide WM with the expertise to bring proposals, recommending the usage of recycled plastics for manufacturing, to the stage of a shareholder vote. This strategic alliance will not be one-sided. AYS will reap the benefits of WM’s strong position in the industry and ability to communicate the values they both share on a national scale. As an organization committed to transforming corporate business decision-making, AYS has an inherent interest in educating the public as a means to achieving this goal. Given AYS’s lack of financial capital limits its ability to do so, joining forces with WM will allow it to raise awareness on a much larger scale.
Targeting the CPG Manufacturers
Once shareholders intensify pressure on CPG manufacturers to increase recycled plastic content, senior management will be more receptive to trial testing the integration of recycled plastic into the manufacturing process. Traditionally, resistance from manufacturers in using rPET stems from various misconceptions. Companies believe that costly investments in new equipment are needed to facilitate processing rPET or that the quality of their products will be compromised. However a successful trial testing experiment led by the Waste & Resources Action Programme (WRAP) in the UK dispelled these myths. Product trials using significant levels of rPET with corporations such as Coca Cola, Marks and Spencer (M&S), and Boots, have been implemented from sourcing, production, processing, testing, and consumer acceptance. Following successful testing of recycled plastic in M&S’s “Food to Go” line and Boots’ shampoo and conditioner ranges, with no discernable difference between rPET and virgin packaging, both companies adopted rPET across additional product lines.
WM can use the success stories of corporate rPET trials combined with positive feedback from surveyed end consumers to gain manufacturer buy-in. Consumer surveys revealed that 78% of consumers would feel more positive about a product whose packaging contained recycled plastic. Additionally, almost 50% said they would be more inclined to purchase a product which used recycled packaging. It is evident that using recycled materials in packaging will not deter consumers. In fact, it can improve consumer perception and brand equity in a valuable way.
To provide manufacturers with the means to capitalize on the WRAP trial’s positive consumer responses, WM should develop a unique eco-label. This label will serve as a stamp of approval, communicating to end-buyers the manufacturer’s positive environmental efforts. Clearly displaying the product’s rPET content will draw consumers’ attention and enable easy identification between products with rPET and those without. Explicit labelling will increase consumers’ association of the product with sustainable practices, therefore enriching brand perception. As more successful trials are completed and new relationships are formed with WM, eco-labels will become increasingly valuable to companies.
Selecting the Right Partners
WM should develop a selection criteria that will allow it to find CPG partners that will be receptive and benefit from the adoption of recycled plastics. These partners would be companies that depend heavily on customer loyalty and brand equity as well as companies who have an existing CSR foundation but have not taken steps towards using recycled plastic.
An example of such a corporation would be Johnson & Johnson (J&J), whose dedication to maintaining a sustainable environment is embedded into its credo. In 2007, J&J began including post-consumer recycled materials in two of its product lines, and with such a diverse portfolio of goods, there is further potential to expand to more product lines in the future.
Locking in the Relationships
Successful trials should follow with renewable, long-term contracts between WM and the manufacturers. Although monthly negotiations are the norm in this industry, both the manufacturer and WM can benefit from the cost predictability and supply assurance that long term agreements provide. Multi-year contracts will balance out the inequity that both high and low oil prices create on either side. This will help insulate WM from volatile commodity prices and deter customers from sporadically switching to and from rPET.
WM should also exploit the strength of its other product segments and offer a bundle of services pairing the supply of rPET with their manufacturing and industrial solutions. Incorporating WM’s sustainability or industrial waste services as a supplement to recycled plastic provisions creates a competitive advantage for the company, and decommoditizes the material by competing on elements beyond simply price. These added benefits in a long-term contract align with WM’s sustainable value proposition and will encourage CPG manufacturers to choose WM as their recycled plastic supplier over competitors.
Reaping The Value of Recycling
By gaining large manufacturing clients and locking in existing customers, WM can stabilize the demand for recycled plastic that it sells. AYS provides the expertise to influence top management through shareholder activism, which will increase demand for rPET. WM can move towards decommoditization of recycled plastic through the addition of other value-added services, including a certified eco-label. WM’s past recycling success proves this segment can be profitable, and by stabilizing demand, the company will be less susceptible to the volatility of oil prices.
With a strategic partner at its side, WM will be equipped with both the resources and the voice to impact change in the plastic industry. Partnering with AYS will bring environmental reform to life, change business practices, create new long-term relationships with CPG manufacturers, and ultimately bring stability to WM’s volatile recycling revenue stream.