Profit from the growth in green packaging

published 18 July 2007

The average Briton creates more than half a tonne of waste each year, 27% of which gets recycled. That's nearly double the rate of three years ago, but we are still playing catch-up with many of our European counterparts Austria and the Netherlands now recycle more than 60% of their municipal waste, says The Economist.

So does this mean we'll have to drag even more rubbish down to the recycling centre? Not necessarily. One solution is biodegradable packaging made from starch or corn rather than plastic. Instead of dropping the remains of your ready-cooked meal into a special bin each evening, you could soon be dumping it on a compost heap in your garden.

Britain's biggest retailers are already using such packaging in certain products in the race to out-green' their rivals. Sainsbury's will introduce biodegradable packaging made from maize and starch for most of its organic fresh produce and own-brand products by the end of this year, says Martin Hickman in The Independent. Tesco has replaced its plastic bags with a biodegradable option and Marks & Spencer has already sold 132 million sandwiches packed in corn-based plastic.

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But adopting biodegradable packaging isn't just a PR exercise for the retail industry. It makes good business sense as well. Last year, food packagers faced between 30% and 80% price rises because the soaring oil price drove up the cost of conventional plastics, which are derived from petroleum. Corn or starch-based plastic could be one way around this problem. The raw materials are cheaper (for the time being, at least) and such plastics can be heat-sealed at lower temperatures, which means faster packaging times and hence increased output, says Ahmed El Amin on FoodandDrinkEurope.com.

Meanwhile, the US represents a massive, as-yet-untapped market. Biodegradable packaging has yet to catch on among America's biggest retailers, but with companies such as McDonald's and Wal-Mart eager to establish their green credentials, it may not take long. Coca-Cola was so moved by the merits of looking green, for example, that it recently redesigned its iconic bottle to reduce packaging. Wal-Mart has set itself the target of becoming "packaging neutral" by 2025, says Claudia Deutsch in The New York Times.

One day, even your TV or laptop could be biodegradable. Kenji Hall in BusinessWeek reports that a race is hotting up among Japanese technology companies to develop a compound of petroleum and bioplastics that is durable enough for use in TVs and computer chips. But for now, the main market remains in retail packaging, which accounts for 25% of all rubbish put out by UK households. That's good news for the environment and it may also save you from having a collection of bins like a set of Russian dolls outside your door. We have a look at some of the companies set to profit below.

As major consumer-products firms aim to prove their environmental credentials, "biodegradable plastics could translate into two more words: healthy profits", says Jack Uldrich on Motley Fool. Uldrich likes Metabolix (Nasdaq:MBLX). The company, which makes corn- and sugar-based plastics, entered into a 50-50 venture with pharmaceutical giant Archer Daniels Midland to commercialise the product in April. A 50-million-kilo-per-year plant is expected to be online by this time next year and Metabolix is already working with 40 prospective customers on more than 60 applications in consumer products, packaging and agriculture. Cantor Fitzgerald has a 12-month target price of $40, compared to the current $25. The shares trade on a p/e of 8.1.

However, currently Europe remains the main market for biodegradable packaging and one company looks especially well placed. Biopack Environmental Solutions (OTCBB:BPEV) has just signed a deal with Moonen Packaging, Europe's leading supplier of such packaging. Several of Europe's leading supermarket chains have already switched to Biopack's compostable trays on the strength of the partnership. The $155m company reported sales of $6.6m last year and is tipped as being an "industry leader in the green revolution" by Smallcap Investor.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.