Sustainable Profits
The challenges of a waste-recycling business.
In 2012, TerraCycle had $15 million in sales with operations in 22 countries, primarily in North and South America as well as in Europe and a little bit of the Middle East. A few months ago, we embarked on opening in our 23rd market, Australia.
While opening in a new country presents an opportunity for growth and revenue, it is also an opportunity to lose ours shirts — through unexpected issues and complications. As such, it is important for small businesses that don’t have gobs of cash to manage each opening carefully.
That said, we now live in a world where opening abroad is much easier than it used to be. With Internet phone service, long-distance calls are cheaper than ever and flying to Australia from New York can cost little more than flying to Fayetteville, Ark. Most important, while there are certainly cultural differences among foreign markets, they are far less problematic than many presume. TerraCycle, for example, is basically operated the same way in every country where we have operations, from Brazil to Turkey. We do adjust for each location, but we try as much as possible to avoid making adjustments in order to maintain coherence in a small organization of just more than 110 employees.
For TerraCycle, the first step in choosing a new market is to evaluate the legal, financial and language issues to make sure we have a good fit. The next step is to look at the market opportunity. Will our business model — in our case, recycling waste that has been considered nonrecyclable — work in that market, and is the market big enough to make the effort worthwhile?
These issues are connected. Big markets — Britain, Canada, Australia, Germany — tend to have relatively simple legal and financial requirements, and they tend to use English as a primary (or, worst case, secondary) business language. This is not as true in Asian markets like Japan or South Korea, which are immense but handle business very differently (and not in English).
Countries like Turkey, Puerto Rico and Argentina are more challenging for us, with smaller economies, bigger language barriers, and complicated (meaning expensive) processes to set up a business. For example, incorporating in Argentina cost considerably more than incorporating in Canada, and the market size opportunity is smaller. This goes not just for setup but also for maintenance. And then you have the idiosyncratic human resources rules in each of these markets, which tend to favor the employee over the corporation.
For us, opening in a new country usually begins with landing a deal with a company to create a waste-collection system for nonrecyclable waste. In Brazil, it was Pepsico that wanted to start a national chip-bag collection. In Japan, it was a major cigarette company that wanted to start recycling cigarette butts. And in Canada, it was Mondelez International that wanted to recycle juice pouches. The benefit of having a client up front, before incurring costs, is that the revenue from the deal can help finance the investment.
Now, this doesn’t always work. We thought we had a deal in Colombia, and it fell through. We had already incorporated and opened bank accounts, which means filing taxes — even if the income is zero. It also means paying lawyers and accountants $5,000 to $10,000 a year to keep the entity alive. It will cost us money even if we dissolve the entity, and we cannot just walk away if we ever want to operate there in the future. As a result, we are working very hard to land a deal in Colombia as soon as possible.
About a year ago, to get started in Australia, I led a one-week business development mission to Melbourne and Sydney. Even though we knew interest was high among potential clients, our United States-based business development team had not been able to convert that interest into a deal.
This is rare, but it does happen in markets that prefer to work with locals. We have seen this in Mexico, Brazil, Israel and a few other places. When it happens, we look to find a local person who is willing to take the lead — without pay — until a deal is signed and starts invoicing. We spend resources on training and support, but we align incentives by making the general manager’s job tentative, pending the landing of a deal. Once that occurs, we open a local office, and put the general manager on the payroll. This is how we opened in both Argentina and Israel, where we have had great success.
For Australia, we brought on a fantastic new addition to our team, Anna Minns, who joined TerraCycle a few months ago and worked initially from our Trenton headquarters as a G.M. trainee. Anna was able to embrace our culture and business model, and she recently got back from a trip to Australia where she had terrific meetings with more than a dozen potential clients.
It didn’t hurt that the Agence France-Presse happened to run a positive story about TerraCycle that was picked up by The Sydney Morning Herald on the first day of her trip. Last year, we finished working with local lawyers and accountants to incorporate and set up bank accounts in Australia. Just as with Colombia, we thought we had a deal ready to go after my business-development mission to Melbourne and Sydney.
But it fell through. So even with our low-risk approach, there is always risk. The process of setting up the entity typically costs $10,000 to $25,000 in year one and then $5,000 to $10,000 a year thereafter. Naturally, this depends on the market, and is generally the only major investment we have to make in a local market because the rest of the investment is generally financed through the partnerships — once they start coming in.
For the next few months, Anna will work from Trenton as she attempts to finalize a deal with the goal of opening a Sydney office this summer. The next question we will face is how we will manage an office that is literally halfway around the world. And will Anna prove to be as great a G.M. as we expect?
The key challenge with G.M.’s is that the job changes quickly. Initially, these new offices are one-person shops, and the G.M.’s have to do everything — get the deals, manage them, handle the accounting, and provide customer service. It’s highly entrepreneurial and highly stressful. Then, as the office expands and more staffers are hired, the job evolves into a managerial function.
For example, in Britain, our London office opened in September 2009 with one person, Chris Baker. Today, it employs around 25 people. Chris’s job has evolved, and while Chris has been a fantastic G.M., not all of our hiring choices have been able to handle this evolution. I’ll talk more about that in my next post.
Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.
Article source: http://boss.blogs.nytimes.com/2013/03/08/the-risks-of-expanding-into-australia/?partner=rss&emc=rss
