It's easy to understand the desire to keep harmful chemicals out of our water systems or harmful pollutants out of the air. But those problems are so yesterday. The next big environmental and social fight looks like it will be keeping food out of the trash. It's a bigger issue than you may think, and, interestingly enough, Emerson Electric Co. (NYSE:EMR) is already ahead of the problem.
If you are like most Americans, you buy food each week and then don't eat it all. Or when you go to a restaurant, you don't clean your plate off the way your mother told you to when you were a child. (There are starving kids in some far off land, don't you know!) Before you say that's not you, according to the U.S. Department of Agriculture, we toss around 30% of the food produced in this country. That's a lot of food.
But so what? Food is biodegradable, so send it to a landfill and let it rot away. Well, apparently, the landfills where this happens are the third largest methane source in our "Land of Plenty." Methane is actually worse for global warming than carbon dioxide, and degrading food waste is a big source. That's why the the USDA and the Environmental Protection Agency are calling for a 50% reduction in food waste between now and 2030.
Should have listened to Mom
Businesses account for roughly half of the food waste that goes to landfills, according to Emerson, and are already feeling the brunt of food-waste bans in places like Seattle and Massachusetts. But fear not: Emerson Electric is ready to help with this problem. The company's Grind 2 Energy food disposal takes food waste, chews it up, and sends it to an anaerobic digester that eventually turns it into energy.
That's neat, but think about this for a moment in the larger context of Emerson's business. The company's InSinkErator line lives within its commercial and residential solutions segment. That segment will account for around a third of the company's top line after the recently proposed spinoff of its network power segment. And while the food waste-to-power product is relatively small now, it serves a niche that is going to grow quickly if the EPA and USDA get their way.
Institutional food waste comes from hospitals, event locations, hotels, and restaurants, among other places. But just to give a small idea of the market, the National Restaurant Association estimates that there are roughly 1 million restaurants in the United States. That's a big market to tap and is only one of the many industries that will have to start thinking more about their food waste over the next decade and a half or so.
A new twist
The model for Grind 2 Energy, however, is different from what you might expect based on your experience of InSinkErators. The food disposal in your sink was a mass-produced product that you could buy at a hardware store. Grind 2 Energy's installations are tailored to each customer's needs and paid for with a monthly fee. In other words, Grind 2 Energy shifts the model and gives Emerson a recurring revenue stream. And since the systems are tailored to each customer, it's likely to be annuity-like because of high switching costs for customers.
What's not to like about that? It depends on who you are. Emerson could be on the verge of a new service-oriented business with huge market potential. But Waste Management (NYSE:WM) might find that some of its customers don't need their trash picked up as frequently. With trash haulers already feeling the pinch from municipalities trying to cut costs and weak commodity prices for recycling, Grind 2 Energy could wind up being notable competition.
How big a threat is this? Emerson highlights one customer who went from two trash pickups a week to one every 10 days. In another case, grocery chain Sendik's was able to cut its landfill shipments from eight a month to just one in a test run of the product. Those are big changes, and the saving from fewer pickups can clearly be used to help pay for the new Grind 2 Energy fee. Sendik's, by the way, decided to expand the Grind to Energy relationship to 11 stores and a distribution center based on its positive results.
That's great for Emerson and its Grind 2 Energy business, but it will hit at a core customer group for trash haulers like Waste Management. Fewer pickups means less revenue. Less garbage means less revenue. And, to add insult to injury, remove the refuse that helps produce landfill gas from landfills and Waste Management's over 130 landfill gas to energy projects could become less desirable assets. Many of these projects actually produce natural gas that gets used in Waste Management's truck fleet, which means Waste Management's costs for fuel could go up over time if its gas production falls or doesn't grow as expected. In other words Grind 2 Energy is the last thing Waste Management and its brethren want to see gain a foothold in their sector.
Emerson is a company in flux today because of its spinoff plans. That said, Grind 2 Energy is an exciting example of the potential hidden within this industrial giant. In fact, growth in the food waste disposal business was a highlight in the company's fiscal third-quarter earnings release. And if food waste becomes as big an issue as it looks like it will, you could see InSinkErator and Grind 2 Energy making more positive appearances in quarterly results in the years ahead.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Waste Management. The Motley Fool recommends Emerson Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.