TerraCycle makes these tote bags from used wrappers.

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Is a tote bag forged from old Capri Sun pouches fashionable? What about an umbrella constructed of used Chips Ahoy wrappers?

Each year, billions of food and drink wrappers encasing popular brands end up in landfills because their multilayered materials — which keep products fresh — are tricky and expensive to break down and recycle. This waste has presented a challenge for manufacturers eager to reduce their environmental impact and buff reputations among eco-conscious consumers.

But that's changing due to an unusual alliance between a growing number of food and beverage bigwigs — including Kraft Foods, Kellogg, Clif Bar & Co. and Coca-Cola — and a tiny company in Trenton, N.J., named TerraCycle.

In recent months, TerraCycle, which made its mark as a purveyor of fertilizer made from worm casings, has signed deals or was in talks with these and other companies to collect some of their packaging waste and sew, fuse or weave it into new products such as shower curtains, umbrellas, pencil cases, totes, lunch boxes and backpacks — a process known as upcycling. Many of these items — produced from old Oreo, Kool-Aid and Bear Naked granola packages, among others — are now shipping to Target, OfficeMax and Walgreens stores or are part of discussions for future sale at retailers including Wal-Mart and Home Depot.

And the small company stands to profit well beyond what it sells in stores. In some cases, manufacturers, including Kraft, say they will begin putting TerraCycle's logo on some of their products' packaging to encourage upcycling — a move tantamount to free advertising on millions of items.

That a five-year-old company like TerraCycle knit together contracts with such heavy hitters so quickly underscores the entrepreneurial potential of locating an industry's Achilles' heel — and figuring out how to mend it.

"Obviously, this isn't our core business of upcycling," says Jeff Chahley, senior director for sustainability at Kraft, which has signed a multiyear contract with TerraCycle for upward of $1 million. "We'd rather partner with folks who have figured this out . . . and (TerraCycle) has a nice, unique business model that we really liked. We'll work with them until they can't handle it anymore." Kraft's Nabisco business alone sells approximately 597 million packages annually, with Chips Ahoy and Oreo packages making up about 60 percent of that total.

TerraCycle has set up nearly 4,000 trash-collecting brigades across the country, mostly from schools, churches and other nonprofit groups. They are paid two cents per wrapper or pouch. TerraCycle covers the cost of collection, including shipping, by securing sponsorships from the various food manufacturers; typically $150,000 to $350,000 per year depending on how many brigades are sponsored. TerraCycle then sends the trash to its factories in Mexico to be refashioned into new products for retail.

"We want to lock up every waste stream," says Tom Szaky, the 26-year-old co-founder and chief executive of TerraCycle. "Then you own the infrastructure and create momentum."

In 2008, TerraCycle expects $8 million in revenue, with 20 percent to 30 percent coming from the upcycled products. In 2009, the company expects that percentage to double on revenue of $15 million. Last year, TerraCycle had revenue of $3.5 million.

Keeping brigades operating seamlessly will be critical to Szaky's ambitions. The company needs a steady stream of waste to meet retailer orders, but without sponsorships, the brigades are too expensive.

TerraCycle recently suspended a similar cadre of bottle brigades for its fertilizer product, which the firm had funded on its own dime, until it can find a sponsor.

While it's too soon to determine how many consumers will plunk down cash for rebranded trash, retailers are banking on novelty and the green hook.

"What TerraCycle has done so well is they've created products that aren't boring," says Ryan Vero, chief merchandising officer at OfficeMax, which stocks TerraCycle's Capri Sun and Kool-Aid binders and pencil pouches and has ordered computer bags for the fall. "That's cool for back to school. We even have executives carrying them around this building."