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 Inc., Kellogg Co., Clif Bar & Co. and Coca-Cola Co.--and a tiny company in Trenton, N.J., named TerraCycle Inc.

In recent months, TerraCycle, which made its mark as a purveyor of fertilizer made from worm castings, has signed deals or is 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, lunchboxes 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 Corp., OfficeMax Inc. and Walgreen Co. stores or are part of discussions for future sale at retailers including Wal-Mart Stores Inc. and Home Depot Inc.

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 knits 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.

Over the years, as food makers moved to create lightweight packaging that used fewer raw materials, they embraced technology that fuses super-thin layers of plastics and other polymers to protect food from moisture, air and sunlight. But for recycling companies, which are often paid by the weight of their collection, it's difficult and not particularly cost-efficient to separate those fine layers for reuse.

A lighter wrapper is "environmentally good because it uses less material and less energy per package," says David Cornell, the technical director of the Association of Postconsumer Plastic Recyclers in Washington, D.C. "This is all fine and dandy until the package gets to the end of its life."

And that's where TerraCycle comes in.

The company 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 Mr. 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.

And because brigades are dependent on volunteers, collection can ebb and flow. "Drink pouches are a little bit slow," says Steve Krajewski who leads a new brigade for the Trevose United Methodist Church in Trevose, Pa. "Our members are drinking sodas." He estimates collecting about 200 CapriSun packages--or $2 worth-- since starting the program. His two-year-old bottle brigade, by contrast, pulled in a couple hundred dollars in the past two years before TerraCycle put the program on hiatus.

Still, Mr. Krajewski says, "every bit counts, and we are trying to teach our kids that we live in a throw-away society."

To augment the brigades' efforts, TerraCycle also is collecting what's called postindustrial waste from many manufacturers - which includes excess labels or packaging with misprints that never makes it to market. With Coca-Cola, for instance, the company is working to develop a line of products designed from reclaimed Coke billboards, misprinted labels and cans, and old glass bottles. It will then act as a licensee to sell the Coke-branded merchandise, according to Coca-Cola.

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 CapriSun 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."

Szaky believes the story behind his upcycled products will help them compete.

"We're able to retail at the store for the same price as a normal Hanna Montana backpack," he says. "Except ours is made from garbage collected by American kids. And each pouch represents a little donation. And parents are captured by this."

Originally published by The Wall Street Journal.