CONTENTS EdEvidence Newsletter

June 2008

Polycarbonate Bottle Market Meltdown

Investors’ Early Warning… Safer, Innovative Products Grab Market Share

The market for polycarbonate sport and baby bottles made with bisphenol-A (BPA) melted down this spring, rewarding companies offering alternatives perceived as safer. The remarkably rapid shift underscores how quickly markets can be moved by consumer concerns about toxic chemicals in familiar products and retailer worries about reputational damage from tainted goods. Investors raised this market issue with companies beginning in late 2005, as scientific evidence from animal studies accumulated and raised questions about BPA's possible human health effects.

Government Alarms. Two government reports issued within days of one another in mid-April were the immediate cause of the meltdown. A draft report from the U.S. National Toxicology Program (NTP) declared, based on laboratory animal studies, that NTP had "some" concern for the neurological and behavioral impact of BPA on human fetuses, infants, and children. This was less than "serious concern" or "concern", but more than "minimal" or "negligible" concern. About the same time, Health Canada released a draft determination that BPA may be a risk to infants, and it proposed classifying the chemical as toxic to human health and the environment. Canadian retailers in particular scurried to pull baby and sport bottles from their shelves. A Wal-Mart Canada representative voiced the company's underlying reputational concern concisely: "Irrespective of the pending science, it's an issue of trust for us, and our customers need to know they can shop [with] confidence at Wal-Mart, particularly in the baby aisle"

Investor Engagement. Investors participating in the Investor Environmental Health Network first raised BPA as an issue with Whole Foods Market in late 2005. Based on the rapidly growing number of scientific studies identifying concerns about BPA, investors led by Green Century Capital Management filed a shareholder resolution at Whole Foods Market, requesting that the company report on its policies with regard to hormone disrupting chemicals such as BPA. The resolution noted that scientific studies had shown that BPA and other hormone disrupting chemicals are present in humans at levels already demonstrated to cause adverse effects in numerous animal studies. To its credit, Whole Foods Market had already engaged consultants to examine BPA and other chemicals suspected of disrupting human hormones. Just prior to the vote on the resolution, and following constructive conversations with the shareholders, the company announced that it was pulling baby bottles and cups from its shelves containing BPA and would endeavor to minimize its customers' exposures to hormone disrupting chemicals.

By being an early mover in the marketplace, Whole Foods Market solidified its already strong reputation for selling healthy foods. As more scientific studies raised concern about BPA's safety, in early 2007 investors led by Green Century Capital Management queried nearly two dozen companies about their use of BPA in product packaging. The companies included major food processors, bottlers, and baby bottle manufacturers. Some companies indicated they don't use the chemical, others revealed in confidence plans to examine or introduce alternatives, and others failed to respond. Still others had done leaching studies and had determined that concentrations of the chemical in products did not exceed existing regulatory safety levels, although emerging scientific evidence was signaling that existing regulatory levels are insufficiently protective. Having alerted senior corporate managements to this emerging issue, investors elected to continue monitoring the matter rather than press companies further.

Corporate Response. When NTP and Health Canada issued their reports, some companies were well positioned to grab market share in baby and sport bottles, while other companies that had been making polycarbonate rolled out alternatives so rapidly that they likely had seen the handwriting on the wall. Eastman Chemical's Tritan copolyester, coincidentally introduced to the plastics market in October 2007, seems to have been one beneficiary of the market shift. First developed for use in other applications, Tritan immediately drew attention from polycarbonate bottle makers. With Eastman Chemical having obtained FDA approval for food contact use of Tritan, CamelBak began shipping bottles made from Tritan in January 2008 and had converted all of its bottles by March. Pacific Marketing, marketer of Stanley and Alladin brand bottles, had been looking for a BPA alternative for several years, because of BPA concerns that had surfaced in Japan, and quickly shifted to Tritan. Nalgene, the company most popularly associated with polycarbonate sport bottles, also quickly rolled out Tritan bottles, and announced after publication of the agency reports that it would phase out polycarbonate bottles. BornFree, a company created in 2005 specifically to produce BPA-free bottles, was by this point available in 4,000 retail outlets in the US and Canada, including Whole Foods Market and Babies "R" Us. The major mainstream baby bottle manufacturers also signaled their intent to add non-polycarbonate bottles to their product lines.

Other companies experienced surging consumer demand even before the formal government findings. SIGG, a Swiss producer of aluminum sports bottles had seen its North American sales grow fivefold year over year. Similarly, Babies "R" Us reported a fivefold increase in sales of BPA-free bottles and other products over the preceding year, including a five-fold increase in glass bottle sales. Demand for glass bottles grew so much that Owens-Illinois resumed production of these bottles at a plant in Michigan after a 20-year hiatus.

Product Innovation and Cost. The move from BPA has driven innovation in product designs, including glass bottles by Babylife and Silikids in shatter-resistant silicone sleeves. At this time, BPA-free bottles cost more at retail than polycarbonate bottles; their success signals the willingness of many concerned consumers to spend more for products perceived as safer. It remains to be seen whether retail prices will come down as volumes go up and competition among manufacturers increases.

Metal Cans A Challenge. Food containers such as metal cans remain a challenging market for BPA-free alternatives. When BPA became an issue in Japan more than a decade ago because of BPA leaching from cans in which hot drinks are served, Japanese can makers switched to alternative can linings; Japanese researchers have speculated that this led to a drop in BPA measured in residents of Japan. In the US thus far alternatives to BPA raise both cost and performance issues. But food processors are well aware of consumer concern and are on the lookout for alternatives. Based on the experience with baby and sport bottles, there's a sizeable market waiting to reward the innovative company developing safer, cost-effective can linings.

Lessons for Companies and Investors. The BPA experience underscores the importance of companies carefully monitoring emerging science about chemicals in their products, to avoid toxic lockout from markets and to grab market share for safer alternatives. Corporate strategic planners and investors must decide how to position their companies in the marketplace even in the absence of definitive science; both retail and business customers may demand safer alternatives even before all the scientific evidence is in and before governments take firm regulatory action.