Resources

• Vytal company website
• Vytal enters the reusable event industry partnering with PepsiCo
• Germany’s levy on single-use plastics
• Read the HBS Case on Vytal: Packaging-as-a-Service

Host and Guest

Host: Mike Toffel, Professor, Harvard Business School (LinkedIn)

Guest: Fabian Barthel, Co-Founder, Vytal (LinkedIn)

Transcript

Editor's Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:

Fabian, thank you so much for joining us here on Climate Rising.

Fabian Barthel:

Thanks Mike, thanks for having me. Great to be here.

Mike Toffel:

So Fabian, you and I met a few years ago when my colleague George Serafeim and I wrote a case about your company. And what led us to your company at the time was it's a really interesting example of a circular economy startup trying to solve a problem that everyone knows about, which is packaging waste and your attempt there to try and shift from a disposable society to a reusable society, at least in this one area.

So, I'm really excited to have the opportunity to have a conversation with you here on Climate Rising.

So, can you briefly provide a bit of an introduction and how you ended up helping to co-found your company?

Fabian Barthel:

Absolutely. My background is in business. I studied business administration. After my master's, I wasn't sure whether I wanted to go to academia or want to do something else. I decided to do my PhD first in economic geography at the London School of Economics. And then I got an offer from Boston Consulting Group, and I joined Boston Consulting Group, and I worked there for eight years. So, it took me a long time to realize that I want to be an entrepreneur, but I really enjoyed my time at BCG. I worked mainly in material resources, so in mining projects, in the cement industry, and I enjoyed it a lot. But after eight years, it was time to do something else.

Mike Toffel:

Got it. And what led you to the idea of trying to tackle packaging with a reusable model? Were you looking to create a startup? Were you looking to solve packaging? Or did you think this would be just a cool opportunity to reinvent a long staid industry?

Fabian Barthel:

To be very fair and honest, it wasn’t my idea. I co-founded with Tim and Sven, which I both knew from Boston Consulting Group. And they came up with the idea. But I looked into it, and it became very quickly clear that the current way of doing reusable packaging is not super-efficient. In Germany we have a system which is deposit based so people pay money to get a container or reusable packaging and then when they return the container, they get the money back. So, you have two transactions where nobody makes any money and at the same time it offers very little incentive to bring back the containers. Because deposit is patient you get the same money year, and this leads to low return rates and I think Tim and Sven came up with a very smart idea how to change it and what we're seeing now in the industry that this is becoming the standard with all real modern systems now.

Mike Toffel:

So at the time when you founded this, you described that deposit model. How popular was that? In Germany, was that a requirement or did people opt into that? Because that sounds quite unusual.

Fabian Barthel:

And that's interesting. Now that we're active in more than 20 countries, I just realized that deposit is not the standard. When we started, though, look, deposit is the standard globally, because we are so used to deposit in Germany. think the first Coca-Cola bottle, glass bottle with a deposit was handed out in 1928. So, the Germans are really well known for being very well trained to return their containers. But so far, until we started, the only mechanism to incentivize the return was a deposit, even though it isn’t super inefficient. To answer your question, when we started, we thought, look, this is the way it's done, and this is how it always has been done until Tim and Sven came up with this idea to track each container individually and set a penalty if you don't return it.

Mike Toffel:

Now here in Boston and in many places around the world, I would dare say the vast majority of places, reusable packaging is not even an option. So, when you began in Germany, was that the requirement or was that an option to customers?

Fabian Barthel:

No, look, we have had a deposit return scheme for bottles and cans for the last decades. It's really super well established, and I only found out a couple of years ago that it's not the case in any other market because I have never worked on reusable packaging before. The whole industry was completely new to me. But in Germany, people, as I said, they were very well trained and that such a system is well accepted, even though it's inefficient.

In other countries, especially now when we come to the US, you have a completely different discussion. People are not even familiar with the concept of reusing things. And obviously if you reuse things, for instance packaging, it will carry signs of aging. And you have to educate and train people to say that this is not bad quality, it's just a reused product and you have to inform them about the benefits and so on. And we see massive issues in the US obviously or hurdles when it comes to deposit. So, we have to come up with different solutions for the US market.

Mike Toffel:

Yeah, in the US we too have a long history of deposit schemes at the state level, but really for drink bottles and cans, right, glass and aluminum primarily, but not really spread out to other domains. I mean, you think about milk used to be delivered to your door in a glass bottle and you would leave the empty bottle for the milk man to collect. But those days are quite far away and they never really enter the restaurant space where you operate or canteens, cafeterias. So, what led you to think that this opportunity was beyond the tradition of drink bottles and a few other niche areas?

Fabian Barthel:

So again, we weren't the first to introduce this. There were companies operating real systems, especially for to-go coffee. Deposit-based, one euro deposit for a coffee cup. And this also had been very established back then. I think we were the first to introduce food containers. Because of the challenge with the food container, it's still quite a low value product, but it's much more valuable than a coffee cup. So, the problem is that you have to charge at least 5 to 10 euro deposit. And this is a much higher hurdle for user acceptance than a one euro or one dollar deposit on a coffee cup. So, our system made much more sense for food containers and for drink containers. And this is what we added to the market, building on existing systems who operated already in the cup space.

Mike Toffel:

Yeah, so let's talk about you mentioning that the deposit scheme was in a way like not really a business because you pay a deposit, and you get it back. And so, no one actually makes any money in that. And here you have an additional hurdle. If that amount that you have to pay or opt into is five euros or more, people are reluctant to opt into that when they can get other packaging for free or nearly free. And so you invented a different way to charge from a deposit scheme. Can you describe that alternate model that you developed?

Fabian Barthel:

So, the companies who operate a deposit-based scheme typically charge a monthly fee, a subscription fee, which is independent of the number of containers used. So, there is a business model behind. Just the two transactions of exchanging containers against deposit and back, there is no margin on it. But we said, the gastronomists, they do the calculation for the meals, and they factor in a certain price per meal for the packaging. And this is exactly what we are offering. So, we offer our packaging on a pay-per-use basis. The system is as follows. We own the containers. We purchase them or organize them differently from the market. And if we provide them with to our restaurant partners for free, they don't have to pay them. They don't have to finance the deposit upfront. And then we charge them when they actually use the containers. So, whenever they hand over container from their account, from the restaurants account to the users account and this is what's tracked in our system. In this moment we charge the restaurant a usage fee for our container which is actually lower than the comparable cost of a more sustainable single-use container. Look, we cannot compete on a price level with aluminium or with styrofoam in the cheapest plastic container but they are banned in Europe anyway. Sustainably looking containers made of cardboard with a very thin plastic inlay. These are more expensive than what we charge for the use of our containers.

Mike Toffel:

Got it. So, you're charging the restaurant for each time they hand out the container to the customer. And then what about the customer? What's their experience in this process?

Fabian Barthel:

So, the customers, they borrow the containers. Either they download our app, set up an account, and they put in payment details as a security, or they just use their credit card to borrow a container, just like with a rental company. And for the user, that's beauty. It's completely free.

If they behave well, so if they bring back the containers within 14 days, it's completely free for the user. But only if they don't bring the containers back after these 14 days, they automatically buy the container and can keep it.

But less than 1 % of our containers are not returned within 14 days. And that's a massive difference to the deposit model where the biggest deposit system in Germany, they don't know, they don't have the data because they don't track the containers, but they estimate an 80 % return rate. 80 % doesn't sound too bad, but when you think I hand out 100 containers, I get back 80, I hand them out again, I get back 64, hand them out again, I get back 50 something. And after five, after 10, uses I only have five containers left in the system and the average container is only used five times. Whereas with our system we get a return rate of more than 99 percent which means our containers can be used much more often and save much more resources than based on a deposit scheme.

Mike Toffel:

Now, I remember when we talked a couple of years ago when we were writing this case that you and your colleagues had developed this alternative scheme in part based on behavioral science and people's expectations. So, can you say a little bit about how you leverage behavioral science in coming up with this? Really, this is like a library scheme, like a public library scheme, I remember, right? Where it's free to borrow a book, but if it's beyond the deadline, you start paying.

Fabian Barthel:

Absolutely. And one of my co-founders, Tim, is a psychologist and he did his PhD in behavioral science. And even though a deposit is actually not additional cost, because you get the money back. And this is what operators of a deposit scheme argue, look, it's cost neutral. But the human brain doesn't think like that. So, you pay $12 for your lunch plus $5 for your meal box. In your head, it feels as if you pay 17 euro. And this is what you pay, but you don't deduct the money at the point of sale. So, this is a big hurdle. And then the people have a very high loss aversion, which means they fear losing money. But once they've lost the money, there's not a strong incentive to get the money back. So once the money is gone, it's gone. And that provides a very low incentive for the deposit managed containers to be returned. And our system works exactly the other way around. So, you get the containers for free. That's one element. So, you have to pay if you don't return it, and this triggers people to return it. Second thing is you have a clear deadline. We say, bring it back within 14 days. You cannot say, look, I bring it back next week, I bring it back next week. People are humans. The third element, it's not completely anonymous. There's a name on the container. And we remind you, look, you have this container and please bring it back. You borrowed it; we gave it to you for free. So, you didn't pay for it, you just borrowed it. And most people have something like cognitive dissonance, and they say, look, someone gave me something for free. I really want to give it back. And the combination of these three factors leads to this super high return rate which we're experiencing.

Mike Toffel:

Yeah, super interesting. I love it when we hear stories of how companies are putting into practice some of the insights that academics develop. And that's a really interesting story about that. Now, when you say take it back, with Vytal, it's a little bit different than some of the deposit scheme systems or certainly one that an individual restaurant might operate, because you allow folks to take it back to not just the place where they got it from, but to other retailers who are participating in the system, which on the one hand seems pretty convenient, certainly for the customer, and might even be nice for the restaurants because they might get customers returning goods where they'd never been to that restaurant before.

So now they have some new foot traffic, but it also seems like it's going to inject operational complexity in a way like bike shares do, where you start in the morning with a bunch of bikes in one area and you end the day with a bunch of bikes in the other area and then you need to do load rebalancing and everyone would like to have on the one hand lots of inventory so they never run out but they don't really want a bunch of dirty inventory because they have to clean it and it's going to take up space. So how do you think about inventory levels and load rebalancing?

Fabian Barthel:

100%. That's an issue. When we started, we had the promise, return any container type at any partner. It was a nice promise. It didn't work out in practice, to be honest. First of all,

or mostly because our retailers, they said, “look, I'm a pizza place. I don't need a burger box. And they send away the customer. So, we had a bad customer experience. So, in fact, it wasn't that convenient because the transaction didn't work well. And what we introduced, we introduced different types of container groups. So, if you hand out boxes, you have to take back all boxes or all bowls, no matter whether it's a small, a medium or large bowl. If you hand out sushi containers, you have to take back all sizes of our sushi containers. If you hand out coffee cups you have to take back all the coffee cups. So we reduced complexity by bringing down our number of container types to four or five different groups and this works quite well. And that's the first point to reduce the operational complexity a bit.

In closed-loop systems like canteens, the on-site return rate is 99.6%. So you don't have the issue there. In a canteen, you every now and then get a container from outside returned at the canteen, but that's not a massive issue. In Berlin, for instance, the on-site, the same store return rate drops to 63%. So nearly one third or more than a third of the containers are not returned to the place where the customer got it from.

The good thing is that a few of these flows are unidirectional. Often, they set each other off. And it's not like with the bikes where you have a clear pattern and where you need the bike every day. So, if a restaurant has 20 containers, they get another 10, you can let them sit there and wait until they have 40 or 50 containers. And then we do some rebalancing of the network, but only when they accumulated a larger number of containers economically viable to do the redistribution. And here it helps so that the container is much cheaper than a bike.

Mike Toffel:

Right, right, and takes up much less space. Great. So that's an interesting evolution of your business model. You had initially promised to bring it back to anywhere, and then you constrained that after you learned that that's actually not the most effective for all the partners. What other things did you learn along the way that led you to do some interesting pivots?

Fabian Barthel:

Absolutely. Another thing is the second lesson learned is that on a pure pay-per-use model, so you only charge when the containers are used. It leads to a situation of overstocking. So as you said, every restaurant they never want to run out of containers. They stock more containers than they need. They overestimate the willingness of their customers to accept reuse and so on. And so, it ended up in high container stocks sitting idle at partners, not generating any revenues and not generating any impact. And this was an issue and this is also what we discussed together as part of the case study. So here we introduced a non-usage fee. In marketing terms, we call it a sustainable stock level and a sustainable inventory level where we charge above a certain threshold a monthly rental fee for unused containers. So, we're putting a price tag on overstocking with the consequence that the containers come back to the warehouse and we can use them. We save on capex and our containers generate more revenue and generate more impact.

Mike Toffel:

Got it. Yep, great. So, you're trying to align incentives between you're bearing the cost of actually producing all these or funding for all these containers with restaurants potential propensity to overstock because they never want to run out. Now you're putting basically a disincentive there so that they actually try and figure out what's the optimal level of inventory.

Fabian Barthel:

Yes. Absolutely. and the optimal, the level which you get for free obviously depends on the usage. There's a formula behind an algorithm. So, you can, when you hand out many containers, you can obviously have a large stock. And even if you shut down your restaurants during the holiday season or you have low seasons, we don't ask you to send the containers back for two weeks or three weeks, but you can keep them. So it's a dynamic modelling but it's not super reactive to your actual demand in the last week.

Mike Toffel:

Got it. And I want to come back to that in just a moment, the idea of modeling and what you do, because I mentioned earlier that analytics is a backbone of some of your key decisions. But first, I just wanted to get your sense just more in the organization. So, you mentioned canteens. Now, the canteen is as commonly used word in Europe, less common in the US and elsewhere. It's mixed, but it basically means, if I understand it correctly, it's an internal cafeteria for an organization, whether it be a factory or a corporate headquarters or a university or so on. Okay. So tell me a little bit about what's the range of food establishments? So, canteens clearly, and then restaurants, primarily take out restaurants. So, these small one-off restaurants, mom and pop shops, as we would call them, or are these more like the McDonald's of the world? And then geographically as well. I know you started in Germany. Where have you spread to?

Fabian Barthel:

So, we still have the majority of our partner base in Germany. We're active in 24 countries, but Germany is still dominating the reuse market. In terms of partners, we have mom and pop restaurants, individual accounts, as we call them, and they're typically the classical lunch takeout place. It's not the fancy dinner stuff you go to eat in. So, these are restaurants with a large share of takeout meals. Many vegan restaurants, vegetarian restaurants of course, because there seems to be an overlap in the customer base, but due to the regulation in Germany every restaurant above a certain size has to offer a reusable packaging option and we can discuss this obviously later.

And then you have the staff restaurants or the canteens as we call them. We have a couple of quick service chains, but most of them have their own system. So, we work for instance with Kentucky Fried Chicken with Pizza Hut in Germany, but not with McDonald's as you mentioned.

Mike Toffel:

Got it. And what have been some of the challenges of spreading internationally? know, Germany seems to have some tougher regulations. And so, I imagine without the regulatory punch, it's more of a bigger sell job for you guys.

Fabian Barthel:

Absolutely. The biggest challenge is really the maturity of the market and the level of education of customers. What I mentioned in the beginning is that you really have to educate people first. What is reuse? Why is reuse better than single use? And this is how you actually do it. And then you have to return your containers. This whole journey was well established in Germany already. So, it was much easier to scale in Germany than other markets. And outside Germany, we really focused on these closed-loop systems which are mainly campus settings, universities, staff restaurants and so on. Because typically here the big difference is individual restaurant owner. They are in competition with the neighboring restaurants, and they don't want to put any burden on their customers in the fear of losing business. Whereas on the other hand in a staff restaurant or a canteen or an on-site cafeteria you typically have a local monopoly and there is one operator or one head of hospitality who can take the decision, okay we will introduce reusable packaging, we'll put a price tag on single use, or we will even end single use completely because they have much less competitive pressure and much less complexity because those containers are returned on site anyway are washed and handed out again.

Mike Toffel:

Right. And those establishments on the canteens, they're the ones saving on the waste disposal costs, right?

Fabian Barthel:

100 % and they have typically a strong CSR department and who must show some progress, report some numbers and we provide very tangible numbers, and we actually have live counters on the websites so that everybody can show individually but also our partner can show like we saved so many single-use packages. Our best partner is Evonik, a large chemical company and together on their nine sites they saved more than 600,000 pieces of single-use already. That's a massive, massive impact.

Mike Toffel:

Yeah. So, let's talk a little more about the analytics piece. So, analytics is a backbone capability of Vytal since its founding. And you mentioned earlier a bit of using some analytics to predict inventory levels at each store and basically the demand that each store would face. How else are you using analytics?

Fabian Barthel:

Yes. Mainly to optimize our operations. It's not so much about customer data and insights about customers to generate additional revenues. It's really understanding where our containers are, how often they have been used, what is our forecast on how many containers we have to procure to not run out of stock, rebalancing the network, and that's basically the main focus of our analysis.

Mike Toffel:

Got it. It reminds me of airlines, where their goal is to try and keep planes in the air and minimize their time at airports. So, it seems to me like, similarly, you want to maximize the amount of usage of your containers and minimize their time parked at restaurants.

Fabian Barthel:

100 % and that's the beauty what I love about our business model and that what got me into it and joining as a co-founder. Our incentives are perfectly aligned. We only make money when our containers are used. So, we have an incentive to use our containers as often as possible and as quickly as possible and to maximize our revenues and to maximize our impact.

Mike Toffel:

And these products are anywhere from, as you mentioned, small, medium, and large bowls, more squarish containers, pizza box containers, a whole range.

Fabian Barthel:

So, on the highest level of abstraction, we built software to track mobile assets and to track assets along a circular cycle, for instance. And that's why we can, and we started to work on packaging and specifically on food and drink packaging.

But given our technology is so flexible, we are completely agnostic about the container type. So, we have more than 300 different container types in the system by now, which are stainless steel containers, which are plastic containers, which are squared containers, round containers, burger boxes, but also branded containers. Some containers we only co-brand and say like the Pepsi cup. It's tracked in our system. It doesn't show Vytal very prominently. It just says little powered by Vytal. And this is the power of our technology because we can say you're a restaurant, have a very strong brand, you want to have your branded containers, but you want to make sure that the containers get back to you and you don't want to finance the container stock. So, we can produce branded containers, track them with our software. And in the system, we set up, we can show the customer, you can return this container only at the stores of this chain, for instance. So, we are very flexible.

And this is the power of technology which you will never achieve with an analog deposit system without tracking individual containers.

Mike Toffel:

Yeah, interesting. I didn't even know that you did the co-branding, which is one more layer of complexity. 300, in a way, stock-keeping units, right, SKUs, seems like an awful lot of complexity where the trade-offs are often, you can customize your offerings to your particular specifications of customers, but the pooling benefits of, you know, 10 products, 10 SKUs are really diminished because you have so many now. How do you think about that trade-off?

Fabian Barthel:

Very, very good question, Michael. And we only offer branded products for closed-loop systems. And that's the key. We say, look, our technology, you can brand your containers, but you can only return them to your stores. So, they don't end up in our vast network of partners, and we have to collect them. So, the customer sees in the app, you can only return it here. And that minimizes operational complexity, because they are returned by the customer to the store. They wash it and hand it out again.

For us, this actually doesn't increase complexity too much. Also in the event space, which we just entered, we have brand containers. But in the event space, the whole cycle is different because in the open system where we discussed so far, the containers are washed on site typically. We really act as a platform with restaurants and users, and they exchange on our platform physical products, namely containers. In any event, we do packaging as a service where we deliver containers, we pick them up again, we wash them with partners, we store them and send them out again.

Mike Toffel:

Got it. you're saying events, are you talking about festivals? You're talking about soccer games or what do we mean?

Fabian Barthel:

All of it, concerts, festivals, stadiums, everything, city festivals, Christmas markets. So, we just, for instance, we work with Insomniac in the US, will do the EDC festival in Las Vegas, just this weekend upcoming Beyond Wonderland, we will supply reusable cups. We just signed a contract with the San Francisco Giants to provide reusable cups. So, this is what we offer as a service. And in this case, it's full service. So that means we also do the washing and the logistics.

Mike Toffel:

Super interesting. We've been talking a little bit about policy so far in the German context where you mentioned there's the regulation requires restaurants that you take out to have the option of reusable for customers. What's been the evolution of these types of regulations both within Germany and then elsewhere around the world.

Fabian Barthel:

So, Germany was the first one to introduce it. It became effective on 1st of January 2023. So, as you said, every restaurant above a certain size has to offer a reusable packaging option.

And that's important. So, it has to offer a reusable packaging option. We can talk about the effectiveness of such a regulation in a second. But this regulation has been copied by many other countries. So, we have the same regulation in the Netherlands. We have the same regulation in Portugal. We have the same regulation in Sweden. We have the same regulation in Poland. In the US, I think there is much less regulation at the moment. But obviously, this has been discussed. And we're very curious how things will develop over there.

Mike Toffel:

Yeah, my guess is it's going to develop not at the federal level, but rather, I mean, these types of things have developed largely at the state and local level anyway over time. And I think that's likely to continue. So, when you talk about at the stadium level, you know, that's like sub municipal. But I do think that there's going to be some trials at these municipalities. The more proof points you have, of course, the more confidence policymakers will have to say, yeah, I guess it can work. It’s your foray into event space. It's like a little city sometimes, you know, when you have these multi-day events and there's like tens of thousands of people who show up. Those are interesting proof points to show to municipalities.

Fabian Barthel:

Absolutely. And again, with this, with the festival or the stadium, again, there's one authority too, and it's not even a public sector authority, it's a private sector authority, the head of operations in a stadium, they can say look we switch to reusable packaging because we believe in it independent of any official regulation. And that's why again this is why closed loops work because there's an authority to decide on reuse, a single authority and people don't feel any change in convenience. It doesn't hamper their convenience. If you grab a beer at a festival, you typically throw away the single-use cup in a bin, in a waste bin, and the reusable cup you throw in a collection bin. It's exactly the same process for the user, especially without deposit in the US. So that's why closed loop make a lot of sense to apply or employ your reusable packaging.

Mike Toffel:

Got it, super interesting. So, let's look forward a bit, both at your organization and in the reuse of space, policy. So, what are you looking ahead in the next 5 to 10 years in evolving your organization? How do you expect the environment to change, whether it be customer preferences, regulations, technologies, and how are you planning to meet that moment?

Fabian Barthel:

So, since we have been talking about regulation, think we have to stress that the current form of regulation, which was introduced in Germany and has been copied by all other countries, is highly ineffective. It's an obligation to offer a reusable alternative without providing any incentives to anybody to change their behavior. In market society, whenever there is a demand for a product, someone will supply it.

But the idea that you just have to supply something, and the supply will create demand is just a bit naive. Because imagine you're an author and you write a book and just because you wrote the book someone has to demand to read it. That's just not the case. And that's also what we see about the regulation in Germany and in all other countries. It's highly ineffective. It doesn't change behavior. It has literally no effect on the replacement rate for single use. More to your question now, what we see now happening on a municipality level, that they start to introduce a single use tax. So Tübingen has started it; they won a lawsuit against McDonald's, who obviously was against the single use tax.

Now the city of Constance has implemented a single-use tax and there are more than a hundred municipalities in Germany who have plans to introduce a tax on single use. And that works very simply. So, whenever you order your takeout food in a single-use container you have to pay 50 cents. A reusable container is completely free. And this provides an incentive for users to change their behavior because every time they opt for the reusable option, they save money. And that's an incentive. That's a real incentive. And we have restaurants or canteens who introduce this privately and we see an uptake of a couple of hundred percent in the replacement rate of the reused.

Mike Toffel:

Right. It's a very classic example of just aligning incentives and the polluter pays principle where you when there's a polluter, a pollution item, if it's for free, you're going to overuse it. And so, the idea is to tax it so that you transition to other technologies that are less polluting, which sounds exactly like what's going on here.

Fabian Barthel:

And that has always been the core of our business model and business thinking. That's why we're so much in favor of this term, of this regulation, rather than a ban. I'm personally not a big fan of banning single use. In some cases, it might just make sense. If you take a plane from Germany to US, it makes sense to use single use and not a reused of cap which you will never return. That's one thing. So, on the regulation side, we hope that we'll get a more supportive regulation over the next years. And the second trend is more technology related. In the future I think we will have a single transaction to buy stuff and to borrow stuff outside our business, you go to Home Depot, you borrow a screwdriver, and you buy the consumers in one process. In our product, in our market, you go to a restaurant, you order food, you pay for the food and in the same transaction, you borrow the container.

So there's just one payment transaction in which the container is linked to your credit card and then you have 14 days to return it anywhere. If you return it, you will not be charged. If you don't return, you pay your penalty. But this will further lower the hurdle, the acceptance hurdles, because at the moment it's always two steps. I buy the food and then I have to do a separate transaction to get the reusable containers, either with the app or with a credit card. And we are taking first steps to fully integrate this. And this will then allow retailers to say, look, I switched to 100 % reusable because my checkout process is exactly the same. And if the consumer doesn't return the container, it's their issue. And Vytal will deal with the consumer in communication. But we don't have any extra work. And I think this is where the market will have to.

Mike Toffel:

Got it, so reducing transaction costs, figuratively and literally.

Fabian Barthel:

Exactly. 100%.

Mike Toffel:

So right now, when customers are assigned the container, is it a QR code or a UPC symbol, or is there an embedded chip in the product?

Fabian Barthel:

On every product we have a QR code which is super easy to scan with any camera. In the event setting we also or in some use cases where we need bulk reading without any line of sight we also use RFID tags. They're beautiful because you can really scan 200 containers in a box and identify exactly which one has been taken out of the box and this makes a lot of sense in specific use cases.

Mike Toffel:

Got it. Super interesting. So next steps for Vytal in terms of increasing its scope, increasing its scale to new geographies. I mean, you have really interesting data about that shows, you know, the sequence of steps that customers take. They might go to this restaurant and then all of a sudden, they go to a different restaurant. So, you imagine you could leverage that with coupons or something to encourage that. So where are you seeing the future of your business?

Fabian Barthel:

Yes. Geographically, we concentrate ourselves on more mature markets or large markets in Western Europe, North America and Australia. This is what we do ourselves with our own salespeople, our own containers in our own operations. Other markets we serve via our franchise partner network. So, if there's a local entrepreneur, for instance, in Albania, is one who, look, we would never go to Albania to offer reusable packaging there. But we invested quite a bit to build a very nice piece of software and a very nice user journey, which you now can very easily translate into Albanian. So, we offer our system to local entrepreneurs to build a reuse packaging system in the domestic market, especially those markets which are not of most relevance to us. In terms of market or segments, I think the whole events and closed loop segment are super interesting because you get the high volumes, the high replacement rates, the high return rates there. I think this is what we're to focus on.

In terms of tech development, the US we discussed already, deposit is not working because of the transaction cost, because of the hurdle. So, we are implementing a system there where you get the container on a trust basis. So, if you don't return it, nothing happens, but we provide a positive incentive if you return it. So, there's a chance to win something. For instance, at a festival, you can win some merchandise, win VIP tickets, you can win some drink vouchers, whatever. And this increases return rate without interfering with the checkout process and the need to pay back deposit.

Mike Toffel:

Very interesting. That's basically like putting in place the mechanism that motivates people to play lotteries, right?

Fabian Barthel:

Absolutely, and this is where all the brand partnerships then come in. We have a brand partnership with Pepsi in Germany, we have with Hyrox a partnership, there's a new sports concept. So, I think this feeds in or entails nicely, it links very nicely. So, you do branded containers, you provide them to stadiums or to festivals and then with the digital incentive platform you can also play with the brands. I think that's the way we are going, not so much into individual user data. This was on the table in the beginning when we started but I think this has become a bit less relevant over the last two years.

Mike Toffel:

So, this has been a fascinating conversation about the motives and the business model and the regulations and the technology all around this use case of a reusable economy, part of the whole closed loop or circular economy. I wonder if you have advice for folks who are interested in entering this space, whether narrowly in packaging or more broadly in closed loop or circular economy, based on your being in this space for many years now. Where do you see future opportunities and where should budding folks look to learn more about this space, where should they tune in? Are there podcasts? Are there conferences, newsletters? What do you suggest?

Fabian Barthel:

So where to learn more about packaging there? It's a niche industry, let's be honest. And it's a low engagement product. If someone is interested in packaging in this very specific topic, there are specific websites. You can just Google Packaging Europe, for instance, or trade fairs and so on.

As a founder in circularity and the sustainability space, I think one mistake what many founders do and what we also partially did in the beginning is thinking look I'm solving a societal problem like in our case waste there must be a business. Everybody says that's a great idea, they are always fed up with the waste, and but it's hard to build a business on that. When you only solve a societal problem it's better to set up an NGO. And to set up a business and to run a business you have to solve a private problem so the problem of an individual who is willing to pay for it, not only the society as a whole. And in our case what we are solving is obviously a reduction of waste sorting costs, waste management costs, reduction in littering costs, regulatory compliance and if they already employ reusable packaging for any reason. It's the efficiency of handling the reusable packaging with our tracking system.

So that's one piece of advice. Be very clear who pays for your services and whose problem you are solving. And the second one which I have already touched upon is, I like business models, especially in the sustainability space where the incentives are aligned. There are many business models where it's always a compromise between impact and profit or impact and revenues.

For instance, if you have a business model which is buy one, donate one. And they always have the incentive to maximize the profit. You can say like, ah, buy two, donate one, or buy three to donate one. And this is how they increase; they could increase their profit. Whereas in our business model where the incentives are completely aligned, we can say things like, with every container which is used, we make more revenues, but we also generate more impact. And I think that's the second piece of advice. Be very conscious of the alignment of incentives.

Mike Toffel:

Perfect. Very useful advice. Thank you so much, Fabian, for spending the time with us learning more about your company, Vytal, and its evolution. I really appreciate it.

Fabian Barthel:

It was a pleasure. Thanks for having me, Mike.