The Future of Leather
The leather industry faces immense regulatory pressure while new players are leveraging breakthroughs in biotechnology.
The leather industry is among the most polluting in the world. Without even accounting for the ethical risk around animal cruelty, climate change poses a tangible risk through the combination of regulatory and reputational challenges. This blogpost sets out to compare and contrast the approaches taken by two very different institutions: Tandy Leather Factory (NASDAQ: TLF) and Modern Meadow.
The pollution of the leather industry is caused by two factors; the need to raise livestock and the process of leather manufacturing itself. The first, raising livestock, has been deemed as the most important factor in fueling climate change. It has been estimated that animal agriculture is responsible for 18% of greenhouse gases; more than the combined exhaust of all transportation. Livestock consumes 80%-90% of water in the U.S and occupies around 45% of earth’s total land, leading the charge in desertification which totals around 1/3 of the planet today.
As for the actual process of leather, it utilizes a wide-array of dangerous chemicals that produce wastewater. Disposing of the byproducts of the tanning process is pretty much completely unregulated, leaving the responsibility up to each individual company to do it in a safe, responsible way. In the U.S, this falls under EPA’s scope of action and the regulation is light, at best. Most worryingly, most leather comes from developing countries who have zero regulation in this matter, or if they do, they have little-to-no enforcement capacity. The companies themselves have little incentives to do so. Some of the chemicals generated include trivalent chromium, formaldehyde and glutaraldehyde. Dumping mostly untreated waterwaste in the nearest waterways is directly toxic to aquatic life and poses severe risks to humans including respiratory problems, infections, infertility and birth defects.
TLF is one of the very few—not to say the only one—publicly traded leather companies. The majority of TLF’s comes from distributing leather from manufacturers to leather designers. They also operate 108 retail stores and a small number of their own tanneries. As of today, most of the pressure to reduce its’ environmental footprint has come from legal disputes of employee’s or local communities. Most leather companies in the U.S are moving towards recycling chromium and investing in wastewater treatment. This approach can only minimally decrease the overall pollution generated in the process. As regulation tightens around wastewater treatment, the cost to treat raw hides will increase. This will reduce margins for all intermediaries and potentially begin to curb the demand for leather. Even when we reach the point of regulatory stress on the tanning side, the industry will face increasing pressure to address and reduce the waste generated in raising livestock. It is safe to assume that this pressure will lead to increasing regulation—and thus costs—aimed at reducing the sheer number of livestock raised for human consumption.
Modern Meadow (ModMed) is a bio-technology startup that is betting on regulation, fueled by climate change, to limit the use of livestock and to increase the current costs to manufacture leather. ModMed’s innovating technology allows them to biofabricate real leather in a lab, without the need for livestock and without generating any wastewater. Their technology allows them to source cells through a simple biopsy, grow those cells, generate sheets of cells, layer these sheets, combine the layers, tan the layers and eventually apply the finishing touches. This radical breakthrough uses no livestock and generates no wastewater. It also has three additional benefits; it is cruelty-free, it’s not regulated by the FDA and should pass the EPA’s regulations easily. ModMed has raised over U$50M in venture funding to develop the technology and has made remarkable achievements in advance of their launch to market, which is still more than a year away.
The leather industry is comprised of many small players and most of them in developing country. This structure may allow for climate change and market dynamics to completely blind-side them and drive them out of business. Approaches like ModMed’s have a strong vision that anticipate the changes that are coming.
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 “Livestock’s Long Shadow”. Food and Agriculture Organization of the United Nations. Rome, 2006. http://www.fao.org/docrep/010/a0701e/a0701e00.HTM
 “How Important is Irrigation to U.S. Agriculture?”. U.S Department of Agriculture, Economic Research Service. http://www.ers.usda.gov/topics/farm-practices-management/irrigation-water-use/background.aspx
 “Livestock and Climate Change”. Thornton, Phillip, Mario Herrero, and Polly Ericksen. Livestock Exchange (2011).
 UN launches International Year of Deserts and Desertification”. United Nations News Centre.
 “Federal Register. Rules and Regulations”. Enviromental Protection Agency (1996).
 ”Leather Tanning”. Environmental Protection Agency (1995).
Student comments on The Future of Leather
Nico, thanks for sharing. Your post leaves me far more informed about the impact of the leather industry and eager to give up leather altogether or shift consumption to companies like ModMed. How do you think TLF will ultimately adapt to tougher regulation? Does it make sense for TLF to by ModMed? It seems to me that legacy leather players will ultimately need ModMed’s technology, and this would be a very forward-thinking acquisition.
Thank you for the post, Nico. Very impactful to compare and contrast such different approaches to ultimately creating the same product. Assuming that truly these would be substitute goods, I find it hard to imagine a scenario where a consumer would opt for a TLF product over ModMed leather.
Further, I wonder whether there might be additional opportunities to reapply this technology to other presently controversial animal products such as furs. Assuming their product launch is a success in the coming year, there could be opportunities to explore those sorts of avenues as well.
In any event, you rightly point out that regulation, in this industry and in others, will inevitably head toward more environmentally sound standards, and corporates would be wise to front-run this trend in order not only to remain competitive, but in some cases, even to remain solvent.
Nico, thanks for the post – very informative. ModMed clearly has an incredibly strong value proposition, particularly as climate change regulations continue to strengthen; however, I’m worried that customers will (sadly) be highly skeptical of ModMed’s biofabricated product. Will it look, feel, and smell like traditional leather? I’d be curious to hear how you think the product should be positioned against traditional leather, beyond the advantages that you identified in your post. As Sam points out in his comment, perhaps a partnership with an existing player could bridge this gap in the consumer’s mind.
Nico, great post! I’m a huge fan of Modern Meadow. Another nice benefit of biofabricated leather is the fact that it can be produced in a rectangle, instead of the irregular shape of an animal hide. A huge amount of traditional leather is wasted because of imperfections (ex: big bite) or pattern pieces not fitting onto the irregularly shaped hide. As you mention in your post, biofabricated leather still needs to be tanned. I am curious how, or if, Modern Meadow will try to address the environmental effects of leather tanning, which is quite harmful to the environment. So far, the best attempts I’ve seen to improve the tanning process are:
1) Leather Working Group (LWG) – A multi-stakeholder group that has developed a protocol to assesses the environmental compliance and performance capabilities of leather manufacturers. Basically tanneries are continually audited and rated gold, silver, etc based on their performance. Brands who are part of the group agree to transition a certain % of their leather supply chain over to LWG-certified leather within a few years of joining. You can see what brands are a part of LWG here: http://www.leatherworkinggroup.com/lwg-members.htm
2) Wet-Green – Has developed a plant-based tanning agent that is, supposedly, safe for the environment. The process is Cradle-to-Cradle, which definitely adds some legitimacy. You can check it out here: http://www.c2ccertified.org/products/scorecard/wet-green_obe
Hi Nico, thank you for your post. Your footnotes caught my eye.
I think you hit the nail on the head with the idea of “betting on regulation”. There is a distinct time window between a mature industry being told regulation is coming, and the industry learning to adapt & thereby retaining its competitive edge.
I would argue that climate change regulation can be interpreted as a opportunity for new entrants to capitalise on across many industries.