Rental, Other Changes Shaking Pallet Industry

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Recycling Report-Rental, Other Changes Shaking Pallet Industry

A number of changes rocked the pallet industry in the past year, and more are on the horizon. One of the most significant trends impacting the pallet industry is the continued rise of pallet rental, fueled by the growth of industry giant Chep. Indeed, Chep has figured at the center of a number of major issues or developments affecting the pallet industry.

Third-party pallet management services continue to grow, spurred by the behemoth marketing efforts of Chep. However, independent recyclers increasingly are venturing into the arena, from large recyclers serving distribution centers to small, innovative recyclers forming custom retrieval networks and exploring other strategies.

The evidence seems to indicate a surge in interest of third-party pallet management. The most obvious indicator is the size of Chep’s pool: it is estimated at over 30 million pallets in North America and continues to grow unabated.

There was another sign that third-party pallet management services may be growing out of their infancy — Chep decided to negotiate with individual pallet recyclers to compensate them for handling Chep pallets. However, Chep recently reversed this practice.

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Chep scored a major marketing coup last year, putting its rental pallets into about 40 Wal-Mart distribution centers. Chep provides pallet services at the distribution centers and also began injecting its blue pallets into the Wal-Mart distribution system so that they will go downstream to Wal-Mart retail stores. Wal-Mart also is encouraging its vendors to ship to its distribution centers on Chep pallets.

The Wal-Mart business could help Chep grow its share of the U.S. grocery pallet market from 26% to 46% by 2002, according to one analyst.

Chep’s huge marketing victory with Wal-Mart could have serious ramifications for the pallet recycling industry. If a large percentage of Wal-Mart suppliers goes blue, the shift will cut deeply into the number of white pallets that are available.

There are several other dynamics at play in the pallet industry which do not necessarily portend well for pallet recyclers and manufacturers. At best, many members of the pallet industry may have to adapt to the changes that are occurring in the marketplace.

The demand for new wood pallets seems to have matured. At the same time, the recycling segment of the pallet industry has continued to enjoy annual growth rates in the neighborhood of 20% or more in recent years. In addition, pallet rental — witness the Chep contract with Wal-Mart alone — also continues to grow.

The 48×40 footprint still dominates pallet markets, but continued growth of pallet rental likely would reduce the supply of 48×40 pallet cores; the reduction of 48×40 cores likely would have a domino effect and begin to reign in the growth of the recycled pallet market.

If the new and recycled market for the 48×40 shrinks accordingly, both 48×40 pallet manufacturers and recyclers likely would begin competing against other pallet businesses that have focused heretofore on niche markets. The result would be more competition — the same number of pallet companies chasing fewer pallets — and reductions in volumes and margins. A shift of this magnitude could reverberate through the pallet industry’s suppliers, too.

The changes nevertheless may open doors of opportunity for pallet rental, management, and related services, such as recovery and retrieval, sorting, and repair. However, in order to provide such services, pallet companies may increasingly have to rely on forging partnerships or networks with other pallet companies to effectively close loops and provide the kind of services outlined above. Rental clearly is the best established component of third-party management with well understood and increasingly accepted programs in place.

With the emergence of off-the-shelf tracking software, pallet companies involved in third-party management and savvy pallet users alike have a new tool to improve the management of retrieval and recovery programs. Tracking software is a powerful tool that can help reduce record-keeping labor and increase the accuracy of the records. The software can be configured to accommodate numerous types of reusable pallets and containers and numerous trading partners. The programs also can help prevent the loss of reusable pallets and containers, translating into an increase in the number of trips and reducing costs.

As the pallet industry moves forward, it is becoming impacted further by such issues as the core shortage and ownership of proprietary pallets.

Labor also has become a more pronounced challenge because of the nation’s vibrant economy and low unemployment rate. The challenge of finding and keeping good workers for a labor-intensive, low-wage business such as pallet recycling, in which many of the tasks are strenuous to boot, has become more difficult. Pallet recyclers must compete with fast-food businesses and other industries vying for the same workers, and competing businesses offer higher wages for entry-level workers and better working conditions.

The difficulties in the labor market are contributing to the interest in automating pallet recycling operations. Recyclers seem to be increasingly aware of the benefits of automating processes for sorting pallets and moving them through their shops.

In other developments involving some of the leading pallet companies, PalEx merged with International Food Container Organization (IFCO). The merger created a leading global provider of supply chain support services with expected revenues of about $550 million.

Bromley Pallet Recyclers added eight Wal-Mart on-site operations last year. It most recently acquired Indy Pallet Co. Inc. in Indianapolis, Ind; it was Bromley’s second entry into the region after establishing a presence in Ohio the previous year. With the Indy Pallet acquisition, Bromley now has 25 locations, including its Wal-Mart on-site operations.

National Pallet Leasing Systems landed a new contract to put it back into the national arena of pallet management. The company’s contract with K-Mart involves 14 distribution centers that serve 2,000 retail locations.

The First Alliance Logistics Management has been redirecting its efforts to provide value-added services to its members. The Alliance tapped John Lorentzen as its new president, replacing Phil Deely last year.

After struggling, Pallet Pallet folded its tent, along with its Pallet Banking program. Earlier it had closed operations in New York, Louisiana, Arkansas, and California and saw revenues fall $3 million to $48.7 million in the first half of 1999, when it also suffered a net loss of $3.2 million.

Pallet Management Systems also has been struggling although there have been positive signs lately. Donald S. Radcliffe was elected chairman of the board and also will be involved with daily operations and management decisions; chief executive officer John Lucy III and president Zachary M. Richardson will report to Don.

Pallet Management Systems has taken a number of steps to reduce costs and “sharpen management focus,” said Don.

The company posted consecutive quarterly loss that led in part to postponing its acquisition of the Nelson Company. On the bright side, sales have been increasing.

Chep found itself in the middle of a running controversy that raised its head again in 1999. Pallet recyclers gathering for an industry meeting in Memphis, Tenn. asked Edgar Lozano to tell them his story. Edgar, owner of a pallet recycling company in San Antonio, Tex., described his legal battles with Chep, which unsuccessfully sought to have him prosecuted on charges of stealing its blue pallets.

At the heart of the dispute is a fundamental disagreement between Chep and some independent recyclers. Chep maintains it is the rightful owner of its blue pallets and should not have to pay to get them back when they “leak” out of its system and into pallet recycling yards. The recyclers want to be compensated for costs associated with recovering the pallets for Chep.

As indicated above, Chep announced that it would begin negotiating with individual recyclers to compensate them but later reversed itself. The dispute is far from over. The company also filed a lawsuit against a pallet recycling company in Washington to recover blue pallets.

Another reason for concern for the pallet industry: the first competitive bids made over the Internet. The so-called online auction was conducted for Quaker Oats Company, which used the services of FreeMarkets OnLine Inc. to conduct a “live” bidding process for pallets over the Internet.

The event brought home in a startling new way to the pallet industry the impact of the Internet and so-called e-commerce, the sale of goods and merchandise via the Internet.

The major pallet trade association in the U.S. is undergoing a leadership change. John Healy, president of the National Wooden Pallet and Container Association, announced his resignation late last year in order to accept a position with PalEx. John held the top staff post of the NWPCA for more than 12 years. The NWPCA is in the midst of recruiting a new top executive.

Changes in European laws and regulations impacting packaging are spurring greater demand for pallets built to recognized standards, especially the Europallet.

The new laws and regulations impose taxes on packaging, including pallets. Packaging that cannot be reused or exchanged is taxed the most. Europallets and other pallets that meet approved standards are considered reusable and therefore are more attractive in terms of the tax burden they carry.

The European Pallet Association, which administers the Europallet program, has set up an entity to license Europallet manufacturers in the U.S. The group, the U.S. Pallet Council, is being chaired by Sam Caufield, a pallet industry consultant and former Procter and Gamble executive. The council accepts applications from U.S. pallet manufacturers and recyclers that want to become licensed Europallet manufacturers.

An American version of the Europallet, adjusted for wood species and fasteners available in North America, has been under development and recently passed tests conducted at the Virginia Tech pallet and container research laboratory.

Another issue impacting the pallet industry: the rise in reusable plastic containers (RPCs), which have attracted the interest of major grocery retailers for produce. Among the reasons the grocery retailers like RPCs: produce can be merchandised directly from the containers, which reduces labor associated with unloading shipments of produce in corrugated or other packaging and placing individual fruits and vegetables onto shelves.

IFCO and Chep, the two largest third-party management companies offering RPCs, court major retailers to “pull” containers through the produce supply chain. Wal-Mart has embraced RPCs and is quickly converting its stores for them. Other grocery store chains also are moving to use RPCs or are testing them.

At this stage RPCs only comprise about 2% of the produce packaging market, but that figure could increase rapidly over the next few years. “The RPC has the opportunity to capture somewhere in the neighborhood of 25% of the produce market over the next five years,” said Eric Fredrickson, sales and marketing manager for IPL’s U.S. materials handling division.

The RPC field also is attracting more players. Georgia Pacific (GP), a major manufacturer of corrugated containers, jumped into the RPC business and already has been named one of Wal-Mart’s suppliers.

The rise of RPCs, however, should not have a profound impact on the wood pallet industry — at least not immediately. Most of the containers are designed to fit on a standard 48×40 GMA pallet. But increased retailer interest points to a change in mind set from one-way to multi-trip packaging. This may translate into retailers “encouraging” the use of more plastic pallets in the future.

RPCs likely will fuel the growth of third-party management companies. With some of these companies also offering wood or plastic pallets, they will likely become a factor in some markets where they currently lack a strong competitive presence.