CHEP and IFCO Systems Integration: Brambles Unveils Growth and Business Strategy Plans at Investors Conference
Brambles management unveils growth and business strategy plans, which signals greater collaboration between CHEP and newly acquired IFCO Systems. This spells trouble for the rest of the 48x40 market.
By Chaille Brindley
Date Posted: 5/1/2012
Brambles Ltd., the parent company behind CHEP and IFCO Systems, recently held an investment market briefing designed to inform the public about future operational plans, growth strategies, and integration of the CHEP and IFCO business units. Brambles, a pooling conglomerate, announced intentions to acquire IFCO Systems in November 2010, which caused concern in the pallet industry because this would unite the largest pallet pooler and the largest recycler in the country under one parent company. The deal was approved by government authorities in March 2011 and Brambles took over control of IFCO Systems in April 2011.
While Brambles suggested that the most attractive reason for the acquisition was IFCO’s reusable container business serving the produce industry, the conglomerate commented that the IFCO white-wood pallet division was a good business that could provide some synergies with CHEP’s operations and extend the amount of service offerings that Brambles could offer customers. Due to the perceived differences in how the two pallet companies operated, some wondered how Brambles would integrate the two distinct businesses. Some even speculated that Brambles might try to sell off the IFCO pallet business in time, which remains a possibility. But Brambles seems to be signaling to the market that the IFCO pallet business is a critical new tool in its toolbox to serve customers. The level of planned integration between the two companies suggests that Brambles has no real intention to divest the IFCO pallet business any time soon.
In a recent investor briefing, Brambles top brass discussed the integration, future growth strategies and business moves that could send ripples throughout the U.S. supply chain. With Intelligent Global Pooling Systems (iGPS) somewhat crippled for the moment with systemic problems, CHEP has reinforced its leadership position in the market. Innovation and finding new ways to lower costs and serve customers was certainly on the minds of the Brambles executive team as it unveiled its growth strategy.
CHEP’s Current Position
Having just spent millions of dollars over the last few years upgrading the quality of CHEP’s U.S. pallet pool, Brambles has stated it will not go back to old policies that allowed quality to wane in favor of short-term profit gains. CHEP picked up the Con Agra and Pepsi business that iGPS had stolen for a short period of time. Peter Mackie, group president CHEP Americas and global supply chain chair for CHEP, said, “We are not going to go back to the wrong level of investments.”
CHEP USA believes its improved pallet quality has bolstered its competitive position, which should drive margin improvements. Mackie said, “Our ability to grow and discuss price is easier with the improvements in quality and service in the U.S. business.” He added, “We have a pretty robust competitive position in the U.S. business.”
Currently, the CHEP USA business has three major goals – enhance return on capital investment, focus on cost leadership and remove costs out of the supply chain, and identify and go after growth opportunities for new business. Improved communication with retailers is a major aspect of this effort. Kim Rumph, president of CHEP USA, said, “Retailers control the supply chain inside the United States as they do globally.” As a result, CHEP has focused to improve its deep engagement with retailers by recently hosting a forum for top decision makers. Rumph said, “Now we are sitting with the supply chain teams. And they are saying, ‘It’s about reducing days on-hand inventory. It’s about direct ship to stores from manufacturers.’ They are giving us the insights that we need to drive innovation.”
Improving asset control has become a high priority for Brambles. CHEP has bolstered the total number of asset management staff in the field and is aggressively reinforcing its ownership claims according to Mackie. This is all part of an overall plan to evaluate each customer and shipping lane based on a Revenue Per Issue (RPI) basis. CHEP has begun test programs with customers and analysis of each unique customer situation to identify the true cost to serve each customer.
Rumph, explained, “We are beginning to shift price based on the true cost to serve customers.” While this may mean higher prices for some customers, it also means savings in other cases or possibly a transition to white-wood pallets offered by IFCO Systems. Armed with more data, don’t be surprised if CHEP lobbies for higher prices to serve underperforming lanes in the future.
CHEP is currently conducting end-to-end studies tracking flows for Proctor & Gamble and Kroger as well as Costco Wholesale. The goal of these studies is to identify waste and improve asset utilization.
Brambles believes that growth will come from new business (particularly small to medium sized companies), former customer win backs, such as Pepsi and Con Agra, and price increases. One potential source for new business is customers concerned about mold or bugs wanting a dried, export certified pallet. CHEP is likely to offer a half-sized pallet in the near future. Rumph pointed to the growing trend of special manufacturer promos that are being shipped on half-sized pallets as a major growth opportunity since CHEP USA does not offer a half-sized pallet. CHEP Canada recently launched a half-sized pallet in Canada.
Rumph said, “If there is going to be a fractional sized pallet in the United States, we want to be the one to create that pool and set that standard.”
CHEP believes it has gained only 48% of the addressable pooling opportunity in the United States. It has identified 15% held by other pooling companies and 37% served by standardized white-wood pallets as a potential target. CHEP has a much greater growth potential it has admitted in South America compared to the United States and Canada.
Thanks to the Costco Wholesale mandate for block pallets, pallet poolers have gained access to small-to -medium sized product manufacturers that previously avoided rental. CHEP indicated that this has been a good source of business since these accounts have a higher RPI compared to larger volume accounts.
Rumph said that CHEP has been able to expand about 15% into a higher class category when it comes to volume yet keep at the same RPI, which is one of the reasons that CHEP has been able to boost profitability over the last half year. CHEP considers any account under 100,000 issues to be a small-to-medium sized customer.
IFCO’s Pallet Division
Although IFCO doesn’t have the profit margins of CHEP, it is a low capital investment business. Dave Russell, president of Pallet Management Services for IFCO, said that IFCO has about 3,000 customers and this division grew about 9% during the first half of the fiscal year 2012. IFCO handles over 200 million pallets per year.
IFCO has benefitted from its strategic relationship with CHEP as pallet depots controlled by CHEP have diverted white-wood cores away from the open market to assist IFCO. Also, CHEP has transitioned some unprofitable pooling business to IFCO white-wood pallets. This eliminates unprofitable shipping lanes while keeping business in the Brambles family of companies.
IFCO’s growth plan includes expanding into new markets and opening new locations, leveraging the strategic relationship with CHEP and offering new services. The largest percentage of growth for IFCO has come with its pallet management services aimed at helping companies better control proprietary pallets and packaging. Russell pointed to IFCO’s program with the U.S. Postal Service (USPS) which has helped the government reclaim stray pallets and packaging. Russell explained that the USPS situation presented a challenge of high volumes in heavily centralized locations, short lead times and the requirement of a government compliant contractor. In some cases, IFCO provided wooden pallets as an alternative for trips that couldn’t be effectively managed to secure return of the government packaging asset.
CHEP and IFCO Integration
During the investment briefing, Rumph told the story of one CHEP customer that had a high number of flows to Non-Participating Distributors (NPDs), companies that have not signed on to return CHEP pallets. This particular customer was supplied completely by CHEP. Sixty percent of its flows were going to high RPI participating distributors. The remainder was going to NPDs. Rumph said, “We have shifted this customer from being a non-profitable account to being a profitable account by eliminating NPD flows. CHEP primarily achieved this by moving the NPD flows to white-wood pallets provided by IFCO.
Currently, CHEP has capped NPD flows and is working to reduce NPD shipments. It is also trying to convert many NPDs to its program so that manufacturers can ship even more loads via CHEP.
Brambles has started to integrate some parts of the CHEP and IFCO businesses, such as IT, administration, human resources, administrative support and other functions. Both companies have retained their separate sales teams although the companies are sharing leads and working to move business to whatever approach can provide the best RPI. Mackie said that eventually the goal is to simplify and centralize billing to make accounting easier for customers.
A number of pallet recyclers across the country have reported that CHEP is imposing stricter rules for PDs since the beginning of the year. This includes restricting downstreaming of pallets for picked loads and imposing logistics return fees that had been waived for return freight. After CHEP outlines the tougher rules or imposition of fees, a little while later IFCO comes to visit and suggests that it can make those issues go away if the PD will agree to allow IFCO to manage its program and take possession of all the white-wood pallet cores. This is exactly the kind of sales games that the pallet industry was concerned about when the IFCO acquisition was first announced. Although a number of pallet companies petitioned the Department of Justice (DOJ) to scrutinize closer the acquisition, it sailed through with virtually no problem.
In the end, these recent moves could jeopardize the future of the GMA market and force smaller recyclers to close. This would certainly lead to higher rental prices, which is likely the point of this strategy.
Logistics and Operations Innovation
A major focus of Brambles has become driving costs out of the supply chain. It hopes to do this through using best practices to optimize CHEP and IFCO facilities as well as looking for logistics savings primarily by reducing the amount of distance that pallets must travel in its system. The idea is that fewer miles on the road leads to less money spent on fuel.
In some cases, CHEP has started to work with customers to handle shipping its pallets. CHEP has launched a program with Wal-Mart where the retailer will backhaul pallets in its trucks back to CHEP facilities.
A key weapon in this process is software and logistics expertise pioneered by Lean Logistics, which was acquired by Brambles a number of years ago. Lean Logistics is a consulting firm that helps increase operating efficiency and reduces transportation costs for customers. This computer modeling approach is going to be used to optimize both the CHEP and IFCO logistics network, which means that both companies may close, open or combine some facilities over the next few years.
“Plant network optimization is where we are expecting the biggest chunk of savings (about $40 million) because this reflects the integration of the IFCO PMS and CHEP networks. We are combining two effective networks, and we are expecting big savings there by reducing transportation distances,” said Carmelo Alonso, senior vice president of CHEP.
Brambles hopes to save $95 million through optimization of its network and increasing the efficiencies of its plants. Also, some programs are aimed at addressing customer concerns. Alonso said that one of the most critical factors for customers has been raised nails. CHEP plans to add to its network around the globe a weighted roller system used in Europe that has helped address the concern.
CHEP will start standardizing many practices in its plants. For example, CHEP plans to paint pallets one at a time and stencil its logo and marks on the pallet using ink jet machines, a practice which is used widely in its Canadian operations. Various automation practices will still depend a lot on the volume and local labor costs for each plant.
Synergies and Cost Savings
The big takeaway from the recent Brambles meeting is that the integration of these companies will provide the market a dynamic packaging provider that hopes to drive costs out of the supply chain while offering customers an optimal pallet based on the real cost per trip. Both CHEP and IFCO have been busy trying to grab new business and appear positioned for more growth. That’s bad news for the rest of the pallet business where many recyclers are struggling to survive.
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