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What Will Happen to the Pallet Industry If Pallet Rental Growth Continues?
If pallet rental continues to grow, what will be the impact on the overall pallet industry? A must-read report covers the future of the industry and market changes that will affect everyone.

By Dr. Ed Brindley
Date Posted: 11/1/1999

People repeated ask, "What is going to happen to our industry? How is the explosive growth in pallet rental going to affect the pallet industry?" After examining the factors involved and the total impact of pallet rental, not just the immediate impact on the 48x40 market, it is clear that this issue demands to be addressed in print. Let me first say that I am not against the concept of pallet rental or pooling. As a consumer, it would make little sense to argue against efficiencies created by using pallet assets more wisely. In fact, over the years much of the pallet research, particularly that directed by the NWPCA, has been directed mainly toward increasing the life of a pallet and reducing the cost per trip.

This article contains my predictions for the future. My projections have been reviewed by a number of knowledgeable pallet friends just to make sure I am not way off base.

I believe that every company that functions heavily in the wooden pallet arena is likely to be impacted in some fashion. While some may find opportunities in the massive changes that rental is bringing to our industry, many expect they will suffer due to continued growth in pallet rental. Some will almost surely go out of business, while others will see their businesses suffer due to smaller pallet volumes or reduced margins. People who serve the industry by manufacturing machinery or providing supplies and services are likely to be significantly impacted as well.

The wooden pallet industry is facing changes of the magnitude and speed never previously witnessed. Unprecedented change is a fact no matter how you slice it. Each company must make appropriate adjustments to meet the changing face of our industry. The overall impact on our industry is likely to be adverse unless something happens to reverse the trends covered here.

Wooden Pallet Growth

Ever since the wooden pallet showed its value during World War II, the industry has grown steadily. With a few exceptions due to the impact of economic recessions, projections about the number of new wooden pallets manufactured each year from the 1940s into the early 1990s showed stable growth rates in excess of 5%. Until the early 1990s, the National Wooden Pallet and Container Association published estimates of annual pallet production. Recently the U.S. Forest Service (USFS) published its estimate of pallet production (Graph 1). This new revised estimating procedure reflects what many industry professionals had been saying. Wooden pallet production seems to have hit a plateau; we have become a mature industry with limited major growth potential.

In the early 1980s, slipsheets put a scare into wooden pallet manufacturers. Slipsheet advocates predicted the wooden pallet would suffer major market losses. Of course, slipsheets were not new, and their shortcomings were fairly well known by informed materials handling professionals. While slipsheets may have made some inroads into the number of unit-load shipments, the wooden pallet industry volume exploded as much after the recession of the early 1980s as it ever had. Pallet production declined somewhat during the recession of the early 1990s, as it had during the steeper recession in the early 1980s. In spite of the economic boom the United States has enjoyed during the mid and late 90s, the USFS’s figures show the growth in wooden pallet production started leveling out after 1994. Growth rates in the neighborhood of 2% replaced healthier growth rates of the past until 1998 actually registered a decrease of 2.9%. The decrease in 1998 basically offset the growth in 1997 to return pallet production back to 1996 levels.

New pallet figures by themselves can be deceiving because they fail to reflect the number of recycled pallets. The Pallet Profile Weekly has conducted an annual study of the pallet recycling industry since the early 1990s. While recycled pallet shipment growth rates have varied a little, the trend has been unmistakable. The number of pallets going through pallet recycling yards has registered around a 20% increase in most years from 1992 to 1998 (Graph 2).

The Virginia Tech Center for Forest Products Marketing and Management has conducted recycling surveys in which it predicted the number of recycled and used pallets shipped. The survey in 1995 predicts shipments of about 125 million units (72.8% of the 171 million pallets recovered). Assuming 20% growth each year, this would translate into 216 million recycled pallets shipped in 1998.

The growth in recycling has undoubtedly helped retard the growth in new pallet production. Fueled by exploding growth rates, recycled pallets are seizing a high percentage of the pallets purchased each year. If the compounding rate of overall wooden pallet demand were to remain stable, the increase needed in new pallets would be less each year because of the growth in recycled pallets. We may have reached the point where any growth in wooden pallet demand is being handled by recycling. Therefore, it is possible that the demand for wooden pallets has not yet matured; instead it may be more heavily satisfied by recycled pallets.

Although plastic pallets and containers have received a great deal of positive press in the materials handling environment, until fairly recently their market expansion had remained fairly limited. Dr. Mark White of the Pallet Lab has stated that estimates of plastic pallet production in the United States have grown from about 3.5 million units in 1995 to about 12 million today. There are some projections that plastic pallet demand may grow to around 20 million within just a few more years. It seems fairly certain that pallet rental and closing distribution loops are likely to make it more economical to purchase higher quality, more durable pallets. Thus, plastic pallets may become practical in more applications in the future.

The 48x40 Pallet

The 48x40 GMA pallet has been the biggest volume pallet according to surveys, with relatively minor changes in many years. Table 1 shows the figures from surveys in 1977, 1984, 1985, and 1996. Since 48x40 and 40x48 pallets were lumped together in 1985, a reasonable comparison would suggest adding these two sizes in other years as well. This would bring the 1996 48x40 and 40x48 total to 34.3%, compared to about 36.4% or 36.9% in other years. In spite of growth in recycled 48x40 pallets and an improvement in the quality of 48x40 rental pallets, the 1996 total for 48x40 new pallets maintained a healthy 34.3%. The 1996 Pallet Profile Recycling Study showed 48x40 GMA pallets constituted 67.8% of the recycled pallets shipped by survey respondents. The most recent recycling survey by the Center for Forest Products Marketing and Management showed that about 125 million recycled pallets were shipped in 1995 (about 73% of the pallets they report were recovered). According to this survey, the ratio of new pallets to recycled pallets is about 31/3 to 1. The Pallet Profile surveys do not project the overall population size for recycled pallets. However, our research and industry contact base suggest this may be on the low side, perhaps well below the actual figure. Combining the new and recycled populations, over 42% of the total wooden pallets sold in 1996 were 48x40 pallets.

Although some recyclers have moved away from 48x40 GMA pallets (the nearest pallet to an overall industry standard), the trend (Table 1) shows that we continue to be dependent on 48x40 cores for recycling (Graph 3 shows statistics from 1998 Profile survey, see page 17).

In North America, most rental pallets are 48x40s. A significant portion of North America’s rented or pooled pallets, which is probably close to 40 million across the continent, has been manufactured since 1996. This means that 48x40 production figures may have actually been stronger from 1997 through 1999. Since the pallet industry continues to depend very heavily on 48x40 pallets as its largest market for both manufacturing and recycling, any industry factor that influences this footprint will impact both pallet manufacturing and pallet recycling.

Pallet Materials

The wooden pallet industry has two major sources of wood materials – new lumber and recycled pallet cores. Certainly both stand to be impacted by any growth in pallet rental. Pallets that are rented or pooled are managed in a system with controls. A heavier, stronger pallet can be used in a controlled system because it will last longer as an asset. While weight continues to be a problem from an ergonomic point of view, a stronger pallet made with more lumber lasts longer until repaired.

Historically most pallets are manufactured from the lower grades of both hardwoods and softwoods. The largest rental pool in North America uses mostly softwoods; its stringent specifications have caused some pallet manufacturers to buy a high grade of softwood instead of remanufacturing lower grade random length material into different grades of pallet stock.

The conventional 48x40 GMA pallet is manufactured from hardwoods. A common estimate is that around 40% of hardwood material goes into pallets. The percentage of low-grade hardwood used in pallets would be much higher. Competitors for this low-grade material include rail ties, flooring, and furniture parts. While flooring has been a major growth market, its future growth is likely to subside somewhat from its approximate 15%-20% annual pattern during the 1990s. Rail ties are a mature market, and they are drawing a never ending stream of alternative materials to try and replace North American hardwoods. If the wooden pallet industry significantly reduces its demand for low-grade hardwoods, there is no obvious industry in the wings to absorb excess low-grade production. While there have been estimates within the hardwood industry that the supply of pallet material may come under serious restrictions due to environmental concerns and other factors, one could argue the other side of the coin as well. Certainly a rapid decrease in hardwood purchases by the pallet industry would impact hardwood sawmills significantly. It could lower cant prices as sawmills fight to move their low-grade material. It could also reduce the number of scragg mills and hardwood pallet stock companies that process low-grade pulp logs.

In the last few years, rental pallets have required a large volume of Southern Yellow Pine and western softwoods (conservatively at least 250 million bd.ft. a year). Keep in mind that this particular market did not exist to a large extent prior to the mid-1990s. If the annual projections of 10-15 million or more new rental pallets for the early 2000s end up being true, the increased demand on softwood material (a mixture of #2, #3, and #4 material) may continue. In particular, more high-grade material is being used by our industry where not many years ago we almost exclusively bought #4 or sometimes #3 grades.

Ask any recycler about his major concerns. One of the biggest is a tight supply of pallet cores and the deteriorating quality of the core pool. Table 2 from the Pallet Profile surveys in 1996, 1997, and 1998 shows what appears to be an increasing trend of recyclers paying for cores. The data is divided into two categories, one for those respondents that had over 200,000 incoming cores and those with less than 200,000 incoming cores. Since the larger companies are more likely to reflect trends from the overall market, the decrease in free pallets and increase in cost supports the growing concern over core supplies.

When a large distribution center (D.C.) suddenly shifts toward rental, it may dump cores into the local market, temporarily increasing the supply and possibly reducing prices. As the D.C. increases its percentage of rental pallets, the number of cores flowing from it will decrease. This seriously restricts the availability of 48x40 cores since most D.C.s involved in the rental trend have typically received products on 48x40s.

Rental will affect virtually all recyclers. The more the pallet using community goes to rental, the more recyclers will have both a 48x40 core supply problem and a 48x40 customer base problem. Recyclers that have shifted their business heavily toward non-48x40 pallets will likely see more conventional GMA recyclers coming into their markets for both cores and customers.

Pallet Rental History

All pallets that are reused a number of times tend to reduce the number of new pallets required. This includes rental pallets, pallets used in cooperative pools such as CPC and Euro pallets, and closed loop captive systems. Worldwide, pallet rental companies have well over 100 million rental pallets in their pools, most of its owned by the leading rental company. Other pooled pallets further increase the number of pallets being shared by users.

Once successfully established, pallet rental has been more profitable than other aspects of the pallet industry. Pallet users do not want the hassle of fooling with pallets. They are in the business of making money from their established product lines. Materials handling is a necessary function to complement their reasons for being in business, but they relish the opportunity of getting out of "the pallet business."

One company dominates pallet rental around the world, but several others are working to penetrate this market as well. Arguments have been made that there are less expensive alternatives than pallet rental; for example, the often quoted Cleveland Study points out the superiority of a CPC style ownership pool. These alternatives involve pallet pooling options that require some of the same pallet characteristics, such as higher quality pallets and more management control. The bottom line is that pallet using companies do not want to be bothered with managing pallets. Pallet rental companies claim to eliminate headaches and to lower cost compared to current means of shipping and inventorying. To make a better managed system work properly requires more controls. Rental options provide a structure for these management controls that appears to reduce management headaches. So, a pallet using company supplies much of the management effort, while the rental company provides the system.

During the 1990s, the pool of North American rental pallets has grown from its infancy to over 30 million pallets. Those who are closest to this market hear that a growth of 10 to 15 million pallets a year over the next few years is likely.

This outsourcing of responsibilities has become very popular. The materials handling trade journals are filled with articles about third-party management opportunities that promise less hassle and less cost.

Worldwide I am not aware of a single country where pallet rental has arrived and later exited after being unsuccessful. Pallet rental is growing in industrial markets around the world. It started in Australia and New Zealand, spread to European countries and South Africa, and then established itself in Canada. It came to the United States during the 1990s and is now expanding into South America, Central America, and the Pacific Rim. Pallet pooling concepts based on a standard pallet are established in Europe with the Euro pallet and in Canada with the CPC.

As the world shrinks more, the need for an accepted international pallet standard is likely to grow. An educated guess suggests that block pallets are likely to become international standards. Different countries may require different rental or pool pallets underneath imported products. Since pallet rental companies have an international influence, they are probably destined to be leaders in worldwide pallet standards.

Pallet rental companies adamantly contend that they own pallets identified by their logo, paint, and other markings. Over the years they have defended their turf in court and continue to do so in North America.

Pallet rental will likely continue to grow and become a more dominant force in our industry. How widely it will spread is not certain, but the desire of customers to rid themselves of materials handling problems will continue to drive them toward rental in markets where it makes sense to them.

Our industry has had a few false starts at establishing pallet networks, such as PRANA and FNPR. These failed attempts have cast a shadow of doubt over current and future industry attempts at networking solutions. This has soured attitudes about and confidence in our industry. People both inside and outside the pallet industry are less likely to believe the pallet industry is able to police itself well enough to meet our customers’ changing needs. This serves to make rental even more attractive. Remember that the driving force is really the need by customers for somebody else to assume responsibility, or at least the perception that this is happening.

Unit Load Movements

Pallet industry surveys have typically suggested that about half the wooden pallets manufactured each year in the U.S. are limited use pallets, and half are multiple use pallets. As already seen, over 30% of the pallets are 48x40; most of these are GMA pallets for multiple use. When examining pallet rental, realize that the most important thing is the number of unit loads shipped. Many pallets, including rental pallets, are reused many times. Each rental pallet shipment takes the place of a unit load shipment on a non-rented pallet.

If a rental pallet shipment replaces a limited use pallet, it may actually eliminate the need for another limited use pallet since many limited use pallets are used only once. If it replaces a less durable but reusable multi-use pallet, such as many of today’s 48x40s, then during its lifetime a rental pallet might replace several less-rigid, reusable pallets. It is pretty obvious that a managed pallet that is kept repaired to a good standard will make many more trips during its lifetime than a pallet that is not managed specifically to get the most life out of it.

Naturally pallet rental companies want to capture as much business as they can. Since their success is exploding in the U.S. today, it seems logical to conclude that their growth will continue. Most pallet rental today has been in the grocery industry (estimates run in the 25% to 30% for rental pallet use in groceries), but produce is making significant strides as well.

Now that Wal-Mart® has endorsed rental pallets and is strongly encouraging its suppliers to ship on them, the door is opening to all kinds of products to be shipped in the United States on rental pallets. The new relationship between Wal-Mart® and pallet rental could be the catalyst to help rental spread faster than most pallet people ever conceived.

The produce industry is also focusing on reusable plastic containers (RPCs) that can be taken directly from the fields through to the stores without the produce and fruit ever being rehandled. These rented containers encourage efficiency while reducing product damage. This rental concept, which already has been well accepted in Germany and to a lesser extent in some other European countries, is spreading to North America. Again, Wal-Mart® has been influential in testing RPCs; at a recent Reusable Pallet and Container Coalition meeting Wal-Mart® endorsed the RPC concept widely and predicted that it will be using RPCs to ship both produce and meat products throughout its grocery store network within a few years. While RPCs are different from pallets, renting them follows a similar logic and reflects the same customer attitude. Users want the benefits of unit load handling without the hassle.

Pallet and container rental have been widely accepted in Canada’s hardware industry, and it continues to make inroads into automotive assembly plants in North America. Many companies ship on 48x40 pallets and are obvious targets for pallet rental. The potential for other pallet footprints is certainly there if a closed system allows for efficient rental or pooling. So, the potential for expanding pallet rental and pooling into other industries and markets is strong. Don’t take the attitude that your biggest customer is not entertaining either of these options. Many companies and industries are examining their pallet options at senior management levels. Field operations people may not be involved in the unit load decisions; they may not be aware that consultations are taking place.

If most 48x40 pallets are making numerous unit-load trips during their lifetimes, the inevitable conclusion is that far more than 30% (the percentage of new 48x40s) of the unit load trips are made on 48x40s, making them a target for the current rental footprint. Assuming that limited use pallets make a single trip, half of the multiple use pallets are 48x40 and they make six trips on average before being scrapped, and the other half of multiple use pallets make two trips on average before being disassembled into used lumber – then 60% (1500 out of 2500) of the unit load trips made by a 1000 new pallets would be made on the 25% that are reusable 48x40s. See Table 3 for this breakdown.

One could alter the numbers according to any assumption of reuse desired. Regardless of what reasonable scenario is used, one conclusion is likely to hold - the 48x40 reusable pallets being made are going to make a much higher percentage of shipments than their 30%+ of the market would suggest. I would not be surprised to discover that over 60% of the unit loads are being shipped on 48x40s.

Impact on the Pallet Industry

As rental and pooling reduce the number of 48x40 "white pallets," the shrinking pool of 48x40s will force more recyclers to other markets – including non-48x40 pallets, remanufactured pallets (pallets made by recycled lumber), and combo pallets (mixed new and used lumber). Pallet recyclers, many of whom are already seeing their margins squeezed, are concerned that this will cause a further erosion in margins. It could easily cause a decrease in volumes as well. A reduction in the overall population of pallet cores would put recyclers into a competitive raw material arena. They may have complained about the shrinking supply of cores, but they have also reported large annual growths in pallet recycling volumes each year. Rapid growth has often masked mistakes and inefficiencies that may surface more clearly as the growth of recycling is stymied due to more rental pallets handling the business.

Pallet manufacturers who have avoided the 48x40 market will see other manufacturers invade their domains as the 48x40 market shrinks. Intruders can include pallet recyclers who are looking for more new pallet business as well as 48x40 manufacturers who wish to expand their product horizons.

If 48x40 manufacturers and recyclers both become more involved in pallet manufacturing outside of the 48x40 arena, the inevitable result will be a further reduction in margins and volumes. While this may seem hard to believe in light of the margin reductions experienced by pallet manufacturers over the years, it is definitely inside of the realm of possibility.

The backlash will not end with pallet manufacturers and recyclers. If our industry experiences a leveling of overall manufacturing and recycling activity, it signals a maturity in pallets. That will reduce the growth in demand for pallet lumber and pallet machinery, as well as industry supply and support services. A decrease in the demand for new and recycled pallets could impact industry suppliers as deeply as it does manufacturers and recyclers. As one of my favorite teachers once said, "Equally mean to all!"

All May Not Be Negative

If anybody reads this and concludes that I am forecasting a complete doom and gloom, that is not my intention. It is my intention, however, to focus on the importance of pallet rental and its potential impact on everybody involved with the pallet industry. Rental is a factor in today’s market. It will be an even bigger factor tomorrow. Do not make the mistake of taking it lightly.

Some pallet people will probably prosper in this changing marketplace. Pallet recyclers have already pointed the way to new pallet management opportunities. Certainly pallet rental will require management controls to work profitably. Sorting and maintaining pallets in good condition will present opportunities for some. Growth in management control will offer its own set of opportunities as our industry shifts more in the direction of services instead of just manufacturing products.

Rental also requires high quality pallets, which may be seen as a positive move by some quality conscious manufacturers. Many in our industry have been wishing for higher quality pallets for a long time. An inevitable consequence of this is building fewer pallets. Keep in mind that rental and pallet management may eventually involve a much wider spectrum of pallet sizes than the current 48x40 scenario. Helping some customers may be better done by regional or local pallet companies than by rental giants or nationwide networks.

The thesis of this entire article has been the impact on our industry when we have to build fewer pallets. Our service factor may grow while our manufacturing factor shrinks. The biggest question may be who survives and who prospers under this changing scenario. The answer to this depends on how individual companies adjust to the shifting sands.

My colleague, and industry veteran Rick LeBlanc reviewed this article and made the following observations.

Rick wrote, "There will probably be an increase in unit load trips as pallet users try to reduce pipeline inventory by shipping smaller skid lots at greater velocity through the supply chain. Pallets will be of better quality and more durable, so eventually, less pallet manufacturing will be required to replenish the pool. In the transition period, there will continue to be lots of new rental 48x40 building. The industry will "enjoy" this trend for several more years.

"Pallet companies need to serve third party. Build the best pallets at the cheapest cost, repair them well at cheapest cost, and try to participate in other services as subcontractors, in such areas as sorting and depot work. Survival will mean being the best at something, whether it is lowest cost, most flexible, or capacity related."

Rick closed, "Will there be enough competitive third party pallet activity to keep the industry competitive? What should the pallet industry do – support third party alternatives or get serious about saving and building the fungible pallet pool? I still believe we can build a successful pallet pool if the industry works together."

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