A number of changes rocked the pallet industry in 1999. One of the most significant is the continued rise of pallet rental, fueled by the growth of industry giant Chep. Indeed, Chep 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.

Another sign that third-party pallet management services may be growing out of their infancy — Chep’s decision earlier this year to negotiate with individual pallet recyclers to compensate them for handling Chep pallets.

Chep scored a major marketing coup in 1999 — putting its rental pallets into about 40 Wal-Mart distribution centers. Chep will provide pallet services at the distribution centers and also has begun injecting its blue pallets into the Wal-Mart distribution system so that they will go downstream to Wal-Mart retail stores. Meanwhile, Wal-Mart is encouraging its customers 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 an analysis by a stock brokerage firm.

It is a huge marketing victory for Chep and one that 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 in response to the changes that are occurring in the market place.

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, while pallet rental — witness the Chep contract with Wal-Mart alone — also continues to grow. The 48x40 footprint still dominates pallet markets, but if pallet rental continues to grow, it likely will reduce the supply of 48x40 pallet cores, which would begin to reign in the growth of the recycled pallet market. If the new and recycled market for the 48x40 shrinks accordingly, both 48x40 pallet manufacturers and recyclers likely will 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.

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

Rental clearly is the best established component of third-party management with well understood and increasingly accepted programs in place. Chep continues to penetrate the grocery market and to expand into other North American markets.

Another Wal-Mart initiative with the potential for significant ramifications for the pallet industry: the retail giant has been testing plastic reusable containers for produce, using containers supplied both by Chep and International Food Container Organization (IFCO). A Wal-Mart executive told a gathering of the Reusable Pallet and Container Coalition late this year that returnables for produce and other foods — probably meats — are a logical choice.

In other developments this year involving some of the leading pallet companies, PalEx decided to merge with IFCO. The merger, expected to be completed early next year, will create a leading global provider of supply chain support services with expected revenues of about $550 million.

The new enterprise expects to accelerate the roll-out of existing early-stage IFCO reusable plastic container pools in the United States, Asia and Latin America. In addition, it plans to bundle other supply chain support services with the existing IFCO operations by designing and managing closed-loop logistics and materials handling systems for its customers.

IFCO owns and manages the leading returnable plastic container pool in Europe and also has operations in the U.S., Latin America and Japan. PalEx is North America’s largest provider of new and recycled pallets and reconditioned industrial containers.

Bromley Pallet Recyclers has been busy adding Wal-Mart on-site operations this year and most recently acquired Indy Pallet Co. Inc. in Indianapolis, Ind. It was Bromley’s second entry into the region; last year the company established a presence in Ohio.

Bromley has added eight operations in 1999 to service Wal-Mart facilities on-site, including Greencastle, Ind., Grove City, Oh., and Mt. Pleasant, Iowa. The others are in Midway, Tenn., Douglas, Ga., Hope Mills and Pageland, N.C., and New London, Ky. Bromley now has 10 Wal-Mart on-site operations.

With the Indy Pallet acquisition, Bromley now has 25 locations, including its Wal-Mart on-site operations. It has five locations in Florida and five in Tennessee, including some Wal-Mart on-site operations.

Pallet Pallet closed several operations this year in New York, Louisiana, Arkansas, and California. Revenues fell $3 million to $48.7 million for the first six months of 1999 compared to the same period last year, and the company posted a net loss of $3.2 million. Recently, suppliers reportedly were being paid very slowly.

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 earlier this year.

National Pallet Leasing Systems announced it 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.

NPLS president Brad McCormick said the company’s business plan is to sign up receivers. "You’ve got to get the top 75 receivers in order to get 75% of the volume," he said earlier this year.

Pallet Management Systems acquired the Nelson Company, a pallet and container management services company based in Baltimore. The Nelson Company is operating as a wholly-owned subsidiary.

The combined companies have nine locations in eight states and over 425 employees servicing geographic areas east of the Mississippi River. PMS also planned to open two new facilities in two more states before year’s end.

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. However, 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 in 1999: 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.

Online auctions of pallets favor buyers by putting even more pressure on pallet suppliers to lower prices; they also work against the business approach of some pallet companies that are focusing on providing solution-oriented service to customers in order to elevate the pallet out of the realm of a commodity.

Late this year, the major pallet trade association in the U.S. discovered it would be undergoing a leadership change. John Healy, president of the National Wooden Pallet and Container Association, announced his resignation in order to accept a position with PalEx. John has held the top staff post of the NWPCA for more than 12 years.

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 easily 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.

In other developments in 1999:

• Pallet businesses plan to turn to on-site or in-service training to meet new federal regulations mandating forklift operator training, according to companies contacted by Pallet Enterprise. Pallet companies estimated the cost of the new regulations at about $100 to $200 per forklift driver.

• Lawsuits involving pallet failure have dramatically increased over the last decade. Pallet companies can protect themselves against liability by gathering accurate information regarding pallet performance requirements, reducing variation of pallet quality during manufacturing, and advising customers of unsafe pallet handling practices.

• Research performed on pallets assembled with adhesives has shown the process may be suitable for manufacturing pallets for niche markets. An adhesive manufacturer has been working with Virginia Tech to test pallets assembled with glue, and the company plans to move ahead with additional plans to reformulate products and conduct further tests.

• The pallet industry’s top researcher and three colleagues have recommended the establishment of a single or minimum grading method to differentiate quality of pallet cants. A single, minimum hardwood cant grade could substantially increase profits of pallet manufacturers by weeding out cants of poor quality that cost them money, suggested Dr. Marshall ("Mark") White, director of the Virginia Tech pallet and container research
laboratory.

• Virginia Tech and the U.S. Forest Service developed a business plan spreadsheet model to encourage pallet recyclers and landfill operators to work together to provide new sources of pallet parts and pallets while reducing landfilling. The model can bridge the gap between landfill recovery operations and pallet recyclers by helping to plan and virtually test pallet recovery operations.

• Plastic pallets continue to evolve in terms of performance and variety, as well as in the marketing approaches by manufacturers and vendors. Among the most recent trends: improved rackability at more competitive pricing, new leasing options, and some ground-breaking approaches to improving fire safety. In another move designed to help plastic pallet and container vendors more effectively compete among each other, the Reusable Plastic Container and Pallet Association (RPCPA) announced it will issue standardized testing procedures in order to help customers compare plastic products.