Regular readers of this column know there has been a lot of talk about pallet pricing. There were several factors that prompted two columns on this topic in 2008.

            The first column was in the spring. It touched on the topic when it was becoming evident that the pallet industry was losing ground in the perpetual fight for reasonable profitability. It addressed ‘cost creep,’ referring to fuel, delivery and energy costs that were skyrocketing at the time. Higher taxes, wages, insurance and workman’s comp costs also were part of the equation. It was clear that pallet prices needed to move higher to offset these rising costs.

            The next time we addressed pallet prices was September. Some companies had begun to move prices. Typical increases at the time ranged from 6%-8%, with some companies making both smaller and larger moves. Many in the industry had already pulled the trigger on the increases while others continued to ponder them.

            The headline on that column was ‘Monsters Under the Bed.’ The column dealt with perceptions of competition – sometimes competition is real, and sometimes it is simply fear that customers have cultivated. That column also looked at pallet purchasers having the same type of fear of talking to vendors about price trends — fear that they would invite an overdue price increase.

            Then it hit. The pallet industry had been dealing with slow pallet demand all year, but in late September, things were about to take a turn for the worse. The Lehman Brothers bankruptcy started toppling the line of dominoes that sent the banking industry into a tailspin and put the government and the public in a panic. The Wall Street meltdown dramatically slowed an already recessionary economy. Paranoia instantly lopped 20% off pallet demand.

            As if that tumble was not enough, pallet demand pulled back even further after Thanksgiving. As the year came to a close, average plant capacity as published in Pallet Profile Weekly, our industry newsletter, was barely above 77%. In numerous regions pallet companies are only working three or four days per week.

            Pallet demand often fades after Thanksgiving. Many contacts theorized that the Wall Street blues just made the year-end slump arrive earlier. When the second drawback came, though, many were shocked at how far demand had dropped.

            Most contacts were confident that January would bring improved pallet demand. Even the biggest optimists were not expecting the projected uptake to produce a complete turnaround, but they were expecting enough improvement to get back to the modest demand levels from late summer.

            The pallet industry needs it. Most pallet companies admit to having a pallet pricing structure that is based on being able to spread their overhead across fairly high plant capacity. This rate is so high that many pallet companies find themselves on the wrong side of the profitability line when plant capacity drops to 80% or below.

            One contact observed, “Purchasing agents think if you’ve got the best quality and the best service, then all you need to get the business is the best price. As competitive as the market is, you have to be careful, ’cause when the market gets this slow, you can find yourself upside down in a pallet price real quick.”

            What can a company do once it finds itself “upside down in a pallet price” because demand has dropped off? Those who remember General Motors’ difficulties of the late 70s know that you don’t want to raise prices the way GM did. Increasing prices in a dull market can only cause more trouble.

            There is no easy answer. Companies that pushed through price increases right before all the trouble began are weathering the storm much better than those who did not.

            There is an interesting dynamic for those who raised prices. When demand dropped dramatically shortly after the move, companies that had raised prices were quite concerned. It turns out they didn’t need to be. The uncertainty in the market made pallet customers leery of switching vendors. The price increase ended up being the right move.

            The price move was a solid business decision that paid off the way solid business decisions should.

            Sometimes moving your prices to where they need to be can be one of the toughest decisions to make. One of the pitfalls to avoid is fear of doing the right thing. This is not to say that higher pallet prices would have saved a company from fighting the painfully slow market, but it certainly would have helped to ease some of the pain.

            Most of our industry’s problems could be solved with a good shot of pallet demand – and pallet demand will return eventually.