So You Want to Be in the Pallet Business?
Candid look at the business challenges facing pallet companies, especially new players trying to succeed in this competitive market.
By Ed Brindley, President
Date Posted: 12/1/2011
I wrote an article with this same title for our 10th anniversary issue, but after the many changes that have affected our industry I feel an updated version is in order. Over the years many people who find our number call with questions about how they get into the pallet industry. They often seem to believe that they have found an undiscovered goldmine. We try to answer their specific questions and attempt to give them a general education about both pallets and the pallet industry. People who are looking for a way to make a good living and make an impact with their efforts typically appreciate recommendations and information from a source that provides a good overall perspective on the industry.
Sometimes it seems as if a caller has already made up his mind to get in the pallet business. It is a version of the “grass is greener on the other side” concept. People want us to provide some kind of magical suggestions about how to turn their dream into easy money. After sharing some “words of wisdom” with them, the caller typically hangs up with a parting “thank you” and an indication that I have not been very optimistic. When they call, we share the kind of information for which a consultant would expect to get paid at least $500 to $1000 a day, or more. I tend to show them the scary side of the picture. It would not be fair to them to let them view the world through rose colored glasses and then stumble down a path of frustration where they pour their energy and efforts into a business that is not anyway near as profitable as they had hoped.
Changes Taking Place Quickly Today
It should not be surprising to hear that just like all aspects of our society changes are taking place at a fast pace in the pallet industry. So, if somebody is looking for a stable place to settle in and make a good living, you might want to look elsewhere. All of us have heard of pallet companies that have gone out of business lately. Our pallet contacts talk about how difficult it is to find enough business and how particular customers have become.
Because I started working with the pallet industry in 1977 from a base of over 22 Virginia pallet manufacturers, I will use Virginia as a benchmark. Our first weekly market report (known then as the Wooden Pallet Index) started with eleven subscribers in the state; another eleven subscribers joined our original group after about four months. This second wave of companies included companies that were typically a little smaller and were not as involved as industry leaders; none of this second wave is still in the pallet business. One company out of the first eleven shut its doors in November, joining five others who had already gone out of business. Only five are still in business; one of these is only marginally involved in pallets and has moved more to wood fiber markets, sawmilling, and lumber treating.
To say that the wooden pallet manufacturing business is a dependable long term bet is stretching the truth a bit. While the industry is likely to be around for a long time, individual companies and plant locations tend to come and go more than I might have at one time predicted. This is not to say that a well run company cannot survive, but the pallet industry is a very competitive one. In today’s economy very few business people with whom I have spoken have a bright outlook on the short term to intermediate term business situation. A friend of mine who is very close to the pallet industry’s customer base put it this way in a recent conversation. “Unfortunately we cannot price pallets today with a decent built-in profit margin; we price our products with an eye toward surviving to come back another day.”
I suggest that anybody interested in entering the pallet business proceed with caution. Develop good customer relationships but don’t count on that pulling you out of the fire in tough times. Virtually everybody in the pallet business today says they have never seen it so difficult to make money. You can not count on customers to stick with you in the face of predatory pricing. Just about everybody, including pallet customers, views business today with an eye toward cutting costs and surviving. There is no more fat left in the system.
Under the best local conditions, it is still possible to develop a good pallet business, maybe even one that makes decent money. But it can be dangerously easy to stumble down a path of failure. Several facts about owning a pallet company are worth highlighting.
First, there is a sizeable pool of people who made money in the past in pallet manufacturing, but profits are harder and harder to achieve. Historically some made a lot of money, but there are no Bill Gates in the pallet business. Many of the companies that were established industry names when I first started working with the industry are now gone. Others are still around but are often not as prominent as they once were. Some of the established pallet companies today were not even in business in 1977 when I started. The lead article in this issue about Neopal is a good example; it started in 1999, just twelve years ago. Several of the companies we have featured this year have started since the turn of the century, or they grew to their current significance during this period. Some of today’s successful large pallet manufacturers started in the business many years ago and have built to where they are today. Some others have joined the ranks more recently but have made good decisions, adjusting to shifting conditions as necessary. Yes, there are examples of people who have gone into business successfully, but the golden days are gone. Profits are not as easy to come by. Historically pallet company owners have complained about how hard it has been to make money. But past complaints often pale by comparison to conditions today.
Very little financial ratio information is available on the wooden pallet industry. A few studies have been done in the past, but I know of no recent industry studies that provide credible information. In my early days of pallets, I often heard people talking about how squeezed profit margins had become. When cost of goods sold rose to over 80%, people thought they were being denied their potential. By the mid-1980s, cost of goods sold rose to 80% to 85%. I have not seen any recent profit figures but suspect they are much worse based on what I have heard.
Through the 1970s and into the 1980s most pallet companies manufactured pallets using new lumber. As the industry mechanized both its lumber manufacturing and its pallet manufacturing, many companies went through an evolutionary phase of improving profits for a while and then facing a more competitive industry. Mechanization made people more competitive, partly through improved efficiencies. In an effort to hold onto business or take on new customers, pallet companies typically sharpened their bidding pencils. Efficiencies from mechanization have often been given back to their customers. It is difficult to hold on to the dollars that come along because of good business decision making. So often others are able to duplicate your decisions, buy the right equipment, etc.
Heat treating for phytosanitary requirements is a good example of how the industry tends to give away its advantages. When we started heat treating pallets during the first half of the last decade, manufacturers often got from $1.00 to $1.50 and even more to heat treat an average pallet. Not today. A pallet manufacturer would like to get $1.00 today; we have heard of prices that are 50 cents or worse.
Mechanization can be a double edged sword. As it becomes more common, margins tend to shrink. The timing of upgrading machinery is important, as is the actual machinery and equipment chosen. It is somewhat ironic that the very thing one needs to survive and prosper in the future (mechanization) can backfire to help create a more competitive environment as others follow a similar tactic. The truth is that a machine is just a machine until people make it productive. People control product flow and machine maintenance.
The 1980s ushered in a new era of pallet recycling. In the early days of recycling, many recyclers made very good profits, typically better than manufacturing had seen since its early days. Initially most recyclers focused mainly, if not solely, on pallet recycling. Most established pallet companies stayed with new pallet manufacturing. Recycling was much more profitable than manufacturing. As time progressed, more and more pallet manufacturers started recycling, and more recyclers entered the more automated, higher-volume new pallet market. Recyclers have always been involved in building smaller orders on hand tables.
In the early days, there was little automation in pallet recycling. Ingenuity and individual initiative could translate into profits for those who did it a little bit better. Initially, many pallet users paid recyclers to take used pallets off their hands. The trend moved toward giving used pallets away free. As the pallet recycling industry grew, pallet cores became more valuable, and a core market emerged. As recycling sailed through the 1990s, its decade of 20% to 25% growth, profit margins gradually gave ground. The development and implementation of sorting systems, recycling systems, and material handling systems, made it easier for people to automate, thereby reducing repairing costs and improving recycling rates.
In the first decade of the 2000s, recycling became more and more competitive. Anybody living in the past who believes they have found the golden goose when they discover pallet recycling had better think again. In the last decade, recycling became more and more competitive. The gravy train profits that once existed have shrunk today.
Pallet users have gone from paying to have pallets taken away, to giving them away, to getting paid for them, to where we are today. Core prices from $1.50 to $2.00 or more are common. In addition, the quality of the core pool has continually deteriorated. So, incoming pallets do not produce the same quality and mix of salable products as they once did.
On the other end of the scale, it is more difficult to get an attractive price today for a used pallet, for both #1 and #2 pallets (or As and Bs). Because of the deteriorating quality of the overall pallet pool out there, incoming cores do not produce a product mix that is as profitable as it once was. Pallet recyclers have seen their profits squeezed from all sides – higher core prices, lower pallet prices, and poorer core quality yielding a less attractive product mix.
Anybody thinking today about getting into pallet recycling should be aware of the core shortage problem. Over the years, obtaining enough incoming pallet cores has often been an issue. Certainly getting enough used pallets is probably the most critical part of running a successful pallet recycling company. When the recession hit, the core supply turned quickly from tight to plentiful for many recyclers. As pallet users reduced inventories, pallets flowed out of warehouses. At the same time there was less pallet demand; so there were more pallets and less demand. Many recyclers handled excessive supplies by grinding #2 pallets. The perpetual core shortage came to a halt, at least for the time being. But the market dynamics had really not shifted permanently. Ask any recycler today and he will tell you that his biggest problem is a lack of cores. They are now finding their core supplies to be far short of what they need to maintain their production and inventories.
Much of this shortage is due to Costco’s decision to require suppliers to ship to it on perimeter based block pallets. Thus many shippers have moved away from 48x40 GMA stringer pallets to CHEP and PECO rental pallets. A reduction of new GMA pallets coming into the pool has made the major pallet used by recyclers to be in short supply. While Costco’s block pallet decision has not spread over to the general retail industry, it may still do so in the future. Some major recyclers have shared their concerns with us. The recycling industry may be at a crossroads. At the least, there is more uncertainty about which way a new player would want to go in pallet recycling.
Pallet Rental and Pallet Management
Pallet rental in the United States started in the late 1980s. Since then it has had a major impact on our industry because more and more of our customers have embraced this method of managing shipments and product storage. The pallet industry used to be made up almost exclusively of individual smaller companies. But now the U.S. market is dominated by large players, such as CHEP, IFCO, iGPS, PECO, Pallet One, and others. As pallet users have increasingly embraced pallet management services the potential to make money by providing customers management services is gaining steam.
Supplying new and used pallets is part of pallet management, but it involves much more than this basic function. Customers’ needs have changed. They want to have their hands held. In a growing number of cases it is no longer sufficient to just supply wooden pallets. Customers may need and want pallets made from other materials, such as plastics, corrugated, and metal. They want record keeping; they want true service which includes speed. They do not want pallet disposal problems, and they may need customized pallet repair services.
Some large companies want pallets and material handling services across the country, and often across the oceans to other parts of the world. It is becoming increasingly important for pallet companies to network with others in our industry. If getting involved in the pallet industry means playing in the bigger management pond, and an individual has the financial backing and a willingness to assume higher risk, tomorrow’s pallet world might provide some opportunities.
It is certainly my belief that whatever role one follows in the pallet industry, management and networking are likely to be keys to future success. It is interesting that when it comes to the operations side, the gap between a beginning operation with hand tools and a couple of trucks and a fully automated pallet plant continues to grow as it always has. The risks are greater today, but the potential payoffs are greater as well. Certainly the need for knowledge and information grows every year.
If you want to become involved in the pallet industry, come on in. Just be aware that the industry is much more complicated than it might seem to be to the casual observer. Management wisdom and decision making are becoming more valuable each year. Knowledge and information are becoming more important. You have to exercise common sense in your decision making, serve your customers, and know what they really want. Many pallet users may not understand their needs as well as they should; so they rely more and more on others. The pallet industry is more than a pool of pallets and unit load platforms. It is part of the growing logistics needs of our society, and being successful today is harder than it may look from the outside.
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