Ed Brindley explores the impact of the economic bust and the dot com crash on the pallet industry.
By Staff Writer
Date Posted: 5/1/2001
Since the election confusion was settled late last year, the media has been preoccupied with the economy. Everybody who understood the business world knew that the dot-com craze could not maintain its pattern. It was a matter of when, not if.
People who live and breath pallets exist in an entirely different world than the dot-com group. We believe that an investment should make sense before you spend money. How many bankers will risk their money on some kind of a crazy idea that has very little prospect of reaching unrealistic expectations? People were spending money like drunken sailors in hopes of either a quick payoff or getting in on the ground floor of tomorrow. People acted as if they had to move today or miss the boat. Emotions lost to financial reason in the end.
The bubble has burst. Unfortunately those of us who did not endorse the absurd aspects of the dot-com craze still pay some of the price because the demise of the dot-coms has impacted the whole financial market.
We publish both the Pallet Enterprise and the Pallet Profile Weekly, which has become the weekly newspaper of the pallet industry. In addition to carrying hot pallet news, it tracks pallet lumber prices in an unbiased source. We keep in contact with pallet manufacturers and recyclers to maintain the flavor of the market and what is going on.
When comparing the more stable pallet market to the erratic get-rich-quick philosophies of today, it makes sense to reexamine market basics. Pallet people invest in their physical plants and companies for a long term return. The dot-coms represented an extreme risk, which can pay off but can also cost you dearly. And you have virtually no control other than buying and selling at the right times.
Wooden pallets are products that follow a derived demand. Pallet users buy pallets because of need, not because of desire. They are not raw materials for the manufacturing process. Customers do not view pallets as enhancing their products. There is nothing exotic about pallets; users view them as a necessary evil. We need to focus on the word necessary.
The positive side of a derived demand product is that buying is not emotional. It is difficult to turn the demand on and off. As long as the manufacturing pace continues, the demand for pallets continues. A growing economy translates into a growing demand for wooden pallets. This pattern has maintained itself ever since World War II. The growth of pallet recycling transferred some of the pallet growth toward used pallets as the recycling industry matured during the 1990s, but pallet growth continued.
Pallet demand suffers at least two setbacks during a slow economy. First, fewer pallets may be needed for shipping and storing as shipments recede and inventories are cut back. Second, wooden pallets are simple products. Companies may be able to stretch their pallet resources by using excess labor to repair broken pallets from the bone yard.
People often say that pallets are a commodity. While this is true, pallets are a customized commodity, which leaves room to provide value added services.
Pallet contacts across North America suggest that pallet people are not happy with profit levels, mostly because they cannot raise pallet prices, not because of a lack of demand. Pallet companies have a very difficult time passing cost increases on to customers. We hear about competition from other materials, but it is pressure from within the wood pallet industry that makes profits increasingly tighter.
While the pallet industry is not experiencing its own dot-com crash, it is unhappy with its financial picture. Much heavy manufacturing has moved off-shore, taking pallet demand with it. The high tech industry has found a home in the U.S., but electronic items are often not as pallet intensive as many products.
In spite of the sad economic news, pallet demand continues to be satisfactory, however, pallet profits are a different story. My best suggestion to improve profits is to work more closely with customers and their total unit load needs, not simply supply them with wooden pallets.
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