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PECO – Pallet Leasing Company Seeks Controlled Growth By Serving Niches
PECO is a different kind of pallet leasing company

By Jeff McBee and Chaille Brindley
Date Posted: 4/1/2002

PECO is a different kind of pallet leasing company, one that may make a venture capitalist proud some day.

It seems like only yesterday that venture capitalists were looking everywhere to throw money at anything that looked appealing. Actually, they were throwing the money at new economy businesses. Dot coms and high technology businesses couldn’t take in enough money to satisfy the venture capitalists.

PECO, an old economy company, did find venture capital at the time, but it was not the bonanza that the dot coms enjoyed. PECO is still a young company and to find any venture capital at all was remarkable. The venture capital market has been in total disarray since the downturn in the economy. This has tightened availability of venture capital.

Restructuring for the Future

Pallet leasing is a cash intensive business. To find the type of funding required to fuel strong growth, an old economy business must present an impressive balance sheet showing a positive cash flow. Although PECO has not reached the break even point yet, the company indicated that it is well on its way. Mike Tebay, PECO’s President and CEO, revealed that the company would reach break even before June.

Last year the company underwent significant restructuring to ensure a lower break even point. Staff was cut and operations were consolidated in Valley Cottage, New York. PECO stopped ordering new pallets in mid 2001 as the company sought to reduce spending. Since the restructuring, the company has secured additional funding and started ordering new pallets again. Sixty manufactures have signed on to use PECO’s pallets. Several of these are significant national players. Over 90 grocery distribution centers have signed on to receive PECO pallets including, for the first time, two major warehouse club stores.

It has been five short years since Denton and Pat Sherry launched PECO with contributions from eighteen pallet companies. Today, 28 pallet companies are shareholders. PECO has also caught the attention of White Mountain Insurance and Green Range Partners both of which have taken significant equity positions in the company. Although PECO does not have big pockets likes its competition, the company has designed a plan for controlled growth and long-term viability according to Graham Connor, PECO’s chief operating officer. Thus, the company has put finding funding on the back burner while it seeks controlled growth.

PECO’s Business Model

Instead of targeting the entire retail grocery sector, PECO has focused on the private label industry and food manufacturers using forward distribution centers, which constitutes about 40% of the entire market. Private label manufacturers tend to serve a limited geographic region. Some national brands ship on slipsheets or floor load trailers at the manufacturing plant and palletize loads at forward distribution centers further down the supply chain. Thus, PECO does not have to serve the entire country to serve these customers, which reduces its cost.

One of the major drivers in PECO’s long-range plan is the desire for a second major player to CHEP, according to Mike. One of the company’s major customers has agreed to provide funding to help PECO grow.

Seeking to carve out a niche for itself in the massive grocery industry, PECO has focused on providing service with a customer first approach. PECO boasts a 99% on time order service level. Thus, a customer gets its pallets on schedule most of the time. Seeking to reduce billing confusion, PECO offers a simple invoicing system and fee schedule based on actual dwell times.

PECO views the relationship with its customers as more of a partnership. This is evident in many aspects of the relationship from invoicing to exchange of information on how the pool functions with regard to that individual customer. Customers are privy to repair standards, dwell times and other aspects of PECO as part of the relationship. This open exchange of information is part of what makes PECO’s invoicing so popular with customers.

Showing customers their use of PECO pallets in detail, including dwell times and leakage allows PECO to have all of their cards on the table. Rather than a complex system of hire fees, daily rental, transfer fees and reconciliation invoices, PECO uses a flat per unit rate based on average dwell times for the individual customer. This eliminates much of the complexity of typical pallet leasing invoices. The rate is mutually agreed upon and based on the information the customer has access to. The rate is adjusted twice a year, based on actual usage. This removes any uncertainty in the customers’ mind.

Going the extra mile, PECO sends letters to distributors with low leakage rates to recognize their contribution to the program. This is a way to say thank you and encourage participation. PECO even sponsors forums to hear the customer’s concerns, questions and suggestions. The next PECO customer forum is in April at the Opryland Hotel in Nashville. PECO is not only keen on building relationships with customers, but they also are willing to work with the pallet industry. There is a fine line between paying pallet recyclers for the service they provide in retrieving stray PECO pallets and creating a black market for PECO pallets. PECO is willing to walk that fine line. Graham said, "We will work with and pay pallet recyclers for some services. We do recognize that pallet recyclers come across our pallets in their normal process of business." However, the company maintains it owns all PECO pallets even those that accidentally leak out of its system.

By working with recyclers and distributors, PECO plans to keep leakage to a minimum. "If you can’t stop pallet leakage, you don’t have a business." stated Graham. PECO is working with customers to eliminate leakage. This is just another part of the information exchange between PECO and its customers. PECO advises customers of out of route pallets. Since PECO doesn’t have a non participating distributor (NPD) program, its tracking system is more likely to detect sources of leakage.

PECO’s new tracking system will improve its ability to identify leakage points and improve order fulfillment. The system connects PECO’s field service team, depots and headquarters. Pallets are tracked in batch through the supply chain. The new system offers improved reporting, flexibility, and scalability. In the future, PECO plans to roll out a customer module.

Future Growth

According to company sources, PECO has as much business as it can handle at the moment and more customers waiting in line. Without deep pockets to operate from, the company has needed to remain focused and keep growth at the highest possible level without overextending itself. The company just received another round of funding from its core group of shareholders that will fund growth through the rest of this year. "Our strategy is targeted and controlled; Not grow at any cost" said Mike.

The company is very up front with customers about its controlled growth strategy. Some customers are waiting in line to be part of the growth. Connor summed it up in saying "The customers are not misled. They understand our position and appreciate our honesty."

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