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Market Update: Anatomy of a Core Crisis
The original Pallet Summit in October 1991, is now more recognized as the “Memphis meeting.” It was one of the first meetings to host a large concentration of recyclers at a time when CHEP was just launching in the U.S.
By Jeff McBee
Date Posted: 5/1/2012
Early Pallet Recycling Industry Growth and the Impact of CHEP
The recycled pallet industry was just beginning to really hit its stride in the early 90’s. The original Pallet Summit in October 1991 is now more recognized as the “Memphis meeting.” This Memphis meeting gained its notoriety for generating more excitement than any pallet function before or since. It is easy to understand why. It was one of the first meetings to host a large concentration of recyclers at a time when CHEP was just launching in the U.S.
The pallet industry as a whole – both new and recycled – were concerned about the entry of CHEP into the U.S. market. The company’s emerging pallet pooling program was rightfully cause for concern.
Shortly thereafter the International Association of Pallet Recyclers (IAPR) formed. The recycled pallet market was gaining market traction by the day and the momentum showed in the IAPR’s growth.
The rapid growth showed up as growing pains in the market and some of the trends of a maturing industry began to become issues. Early industry veterans may recall being paid to haul away pallets, including perfectly good, ready-to-go #1 GMA pallets. That was short-lived in the early 90’s as growth fostered competition for raw material, or pallet cores. Soon that competition found recyclers paying for the pallet cores.
But business was good and so was the money. Ah, the good old days…
By the mid-90’s, the impact of CHEP was being felt by the industry. The pallet rental giant had built its pool to the size that it was reaching critical mass. The impact on the volume of white-wood GMA pallets being produced was not subtle.
The impact began a cycle. Fewer white-wood pallets were being introduced into the white-wood pool. Price-conscious buyers were buying lighter pallets. Third-party management, closed loops and even pallet recycling itself was taking a toll on the overall quality of the pallet pool. Pallet demand in the recycled market was still good. The biggest concern facing the industry were keeping up.
The next step in the tightening supply of white-wood pallets occurred in the second half of 1999. CHEP and Wal-Mart entered into an agreement where CHEP would manage dock sweeps for the retail giant. In turn, Wal-Mart sent letters of advocacy to its vendors promoting the use of blue pallets.
One of CHEP’s early moves in managing Wal-Mart’s pallets was to flush the white-wood out of Wal-Mart distribution centers (DCs). There was a temporary glut of white-wood in the market. None of the other market dynamics had shifted and the white-wood core shortage returned before too long.
The CHEP/Wal-Mart relationship fueled growth for the pallet rental company, which further impacted white-wood pallet supplies. Still, business was good for recyclers. The business had grown progressively more competitive. Both inbound supplies and outbound finished goods were feeling the pinch of competition in the market.
An Important Clue in the New GMA Market
I can remember it like yesterday. It was in 2005. A contact in the Mid-Atlantic area who was doing some large regional accounts in other states, made the remark that the new white-wood GMA market was dead. I replied that I didn’t see it that way. The recycled pallet market was so busy that it couldn’t keep up with demand. The shortfall was so acute that some new pallet manufacturers were actually getting volume GMA business unlike anything they had seen in years. I could also think of a few companies that were historically given to GMA business who weren’t reporting that sort of white-wood GMA business. I went about trying to figure out what was causing the discrepancy.
I did an in-depth look into the new GMA market. I asked about volumes of GMA business compared to overall business levels. Pallet demand at the time was strong overall, but GMA activity was very mixed. I found that companies were either extremely busy with GMA pallets or – like the comment that began the search – were doing almost nothing in the 48x40 market.
The one common factor in governing GMA pallet demand revealed an astonishing trend. Nearly 100% of the strong demand in the market was based on full 5/8” deck GMAs, which was a heavy GMA pallet by modern standards. The other side of the coin was nearly the polar opposite. Companies that had customers who leaned toward ½” or lighter weight GMAs reported almost no activity for the lightweight GMA pallet.
The one linking factor to the high demand sector was that many of the customers were shipping into mass merchandisers, especially Costco. This revealed just how important the mass merchandisers – especially Costco – were/are to the 48x40 market, both new and recycled.
It’s water over the dam now, but that bit of information, as innocuous as it seemed at the time – using hindsight – could have been a very powerful tool.
The Block Pallet Initiative
The next – and currently the final - step on this roadmap of the current pallet core crisis came in 2010.
It was late July. Costco issued a new pallet spec. It seemed somewhat inconsequential at first blush. In fact, it went almost unnoticed for a month. The new spec included a hard date for compliance of January 1, 2011.
It seemed no one knew or anticipated just how large of an impact the change would have in the pallet market. The new spec read, “As of January 2011, Costco accepts iGPS, PECO, and CHEP block pallets in North America. Exceptions are made for: – Purpose-built pallets (see 5.3). – Pallets shipping from regions of the world where CHEP, PECO, and iGPS cannot be supplied. – Equivalent one-way block pallets that are a better value than renting from iGPS, PECO, and CHEP. (As of 2011, stringer/GMA pallets are not acceptable.) General delivery pallets not rented from iGPS, PECO, or CHEP must be equal to PECO/CHEP (per a Detailed PDS© Report(1)), are not returned or exchanged (see 5.1.3), and must be pre-approved. Email firstname.lastname@example.org for guidance.”
The mass merchandiser’s decision to eliminate stringer pallets from its transport packaging system, now often referred to the Costco Block Pallet Initiative has had a dramatic impact on the white-wood pallet pool. As discussed earlier, Costco and other mass merchandisers were large players in feeding the white-wood pallet pool. The switch to block pallets had a profound impact.
By most estimates, the Costco Block Pallet Initiative reduced the volume of white-wood going into its system by two-thirds. It would be difficult at best to pinpoint how much of the volume lost to rental pallets was new pallets, but the impact is certain to impact the overall white-wood pool. A larger factor in the current market is that there is virtually no white-wood coming out of Costco.
The Bottom Line
The white-wood pallet pool has been shrinking from the time CHEP set up shop in the U.S. Each market change amplifies the previous shift, making recent changes a larger factor.
The shrinking white-wood pool impacts recyclers on many levels. Pallet reuse and recycling itself is impacting the overall quality and condition of the white-wood pallet pool. The declining condition of the available white-wood pool is not a new concern but the long term problem is intensified by the short supply.
The quality of the overall whitewood pool has been in decline since the strong pallet recycling growth during the 90s. The accelerated turns of the whitewood pool, with fewer units being introduced into the system, has led to an increasingly faster deterioration of the quality of the available whitewood pool.
The recessionary economy has intensified the deterioration of the available white-wood pool as even fewer new pallets are being introduced into the system. The combination of fewer new pallets along with faster cycles has in effect accelerated the aging of the available white-wood pallet pool.
This makes the recycler’s job more difficult – not impossible – but certainly more difficult.
Where Do We Go From Here?
Costco isn’t the only fish in the sea, and white-wood pallets will eventually begin to flow out of Costco again. That will happen once the company determines that its internal float has hit critical mass. There is one catch to the white-wood pallets coming out of Costco. They are almost certain to have a 9bloc stamp on them and will only be sold to participants in the 9bloc program.
White-wood core availability is almost certain to improve with any upward track in the economy. The downside is that demand will also improve. Understanding your market and core supply lines is well more than half the battle.
(Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call 800-805-0263 and ask for Jeff.)