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Thinking Ahead–Letter from Chaille: Lamenting What Could Have Been – The Downfall of iGPS
Investing in the pallet industry just got harder after the recent bankruptcy of iGPS. What lessons does this major event offer for those who want to revolutionize the industry in the future.
By Chaille Brindley
Date Posted: 7/1/2013
Just imagine what you could do with almost $600 million dollars. Ok, now that you have picked yourself up off the floor, that is about the amount of money that investors gave iGPS to launch and grow its national plastic pallet leasing pool. How could anybody convince Wall Street to invest that much money in pallets? Well, for starters Bob Moore, the founder of iGPS, is a good salesman who was able to convince Wall Street investors that he had found the secret to revolutionize an industry that had seen little advancement in technology in years.
Major investors want game changer technologies, proven demand for products, competitive advantages over existing products and most importantly, the potential for a sizeable return on investment. It is easy to see how people who didn’t know much about the industry could think the iGPS pallet would become a goldmine. Take a look at this video posted on Youtube and just imagine what an angel investor might think. http://www.youtube.com/watch?v=urxityKNMlE
The video suggested that the iGPS pallet was the “first new innovation in pallets in over 60 years.” From fire safety to lighter weight to easier to handle and better for the environment, the video is a sales pitch that works well in the ivory towers of New York City.
“Wood has served well for 60 years, but it is time for a change,” said Bob Moore, former chief executive officer and founder of iGPS. The video explains that iGPS plastic pallets are lighter, stronger, safer and greener than wood. Some of those claims are true. Some are downright false. But it doesn’t matter what the truth is. It really matters what people will believe. I don’t think that Bob Moore could have gotten hundreds of millions of dollars to invest in another wooden pallet pool. He needed something sexy and different, and plastic was it.
The big problem is that most of the iGPS hype was based on a number of assumptions that turned out to be misguided and wrong when tested in the rigors of the real supply chain. iGPS claimed it could be cost competitive because its technology and iDepots cut logistics costs. But this never materialized because the logistics savings only occur when you build a sizeable pool, a large customer base and a broad geographic coverage. Also, the company suggested its RFID technology and tracking software would reduce lost pallets. But in recent court documents, iGPS admitted losing 1.5 million of its ten million pallet pool. This revelation is quite troubling for the company moving forward and any investor that will want to fix the iGPS pool.
The plastic pallet was supposed to be more cost effective because it would last years without needing to be repaired. But the company revealed that it experienced higher damage rates than anticipated and struggled to get replacement pallets after a legal battle ensued with its pallet manufacturing partner, Schoeller Arca Systems (SAS). Some plastic pallet experts familiar with the iGPS design told me that it was never designed well enough to stand up to the warranty and claims made by iGPS and SAS.
iGPS was able to attract a number of customers, but ran into supply problems when it stopped buying new pallets and found that too many of its previous float were lost or damaged. iGPS was a victim of its own success, it grew too much and had too many pallets scattered around to effectively supply some of its customer base. One former iGPS employee told us that part of the strategy was to build up the business and try to sell it off. In the early days some thought Brambles, the parent company of CHEP, would step up and take the bait. Of course, that never happened because Brambles was too smart to buy something they figured was probably a house of cards. iGPS hurt CHEP but not enough to make them pay up.
One major unforeseen factor was the impact that using a fire-retardant containing decaBDE would have on the public image of the iGPS pool. While this chemical was a known carcinogen that many leading companies were moving away from using, iGPS decided to use it anyway. iGPS knew it was the best chemical to obtain the desired fire characteristics at the best weight and price point. As media coverage of the decaBDE issue became a bigger deal, the use of decaBDE raised concern from an environmental and public health perspective.
When you combine all these factors together, the bright promise that iGPS initially offered quickly evaporated. To compete and attract business, iGPS agreed to match wooden pallet companies on price. And this may have been the most fateful decision because the company lost its premium product status by making a price concession. This wasn’t a loss leader situation like a weekly sale at a grocery store. It set a price point that severely limited the future of the company. After all, how long could a restaurant sell filet minion at ground chuck prices? iGPS did a similar thing by renting a high-cost plastic pallet for the same price as a wooden one.
Having gone through much of its investment capital, iGPS recently cut the majority of its staff, filed for Chapter 11 Bankruptcy protection and has arranged to sell its assets to an equity group. The intention is to keep iGPS running and serving customers. The proposed ownership group is called iGPS Logistics, and the sale is subject to higher bids and the court approval.
Even if iGPS can stay afloat for a while, it has yet to prove its business model and is stuck looking for a new generation pallet without some of the concerns of its existing design. iGPS still has a legal challenge pending against SAS, and there is no guarantee that iGPS can truly rise from the ashes.
I wonder if the experience of iGPS has poisoned the investing market so that future attempts at a plastic or composite pallet face an uphill battle. While other companies lost money in the past trying to bring the “next big idea” in pallets to the market, iGPS is the biggest loser yet. It was a huge gamble, but it is always easiest to bet with other people’s money.
Many customers still clamor for a plastic pallet, but they just don’t want to pay for it. And until that sentiment changes or advancements in technology reduce the price point, don’t expect wooden pallets to become extinct anytime soon.
The big lesson here seems to be that it takes more than a new pallet design to revolutionize the industry. You have to develop a business model and support structure that will handle the logistics and supply issues. And that may be the toughest trick of them all.
Imagine what could have been if the more than half a billion dollars used to construct the iGPS pool was spent on a white-wood public pool to replace the existing GMA pool. It could have changed everything by lowering costs, increasing competition and providing customers more options, and creating a viable network for companies to develop private pools. Now the world may never know what could have been if the iGPS experiment has set back the future by making investors wary of the next revolutionary pallet idea. Hopefully, somebody will prove me wrong.