More Than Pallets

Key Indicators of Economic Improvement

Key indicators of economic improvement are increased sales in products and services that move commerce.  Industries such as trucking, packaging and pallets are forward indicators of retail sales performance.  These three industries make up the foundation of commerce and will experience the first sign of what is to come.  Small to medium-size companies are forced to reduce capital expenditures and as a result fall into niche markets until the economy improves.  Recent movement in economic indicators shows that a slight improvement is coming.  The question is what will a newly revitalized economy look like?  Changes in operating procedures, product lines, and marketing trends may have altered how these industries enter a new economy.     

Roll-on 18 Wheeler

While trucking industry trends are still volatile, increased sales in commercial trucks were up in many markets first quarter 2010.  In the article, Strong sales of rigs may be a sign of an upshifting Northeast Ohio economy, diesel fuels sales hit the highest levels in more than a year indicating an increased usage of commercial trucks.  Sales of commercial trucks were up 11 percent in January and February and Northeast Ohio has seen a 55 percent increase in sales.  According to a spokesman from International Trucks, it has been the worst market in 47 years in the U.S.  The article goes on to describe the past couple of years in the trucking business environment as extremely volatile.  Transportation companies have reduced trucks on the road by over 15 percent, parting out parked trucks for basic repairs on working ones.  Click on the link above to read the full article.     

Recent DOT policy is focusing on a last mile policy with the goal of getting as many trucks off the road as possible.  The DOT wants more freight to go by way of intermodal and waterways and only use trucks to deliver from the ports and stations to the end user.  In an article at Today’s Trucking.com, describes how one government agency must not have received the memo.  In a study by the Department of Agriculture trucks are the way to go because of the special handling required by the multiple commodities shipped. In 2007, 31 percent of all ton-miles transported by truck were agricultural.  Because of temperature management and other variables unique to agriculture trucks is usually the only option.  There are a couple other factors that make OTR trucking one of the only viable choices for the agriculture industry, rail consolidation and limitations.  Rail mergers have resulted in a rapid consolidation of the rail industry causing capacity issues.  According to the article, “Shippers are concerned with switching limitations, restricted interchange, paper barriers, inconsistent service, high rates, excessive fuel surcharges, bottleneck rates, and the effectiveness of the rate challenge process,” the study found. 

The Bureau of Transportation Statistics (BTS) has released transportation performance for March.  The Freight Transportation Services Index (TSI) rose .09 percent in March from its February levels.  The BTS reports that Freight TSI has risen 4.5 percent in the past 10 months after declining 15.3 percent in the previous 10 months beginning August 2008.  The fear is that a last mile policy will undo the slight gain achieved after months of struggling growth. 

The RaileX Factor

The perception of rail transport is that it is reliable but not meant for perishable items, and impossible to run a just-in-time (JIT) operation.  Rail companies are developing new markets by teaming with distribution and storage companies creating a new transportation niche.  One of these companies is Railex USA (www.railexusa.com) which transports produce in temperature control cars from the West Coast to the East Coast in five days.  Railex runs a closed loop from two locations on the West Coast to New York leaving little flexibility, but it is an example of the market seeing an opportunity and seizing it.

Packaging

The packaging industry was not exempt from the economic downturn.  One of the largest corrugate manufacturing corporations in the United States is Packaging Corp of America (NYSE:PKG).  According to their website (www.packagingcorp.com) Packaging Corp of America (PCA) containerboard mills produced over 2.6 million tons of linerboard and corrugated medium for PCA’s converting facilities as well as other domestic and international customers.  The PCA offers numerous corrugate products from containerboard, corrugate pallets, export pack, Point-Of-Sale packaging, and Point-of-Purchase display.  Other products include produce packaging, heavy duty packaging, printing capabilities and special packaging needs. The PCA employs over 8,000 employees and produced net sales of $2.15 billion. 

The PCA produced 2.26 billion tons of cardboard production, increasing production every quarter in 2009.  However, production has decrease from 2.45 billion tons in 2007 and 2.35 billion tons in 2008.  The four quarters in 2009 marked the first consistent quarterly production increase, ending fourth quarter production at 600,000 tons.  The first quarter of 2010 produced 569,000 tons.  The reduction of tons produced was due to planned plant downtime.  Downtime is attributed to a major energy project which is scheduled for completion in 2011.  The major energy project is a sort of telltale sign of which direction the PCA believes the economy is going.  The PCA is getting ahead of possible government environmental regulations, spending up to $200 million in energy projects and $100 million on maintenance capital, cost reduction, business growth and environmental compliance.  It seems that PCA is spending a huge portion of their CAPEX on meeting the government’s greenhouse initiatives; continued investment is a sign that they will be ready when the economic worm turns.

Competitors of the PCA include International Paper, Georgia-Pacific, Smurfit-Stone Container Corporation and Temple-Land, Inc.  In all, there are 625 U.S. companies operating 1,340 plants in 47 different market sectors.  The corrugate industry competes against other types of packaging such as the reusable plastic container industry.  To compete the corrugate industry offers competitive pricing, better quality, service, design and product innovation.   

Reusable plastic containers are the natural competitor of corrugate boxes.  In this business environment operational cost savings is essential and packaging makes up a significant investment.  Packaging is used for several reasons and corrugate has more design and marketing options.  However, when it comes to the different uses required of packaging, all things are not equal.  Private label products are one of the fast growing market sectors in the U.S.  According to Private Label Magazine, represents a $50 billion dollar market in multiple retail channels, in 12 label categories.   

• Milk                                                                       $8.1 Billion
• Bread & Baked Goods                                    $4.2 Billion
• Cheese                                                                 $3.5 Billion
• Medication/Remedies/Vitamins                               $3.4 Billion
• Paper Products                                                 $2.6 Billion
• Eggs – Fresh                                                       $1.9 Billion
• Fresh Produce                                                   $1.5 Billion
• Packaged Meat                                                 $1.5 Billion
• Pet Food                                                              $1.5 Billion
• Unprepared Meat/Frozen Food                                $1.4 Billion
• Carbonated Beverages                                  $1.3 Billion

All of these categories require packaging that will be complementary to operations, food safety protocols, allows for maximum capacity per load, and accentuate the marketing message.  Some reasons to use RPC’s over corrugate is environmental sustainability, strong construction, RFID capability, design and in some cases lower cost.  The drawback to RPC’s is that they are rented, which requires pool management from both the shipper and end-user.  Much like the rental pallet industry program management is a point of contention with many users.  A load CHEP pallets is 570 pallets and prior to CHEP USA selling their RPC inventory to IFCO Systems, a load of CHEP RPC 6040 was 6500 units.  An audit of a large RPC user can equate to hundreds of thousands of units and every one must be accounted.    IFCO Systems manages an RPC pool of over 100 million units worldwide, the majority of which are used in the produce sector.  IFCO recently released their Q1 2010 numbers and stated that a significant investment is earmarked for the U.S. RPC market, which can offset lagging U.S. pallet sales.  IFCO has increased their CAPEX by 117% showing the market a commitment to growth and a readiness to compete.

Pallet I am…

Of all the elements that make up the supply chain the pallet industry has the greatest potential for investment.  A few goliath companies like Brambles and IFCO are evidence of the potential the achieved concept can produce.  Across the board the pallet industry has had negative to flat growth in every market sector.  The combination of surplus inventory of used pallets, aggressive under market value pricing and lower sales have caused many smaller companies to close shop.  In the April Issue of the Pallet Enterprise I wrote of a pallet evolution.  Those in the industry can see it, but it is undefined and unclear what the changes will be.  As with packaging and trucking, trends created during these times will result in permanent changes in the market and opportunity for those with the spirit and resources.  One thing is clear, if you are considering starting a pallet pooling system and your model is a scanned copy of the original…you will fail.  That may be blunt, but the fact is Brambles is a master marketer of product and services, and iGPS and Bob Moore is cutting his teeth in his battle for a piece of the rental pallet pie.

A note to investors, pallets may not be what you think to put in your long term investment portfolios but it is an industry whose time has come.  As with any investment, just because a company is on the field does not mean they are in the game.  A pallet is a pallet, whether it is plastic or wood.  The consumer just wants a pallet that won’t break, can be delivered on time, meet all risk factors at the lowest price.  The future is pallet program management, not pallet specification.  Block, stringer, plastic, wood or corrugate if the consumer has to take labor away from operations you are a liability.  Ask, ask, ask…what is your pallet program and how much customer management will it involve to maintain.