An Unconventional Truth – June 2010
Investment Opportunity within the Supply Chain
Choosing an investment in today’s market should be called the 8 second ride, just when you think you got it…you end up hiding in a can and some clown is getting you out of trouble. There is a product within the supply chain that consists of billions of units, generating billions in revenue, and is an industry whose time has come. There are many market sectors for investors to choose and one industry that touches every part of the supply chain is pallets. With the exception of the rental pallet industry, IFCO Systems and a few large regional pallet companies the pallet industry is unregulated, unorganized and a highly competitive market. Many firms have already invested in large companies like Brambles, IFCO, iGPS and PECO. Brambles have an 85-90 percent market share in the rental pallet industry. iGPS and PECO Pallet essentially scanned a copy of the Brambles model changed a few contract points and set out to compete. iGPS has made more gain than PECO; however, they are facing legal and perception issues that could scare away investors. There are multiple policies and legislation in committee that will have direct affect on the pallet industry. Many of the proposed regulations will not pass; however, the trend indicates regulation of some kind will be enacted. Companies with new innovated pallet specifications and management programs are emerging that will change the global competitive landscape. A pallet evolution is coming and early investors will reap the benefits if they choose the right company.
Business Environment
The pallet industry is a multi-billion dollar industry with few dominant players. The environmental landscape is extremely volatile affecting all pallet businesses, from the smallest to the largest. It is estimated that 15% of small pallet dealers have closed and large companies like CHEP have resulted in negative to flat growth. There are several pallet specifications including; wood, plastic, wood/plastic composite, corrugate, and steel. Throughout the world there are multiple sizes pallets required. In the U.S. the common sizes is 48”x40” and consist of both stringer and block.
Several organizations are attempting to organize pallet recyclers in an effort to offer pallet management programs that will present direct competition to the rental pallet industry. Organizations like EPAL, PALNET, and PIMS are working to bring uniformity to an unorganized industry. Some major hurdles are consistent service and quality standards. These organizations are focused on a pallet program that offers an increased user-friendly management of the network. This is an area of weakness for the rental pallet industry as the customer must manage the pooling system. Online computer programs and tools developed by CHEP have made it easier, but the main point of contention from the customer is that they are managing the pooling program.
Pallet manufactures are also getting more aggressive, developing prototype platforms that will meet current and future regulations, market requirements and price point. The fact is most wood pallets are over-engineered and designed to withstand most market requirements. Wood is the cheapest to purchase for the customer, but expensive to maintain. Plastic pallets are more expensive to construct but hold a lower damage rate than wood, requiring few units replaced. I know of several up and coming companies that will be offering innovated pallets that could have the potential to initiate a pallet evolution.
In my opinion, it will not be the company that creates the best pallet, or the company that creates the best pallet management program that will present serious competition in the mass market. What the market is looking for is a combination of both. The customer really does not care how well the pallet is made if it does no more for their operations than the competition. However, if you can combine a pallet that has a workable price point, durable enough to maintain a low damage rate and a pallet management program that can generate maximum turns per year you hit gold.
It’s In There
As they say, the proof is in the pudding. The pallet industry is like any other business and is subject to supply and demand, raw material supply, fuel prices, labor, high overhead and upcoming government regulation. The numbers need to be in range to allow a competitive market price and low customer management while maximizing turns. Investors will want to see high EBITA the first 2 years, payoff within 18 to 24 months, high market valuation and a clear exit strategy.
The pallet industry is in a state of evolution, and is an unconventional investment choice. Environmental and government regulations will change the business landscape that will push small and medium companies to niche markets. There are few companies that have a pallet and business model that can meet market concerns and compete against established companies like Brambles and IFCO. I have seen them, they are coming… and it will be fun to watch.
Andrew Mosqueda
andrew.mosqueda@morethanpallets.com
