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Market Update: Will Recyclers Learn from History or Repeat It?
Pallet recyclers already are concerned by iGPS’ stance for negotiating the recovery and return of its plastic rental pallets.
By Jeff McBee
Date Posted: 7/1/2009
A few years ago when the Buckeye-CHEP lawsuit was settled, it seemed that the pallet industry had found peace with CHEP. At least, the pallet industry resolved it would have to do business with CHEP on CHEP’s terms. Now, some old wounds are being re-opened as iGPS finds itself in an increasingly adversarial position with the pallet industry.
In iGPS, which operates a rental pool of plastic pallets, the industry now faces an excellent opportunity to prove that it has learned from the past as it faces the same challenge.
Pallet recyclers already are concerned by iGPS’ stance for negotiating the recovery and return of its plastic rental pallets. The concern is certainly valid because so much of iGPS management used to work for CHEP during the period when the pallet industry experienced the most turmoil in dealing with CHEP. Bobby Moore was the CEO of CHEP then and now occupies the same position at iGPS. Other familiar faces include Rex Lowe, former president of CHEP and now president at iGPS.
It is not surprising with this much management carryover that iGPS management is offering the same party line they did as managers of CHEP.
How will the pallet industry address this situation? Will it walk down the same road that it did with CHEP? Will the issues be resolved easier, or will the industry choose to fight again?
Is there something to be learned from history? Maybe more than recyclers
Pallet Enterprise’s online forum, The Pallet Board, was the center of discussion at the height of the hostilities between the pallet industry and CHEP. A frequent poster during that time was a Pallet Board member who used the name ‘Sherman the Antitrust Watchdog,’ a somewhat obvious play on words referring to the Sherman Antitrust Act. ‘Sherman’s’ frequent battle cry in the early stages of the skirmish with CHEP was, ‘Say no to free logistics.’
This was a common perception among pallet recyclers. They were bearing the costs of retrieving, sorting, handling, storing and in some cases returning pallets to CHEP.
CHEP had taken a hard line that it would not create a black market for CHEP-marked pallets by buying them back.
However, it wasn’t long after the Buckeye lawsuit was filed against CHEP that the pallet leasing giant reversed its longstanding refusal to pay recyclers for retrieving and returning CHEP pallets. That policy change in 2002 remains largely in place today. A fuel surcharge was added as part of the lawsuit settlement.
Besides higher fuel costs, overall transportation costs have escalated since then. This is the reason I believe that CHEP formulated its compensation for recyclers the way it did.
The compensation plan for recyclers encourages them to provide transportation. They receive $1.25 for each CHEP pallet on their yard, but they receive $2.25 for each CHEP pallet they deliver to a depot within 200 miles.
Recyclers who choose to haul the pallets to a CHEP depot might be better served to consider the benefits they provide CHEP. This would allow a closer look at CHEP’s Asset Recovery Program (ARP) with a long term view. Taking the $1.25 per CHEP pallet on the yard may seem like the wrong move, but if all recyclers went that route, the long term benefit could be much greater.
How would CHEP be impacted if recyclers just took the $1.25 for each pallet? Could CHEP handle the volume of pallets? Could CHEP return the pallets to one of its depots for the additional $1 per pallet?
If pallet recyclers did not provide trucking at CHEP’s current rate, could CHEP afford to continue its Asset Recovery Program? I believe CHEP would have to revamp the program, if not the compensation plan, if most recyclers did not provide transportation services.
Such a move by recyclers could have a devastating effect on CHEP’s price and cost structure. CHEP would have to offset the added costs—most likely by charging higher prices to its customers. This would help make white wood pallets more competitive over the long haul.
Some of the biggest cost challenges would come from logistics. CHEP would have to arrange transportation for all its stray pallets, which it currently does mainly by common carrier. That transportation cost alone could be mind boggling. In addition to trucking, there are the logistics aspects of returned pallets. CHEP would have to hire more employees to arrange and oversee logistics—not just picking up the pallets, but arranging where to send them. CHEP already has to warehouse pallets when circulation cycles do not keep them under load. Many recyclers feel that CHEP uses their yards for storage as it is.
The administration and paperwork involved in tracking transportation costs and making sure that scheduled loads have been taken care of would add costs, too.
The cost of retrieving small quantities of pallets grows with less than truckload volumes. CHEP would almost have to run its own trucks out of necessity if the pallet industry declined to provide trucking.
The list of costs that the leasing giant would have to absorb goes on and on.
In fact, a strong case could be made that pallet recyclers who return pallets to CHEP are helping CHEP by subsidizing its logistics costs.
Can the pallet industry reverse that trend? Sure.
Will pallet recyclers make this sort of switch? That may not be as likely.
Can the pallet recycling industry learn from its mistakes? Absolutely, and the next opportunity may be how it chooses to deal with iGPS.
(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.)