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Wal-Mart-CHEP Shows Strength of Ties Between Rental, Recycled
Markets in Transition
By Rick Leblanc
Date Posted: 2/1/2002
The Wal-Mart greeter is at the door. He’s wearing a big smile for every customer, and badges, too. Now, where are all those blue pallets?
Brambles investors may not have had that same welcome feeling in recent months. A profit warning at the Brambles annual shareholders meeting in November left the investment community scrambling for answers to the company’s lukewarm results. It was the fourth profit warning in a little more than a year for Brambles, but in fairness, "…it was the first necessitated by poor trading in one of the company's core businesses," reported the Sydney Morning Herald. Brambles blamed the deterioration in large part on a "…weak global economy placing pressure on the earnings of its biggest business, pallet hire operation CHEP."
Inventory run-downs and reduced demand in the wake of Sept. 11 have been cited as reasons for the recent malaise. Another problem has been lengthy dwell time; in other words, pallets were getting caught up in customer distribution systems and not making their way back to the rental company -- so they could be rented again. One analyst reported that CHEP USA turns its pallets only 2.8 times per year – that’s the amount of times a pallet gets rented annually. Some of the stock analysts are zeroing in on Non-Participating Distributors (NPDs) and Wal-Mart business for special attention as a cause.
Both situations are important to pallet recyclers. When Wal-Mart embarked on its CHEP program, as part of the deal CHEP came into position of empty white pallets that it sold to its on-site subcontractors. The result was a considerable increase in core supplies, resulting in a better supply and downward pressure on pricing.
Then there is the decision to release CHEP pallets into NPDs. For a modest fee, CHEP customers could ship to customers of their own who had not signed onto the CHEP program. This made life easier for CHEP users. With the NPD program, custom palletization onto a white pallet for these customers could now be avoided. According to some recyclers, this has exasperated the problem of stray blue pallets ending up in the yards of recyclers. The term ‘Non-Participating Distributor’ refers to those distributors who have not signed return agreements with CHEP. CHEP is rumored to be now addressing the NPD situation by dramatically increasing the NPD charge; in some cases the fee is significantly up from the $2-3 premium it was previously charging in order to cover increased retrieval costs. If true, one analyst speculated, this should slow down NPD business but should free up inventory for more profitable business.
At Wal-Mart, pallets are apparently getting absorbed into the distribution system and in large part are not coming free. One analyst estimated that the 8 million trips per year into Wal-Mart are turning an average of only once a year. The reasons run something like this: about 60% of inbound unit loads of product are palletized on CHEP, but 100% of orders are palletized on blue for downstream, which absorbs additional CHEP pallets into the Wal-Mart system. I have never been in a Wal-Mart distribution center, but having been in similar general merchandise warehouses of competitors, they probably get a substantial amount of floor loaded product that is also palletized at the distribution center. Again, this is palletized onto CHEP. The bottom line is that the Wal-Mart system is absorbing a lot of blue, and I have been told that in recent months not many CHEP pallets have been returned, except for damaged units.
By engaging in the Wal-Mart project, CHEP has a huge potential upside. It is hooking up with the world’s most rapidly expanding consumer products business. It is also converting new suppliers that might also use its pallets for other accounts. On the flip side, however, Wal-Mart has apparently become a holding pond for blue pallets, at least for now. At the same time, the spillover of white pallets into the open market has caused a glut of white wood, softening recycled pallet prices, which makes them increasingly attractive in comparison to CHEP, and possibly attacking rental margins.
Years ago I worked in the Canadian distribution business and used an approach that I called the 'white wood shuffle' when I ran low on orange Canadian Pallet Council (CPC) pallets. A similar approach might help CHEP improve its pallet utilization. I would use white wood internally, freeing up the CPC pallets to return to trading partners. The same plan could be used to substitute white wood internally for CHEP at Wal-Mart. There would be a loss in the range of $1.25 to $1.60 for the white wood no longer sold to recyclers, but it would free up CHEP pallets to go back into rent. A leading recycler suggested that excess inventory sitting in recycling yards would suddenly be worth a lot of money. Also, less competitive recycled pallet prices might take pressure off of rental margins across the board. This might make sense for recyclers with inventory as well as CHEP, but perhaps such a plan would be unpopular to the rental company because of perception. It may be a moot point, however, according to Jeff McBee, market analyst for Pallet Profile Weekly. He believes the supply situation could tighten up quite quickly when Wal-Mart conversion to CHEP nears completion. Of course, there may be some contractual obligations between CHEP and ProPak, the company that is managing the Wal-Mart dock sweeps, which could impact a white wood shuffle.
In the pallet business there is no greeter at the entrance with an apron full of badges or a big smile. There is just a lot of hard work and an occasional reminder of how closely interconnected recycled and rental programs have become.