Changes taking place in the market as well as the recent elections were the two major stories of the year. And given the fact that the 2012 elections resulted in pretty much the same thing we had before the election, the market dynamics seems to be where the major changes are taking place. The political scene will have a major impact as the tax code is changed and health care reforms start to take effect. But the unique area of interest to the wooden pallet community is the core shortage that materialized over the last two years and has become the new normal over the last year. Used pallets became harder to find, which meant that recyclers had to become more competitive to obtain cores for supplying customers.
While this is predominantly a recycled pallet concern, it is also something that pallet manufacturers must watch because the two markets are linked. As the pallet recycling market becomes more competitive, look for more companies to migrate toward specialty pallet manufacturing.
Let’s trace a little history to see how what takes place one year can have a ripple effect across the industry into future years. When the overall U.S. economy began to collapse in the fourth quarter of 2008, the recycled market became awash with pallet cores. Recyclers had more pallets than they could handle. This trend continued for a while until the market began to tighten in the middle of 2010.
At the same time, Costco Wholesale made its big block pallet announcement. Costco stated it was no longer going to accept stringer pallets and began pushing people toward rental and other higher quality pallets. Although the retailer had made similar proclamations in the past, this time the company stuck to its guns despite blowback from some suppliers. The Costco mandate was the Story of the Year for 2010.
One major thing the Costco announcement did was remove from the 48×40 stringer pallet universe one of the major retailers that was demanding higher quality pallets from suppliers. This meant that one of the major drivers behind the infusion of new white-wood stringer pallets was no longer in the game. Sure, some Costco suppliers switched to white-wood block pallets. But the majority went to rental either blue, red or black pallets. A group of pallet industry leaders developed 9BLOC to serve as an answer to this situation. And while the organization stills shows a lot of promise, it has yet to materialize in significant pallet orders. I still believe that 9BLOC as an industry-run pool of white-wood block pallets can be a viable solution to bring real competition to the market. But it will take some major customers to jump on board to make that a reality.
Over the last year and a half, pallet recyclers have moved from outright panic over core shortages to acceptance. They have learned how to deal with the reality of much leaner inventories. Companies have moved from having thousands and thousands of used pallets on the ground to supplying customers hand-to-mouth.
The good news is that pallet companies have figured out ways to make it work. The bad news is that there are no easy answers from here on out without the infusion of new pallets into the system. And you don’t want just any new pallet. The market needs a quality pallet, which is why the 9BLOC standard is so important. If all the market gets is crappy pallets, then it won’t take long before the problem comes back with a vengeance.
The most recent pallet user survey conducted by the publisher of Modern Materials Handling revealed that most pallet users had not noticed a significant problem obtaining used pallets. See the complete coverage in the December issue of Pallet Enterprise. Kudos to pallet companies for making this problem as pain free as possible for customer, but the reality next time may not be quite so rosy. All of this took place with the U.S. economy limping along. What happens if the manufacturing sector does roar back over the next few years or even obtain a modest rate of 3-5% growth? There likely would become a time where the supply would lag demand to a severe point. There would be no creative solution to solve the problem without a massive infusion of pallets.
Another piece of goods news from the recent pallet user survey is that many pallet companies say they would buy new pallets if the core supply becomes worse and used pallets cannot be found. The thing that worries our staff is that the pallets bought under such a situation are likely to be of a poor quality. All we would be doing is kicking the problem further down the road… again.
Pallet companies must develop a strategy to handle worsening core supplies. What has become the new normal may lead to further and further crises in the future. It all starts with improving collection efforts and securing more core sources. And an equally important focus must be to work with customers to change expectations and develop new relationships where loyal customers are rewarded. Pricing must go up and reflect the changing dynamics.
Hopefully, the Story of the Year for 2013 is that 9BLOC or some other quality initiative infuses significant numbers of new white-wood pallets into the system. Or else we may see a repeat situation next year with the core supply getting even worse.
