Outlook for Third-Party Pallet Management: Growth and Change

As the pallet industry moves forward, it will be impacted further by
such issues as the core shortage and ownership of proprietary pallets.

If white pallet supplies continue to dry up, third-party pallet
management services provided for distribution centers — such as sorting, repair, and
return — that previously were paid for with excess cores increasingly will have to be
paid "out of pocket" by the distribution centers. It is not clear yet how the
cash-strapped distribution centers will respond or how this situation will play out for
recyclers with pallet management contracts at distribution centers.

Where recyclers are reimbursed with excess cores for providing
pallet-related services, it will become increasingly important for the recyclers to
provide itemized details of the services — and the actual costs — to their
customers. This kind of communication will put them in a better position to seek
reasonable compensation from the distribution center if core recovery continues to
decline.

Other developments, such as the decision by the National Wooden Pallet
and Container Association to establish a national registry of proprietary pallets, may
help enhance pallet retrieval, thereby making reusable pallet programs more attractive to
some pallet users. In a similar vein, Chep announced in recent months that it will begin
negotiating with individual pallet recyclers to compensate them for handling Chep pallets.
This is another sign that third-party pallet management services may be growing out of
their infancy. The loops gradually are being closed, which should promote more reusable
pallet programs.

The evidence seems to indicate a surge in the interest of third-party
pallet management. The most obvious indicator is the size of Chep’s pool: it is at 28
million pallets in North America and continues to grow unabated.

Recent findings by the NWPCA and Modern Materials Handling
magazine also indicate a growing third-party market. A joint survey by the two showed a
huge jump in customers that want retrieval programs. One of every five pallet users either
has or plans to have a retrieval and recovery system, according to the survey; just two
years ago, this figure was only one in 14.

The trend also has been reflected among the NWPCA’s members. In
the 1995 NWPCA membership directory, about 27 companies indicated they participated in
third-party management services. In the 1998 directory, the number jumped to 71 companies.
Similarly, the number of companies that lease or rent pallets climbed from about 27 in
1995 to 59 in 1998.

Rental

Rental clearly is the best established component of third-party
management with well understood and increasingly accepted programs in place. Chep, with a
reported 94 million pallets worldwide, continues to penetrate the grocery market and to
expand into other related segments of the North American food industry, notably produce
and perishables.

Chep’s most recent initiative moves it into the 48×40 beverage
application. It reportedly is not targeting smaller pallets for side-loading soft drink
trucks at this time but has not ruled out this market for the future. There is no
widespread standardization of smaller beverage pallet sizes, which makes the segment a
greater challenge. Chief executive officer Bobby Moore and vice president-marketing Brian
Beattie both have many years of experience in the beverage industry. Robert C. Spence, a
former executive with Chiquita, was recently named Chep vice president-produce.

Chep faced a major challenge last year when PalEx, a major pallet
manufacturer and service provider, stopped building new pallets for Chep and phased out
its repair operations for the rental company. "…our CHEP business has become far
less profitable in recent periods than it has been historically, generating declining
margins far below those we achieve in our other businesses," PalEx chief executive
officer Vance Maultsby said of the company’s decision.

Later, Pallet Management Systems Inc., already a major Chep supplier,
opened a new manufacturing plant in Rogersville, Ala., to build pallets for Chep Americas
under a new multi-year contract. PMS occupied a plant formerly run by PalEx and also
bought the equipment from PalEx, including a GBN pallet assembly system. PMS said it also
plans to set up another manufacturing facility in the Midwest. Several other companies
have picked up Chep work as a result of the PalEx decision.

As for PalEx, termination of the Chep agreement fueled speculation that
the nation’s largest pallet manufacturing and recycling company would shift resources
to the third-party management arena, and it did. PalEx acquired Superior Management Group,
the leading Canadian pallet rental and management company. At the time it was acquired,
Superior reported owning and managing about 1.3 million Canadian Pallet Council pallets,
or about 16% of the CPC pool. The acquisition also fired up the rumor — which was
dormant the last year or two — that the CPC would expand into the U.S.

PalEx recently entered into a multi-year agreement to supply pallets
and related services for the North American operations of Armstrong World Industries, a
building products manufacturer perhaps best know for its floor covering products. PalEx
will provide pallet repair and retrieval services at 18 Armstrong facilities in the U.S.
and also is eyeing services for Armstrong’s European operations.

"We’re excited about our new supplier-partnership with
PalEx," said Greg Deascenti, Armstrong’s worldwide packaging procurement
manager. "They more than meet our criteria for reducing our costs, standardizing our
pallets and closing the distribution loop for this very basic, but very necessary product.

"Of key importance to Armstrong is this partnership’s
emphasis on recycling. Our company has a longstanding policy on the environment, and one
of its commitments is to make use of recycling in all our operations," he added.

Third-party providers estimate that rental pallets flowing through
grocery distribution centers make up 17% to 36% of in-bound movements from grocery
suppliers. The volume may vary for a number of reasons, including the preferences of
regional or private label grocery products suppliers and how strongly distribution centers
push for rental pallets as part of their in-bound pallet policy. "Many companies
(distribution centers) report they are participating in the pallet leasing programs
offered by Chep," said the 1998 Food Industry Distribution Center Benchmarking
Report. However, the report warned that "…most food distributors indicate that
their support for the concept is directly related to the manufacturer’s willingness
to pay the

pallet rental fees."

While the support of distribution centers is a prerequisite to making a
rental network viable, acceptance by grocery products suppliers largely will determine the
rate of rental growth. However, growth will be significantly influenced by the continued
availability and pricing of recycled pallets, which remain the dominant platform for
grocery unit-loads. (Editor’s Note: See related article on page 20 about how the
core ‘crunch’ is impacting third-party management at distribution centers.)

Other noteworthy rental companies in the 48×40 consumer products pallet
arena include PECO, which launched its program last spring, and National Pallet Leasing
Systems (NPLS), the longest-serving rental company in the U.S., which launched a new
national initiative for produce in mid-1998.

PECO, the joint offspring of several pallet companies around the
country, reportedly went to work in the Midwest with a few retail chains and then expanded
to the Northeast. It is using its member companies as well as other contract depots to
form its network. PECO was said to be selecting its business carefully so that the pallet
loops could be managed effectively within its regional infrastructures.

Pallet Control

NPLS, on the other hand, chose to go national, relying on the
PalletBanking network of over 400 depots to close its loops. NPLS had over .5 million
pallet deliveries last year and anticipates 3 million in 1999. Many other individual
companies now offer rental services, too, such as Kamps Pallets in Michigan.

The ability to maintain control of pallets during the expansion stage
is the most important factor in the development of a third-party rental program, according
to Brad McCormick, president of NPLS. "Controlling growth is the hard part," he
said. "The key is to get pallets back." This requires a solid retrieval network
infrastructure and tracking system, which minimizes the risk of pallet loss.

Brad believes the challenge of maintaining effective control during
growth is the greatest hurdle a third-party provider faces — more daunting than
raising capital or signing up customers. NPLS has enormous experience in this area,
however. "We’ve been tracking pallets for well over 20 years," he noted.
NPLS started in 1967 and updated its PALCON pallet tracking program last year.

An important issue in maintaining effective control is whether a
company should launch a regional program, such as PECO has done in the Midwest and
Northeast, or go national, the approach NPLS took with the help of the PalletBanking
retrieval network. A nationwide program may offer greater opportunities landing accounts
with national consumer products companies, but it may expose the pallet company to more
risks and require greater capital investment.

In the GMA pallet market, PalletBanking continues to be the fastest
growing division of Pallet Pallet and has met all expectations, according to Steve Clark,
sales manager. There are 418 authorized PalletBanking depots in the U.S. PalletBanking
made its earliest inroads with the trucking industry, but since then has broadened its
client base into shippers and receivers, too.

The following are brief summaries of some of the latest developments
about the major companies providing third-party pallet management services, including of
the businesses already mentioned above.

Chep

Chep USA says it is making inroads into several industries. Following
continued success developing the pallet pool concept in the grocery industry during much
of the decade, Chep is concentrating on the produce and beverage industries, as well as
meat, food service and ingredients.

To strengthen its efforts in the produce industry, Chep recently named
a new vice president-produce. Robert C. Spence has 25 years of experience in the produce
and grocery industries, most recently as a vice president for Chiquita Brands. His new
duties include overall leadership of the produce sector across the U.S. Assisting him will
be James A. Vangelos, a veteran of several food companies, who was promoted to Chep’s
national sales director for produce. Leading the effort on the corporate side is Bob
Jantzen, president and chief operating officer of Chep Americas.

In conjunction with these management changes, Chep is focusing
resources to better serve produce retailers and wholesalers, market system-wide benefits
of plastic container pooling, and assist in the roll-out of the pallet pool. In addition,
Chep intends to maintain a support team dedicated to providing improved service to
grower-shippers.

"The combination of Bob Spence joining our team, Jim
Vangelos’ move into a position of higher responsibility, and our focused go-to-market
strategy will result in improved service to both retailers and grower-shippers, reduced
product damage and a decrease in the overall carrying cost of produce through the supply
chain," Jantzen predicted.

In the beverage industry, Chep has begun pooling programs at leading
companies. The Perrier Group, a subsidiary of Perrier Vittel S.A, itself a unit of the
Nestle Company, is shipping the majority of its domestic bottled water brands on Chep
four-way entry pallets. This success has led exploration of shipping Perrier’s brands
produced in Europe to North America on Chep pallets. Under current plans, Chep in Europe
will contract for pallets built to North American specifications and deliver them to
Perrier plants in France, Switzerland, Italy and elsewhere. The Perrier products will be
loaded on the pallets and the unitized loads will be shipped to the U.S and Canada, where
the pallets will enter the domestic pallet pools. This would replace the one-way pallet
program Perrier uses and eliminate waste from the trade channel.

Perrier’s decision to offer the Chep pallet pooling program has
executives from the pallet and container pooling company eager to capture more beverage
industry business. The international opportunities are also appealing to the company.

In the food service, meat and food ingredients industries, several
major distributors, manufacturers and suppliers are working with Chep and suppliers to
improve the overall efficiency of the supply chain through pallet pooling. Initial
successes have been reported.

CPC

North American rationalization of business is a key market issue
affecting the CPC, Belinda Junkin, CPC executive director, said recently. She emphasized
that the CPC must be prepared to meet the demands of global competition. CPC pallets
currently circulate between Canada and the U.S.

Belinda believes that offering a high quality pallet will ensure
CPC’s future in the face of stepped-up competition. The CPC technical committee has
been active the past year, developing new specifications to improve CPC pallet
performance.

Last summer the CPC board of directors decided to remove support
stringers from CPC pallets. The board formed a quality committee to ensure that the
distribution of these costs would be equitable. Their recommendations are forthcoming.

Due to increased policing of the pallet industry, the number of
violations has increased. The violation review committee has taken a pro-active role in
detecting and dealing with these problems. The CPC has taken action against non-member
companies who make illegal repairs as well as CPC members who deal with them. Increased
vigilance is helping to increase the quality of the CPC pallet pool.

The volume of pallet sales and pallet repairs continues to be much
higher than anticipated. This clearly signals the competitive viability of the CPC,
according to Belinda. CPC pallet sales were estimated to exceed 1.2 million units while
repairs were projected to reach 2.5 million units, well ahead of repair activity prior to
the commencement of the Enhanced Program.

The next major CPC thrust is a strategic planning initiative. The
organization began a planning process last spring and it has been followed by roundtable
discussions, membership surveys and interviews with industry experts. The information has
been collected, reviewed and discussed by a cross-section of members who convened for an
in-depth retreat in late summer. The strategic plan is well underway and will be released
to members at the annual meeting next month.

First Alliance Logistics

First Alliance Logistics last year launched a program called the Pallet
Clearinghouse and has 175 authorized depots. "It is up and running," said
president John Lorentzen, who replaced Phil Deely at the top leadership position last
fall. The network is very strong east of the Rockies. First Alliance plans to use the
infrastructure to help it manage regional recovery networks, according to John, who
formerly was president of St. Charles Lumber in Michigan, an Alliance member. "I
think basically we are refocusing on how we can utilize the strengths of the membership in
our group. We want to set up recovery loops."

First Alliance plans on building regional networks first. "Our
focus is going to be to start it on the ground floor and then start to interconnect those
networks," said John.

This represents a shift for First Alliance, which in the past was said
to be concentrating on developing its tracking system and national accounts.
"Sometimes you get to market with an idea before the market is ready for you,"
John observed.

NPLS

In the past, many observers associated NPLS with Sears, which was its
main customer before the retail giant went to slipsheets in 1997. In the future, industry
watchers may similarly think of it together with K-Mart. NPLS has signed a national pallet
management contract with K-Mart that includes 14 distribution centers which in turn serve
over 2,000 retail outlets.

NPLS launched its new program in mid-1998, starting with produce and
then moving into other perishables and dry goods applications. The company uses a heavy
duty 48×40 stringer pallet, mainly softwood but with hardwood lead deck boards. Slats are
3/4-inch thick. Painted orange, the pallet is marked "PEP," which stands for
Pallet Exchange Pool.

"A vast majority of the nation’s retailers have endorsed us
as a leasing-rental alternative," Brad said. His company has signed business for over
600,000 pallets and has projections for over 3 million for the next year in perishable and
non-perishable.

"Our business plan has been to sign up the receiver," Brad
said. "You’ve got to get the top 75 receivers in order to get 75% of the
volume." NPLS has worked hard to be "receiver friendly," he said.

"The excitement here is that we are exceeding our expectations.
That’s because the nation’s retailers are accepting us with open arms."

Pallet Management Systems Inc.

Pallet Management Systems Inc. is moving its headquarters to the
Raleigh-Durham area in North Carolina and is gearing up to go high-tech. Chief executive
John Lucy has already moved, and company president Zachary Richardson is scheduled to
relocate in the first half of 1999.

John was first attracted to the region because of its schools, but he
believes the new location also will help attract technically skilled workers. He expects
to hire up to 25 people over the next year to develop an Internet-based tracking system.

PMSI has picked up some Chep supply work since PalEx terminated its
relationship with the rental company, including opening a plant in Alabama. In recent
years, PMSI has distanced itself from grocery distribution center management deals, which
have become extremely competitive. Instead it is concentrating on pallet management in
niche markets, according to Zachary.

PECO

PECO (the name originally come from an acronym for Pallet Exchange
Company) is a pallet rental program for the food industry utilizing a distinctively marked
red 48×40 pallet. The company has remained true to its original business plan of
instituting a region-by-region roll-out, starting first in the Midwest and recently
expanding into the Northeast. There are almost 100,000 PECO pallets in circulation; the
company is working with six suppliers and has six repair contracts.

PECO pallets now are now being received into 30 distribution centers,
and that number is expected to double over the next few months, according to Mike Tebay,
president and chief executive officer. A graduate of the Harvard Business School MBA
program with extensive experience as a logistics executive and consultant, Mike joined the
company last spring.

"Most of our customers are expanding the use of our pallets as we
turn on additional distribution centers," said Mike. "It’s fair to say,
without exception, they are very pleased with our service. We are keying in on really
ensuring that our service is more flexible, more responsive, and more personal than the
competition." This includes ensuring that pallets will arrive when requested and in
first class condition, he added.

PECO is owned by 29 pallet companies and eight other investors.
"We’ve got a well-known investment bank leading the search for a major
organization, institution or strategic

investor that can commit funds to continue the growth during the next
couple of years," Mike said.

Bromley Pallet Recyclers

Bromley plans to grow incrementally into the Midwest, where it plans to
open five new locations in 1999. Its most recent acquisition was J&N Pallet in
Columbus, Oh. This location has picked up several new accounts from customers Bromley
already serviced in other areas of the country.

Bromley’s philosophy has been that national or even international
companies tend to focus regionally on their distribution requirements. For this reason,
Bromley has been able to

consistently provide good service to its customers even through its
locations were mainly in the Southeast.

The company performs a number of third-party services, including
retrieval and relocation for multiple branch sites, distribution center sorting and
repair, as well as working

with Chep at a number of locations.

Bromley Pallet Recyclers is the largest pallet recycler in the Eastern
U.S. with more than 750,000 pallets in inventory. It was founded by Del Groene under the
name Suncoast Pallets Inc. 20 years ago in Tampa, Fla. Over the next 12 years Suncoast
grew into the largest pallet recycler in Florida.

Suncoast entered a second phase of development in 1992 when the Bromley
Companies, a New York-based business with numerous interests, bought a majority share of
Suncoast. Rapid expansion followed. Bromley, as the company was renamed, now has 16
locations in Florida, Georgia, Tennessee, North and South Carolina, Ohio and Arkansas.

Pallet Pallet

Pallet Pallet recently named Corbett Lenz as interim president and
chief executive officer and Thomas Hoefert as chief financial officer. The company is
seeking a permanent president and chief executive officer. Doug Moore, who formerly held
the posts, will remain as chairman of the board and will pursue opportunities for the
company to grow in the marketplace. Hoefert replaced Gary Stanton, who will remain as
treasurer and executive vice president.

Pallet Pallet also relocated its corporate headquarters Dallas. In late
1997 the company moved its corporate headquarters from the Toronto area to Fort Smith,
Ark.

"The Company has reached a critical point in its return to
profitability, and the experience and skills that Mr. Lenz and Mr. Hoefert bring to Pallet
Pallet will place increased emphasis on day-to-day operations," the company said in a
statement.

The PalletBanking Division continues to be Pallet Pallet’s fastest
growing unit. The PalletBanking system was designed exclusively to help customers with
48×40 pallets. However, sales manager Steve Clark reported the company has a growing
business in custom pallet retrieval in the industrial market that also utilizes the
PalletBanking network of service centers.

"We’ve been long-time innovators for white wood," said
Steve. "We offer customized programs that have grown by leaps and bounds, such as in
automotive, for example. That’s where our emphasis is."