Ever since CHEP entered the U.S. marketplace in the early 90s, the global leader in pallet and container leasing has made news and impacted the industry. CHEP is once again garnering attention because of its plans to open up its annual supply of white wood pallets to the industry and its attempt to put a new face on its relationship with recyclers. With over 42 million white wood pallets going through its possession each year, CHEP undoubtedly is the largest owner of used pallets in the country. Due to CHEP’s size, any significant waves it makes may impact core prices and market dynamics.
Compounding the confusion on CHEP’s market impact is the emergence of CORE, a grassroots organization of independent recyclers fighting for fair markets and the survival of the white wood pallet industry. Trying to sway people to their camp, both CHEP and CORE held informational meetings at the National Wooden Pallet & Container Association (NWPCA) Annual Leadership Meeting.
If you want to know how CHEP’s plans or CORE’s campaign may affect your business, keep on reading. No matter your size or customer base, the CHEP/CORE struggle may impact your business at some point.
The New Face of CHEP
Known for its blue pallets with “Property of CHEP USA” marked on the side, CHEP has approximately 70 million pallets in its U.S. pool. As the number of non-participating distributors (NPDs) grew, the pool leakage has increased to about 200,000-300,000 per month according to Gordon Kirsch, senior vice president of operations for CHEP USA.
Concerned by leakage and the poor utilization of the white wood pallets flowing into CHEP’s depots, CHEP’s upper management attended the NWCPA leadership conference. CHEP executives want to find companies to partner with in reclaiming CHEP-marked pallets and developing a more lucrative way to dispose of its white wood pallets. To CHEP’s credit, its people did not come to Marco with a pre-packaged plan for its white wood pallets. Instead, CHEP management came to listen and in some cases take its lumps for mistakes made in the past.
In the past, CHEP has both paid recyclers for their services and demanded that recyclers just hand over the pallets without compensating them. Last summer, CHEP renewed the practice of paying recyclers for their costs to recover, store and transport CHEP-marked pallets.
According to CHEP, more than 700 recyclers have joined its Asset Recovery Program. Some recyclers have opted not to participate because they were holding out for more money or did not like the terms of CHEP’s program. In the attempt to deal with these concerns, CHEP has just announced a new program based on feedback from recyclers. Unlike its previous program, the new one does not require participants to sign any contract or agree to specific terms. The new program started effective April 15, 2003 and will “replace the previous Asset Recovery Program and all of the terms and conditions associated with it” according to a letter by Elton Potts, vice president of asset management for CHEP.
Elton wrote, “CHEP USA recognizes that the pallet recycler community can play a beneficial role in CHEP’s distribution network and that, through the normal course of business, you may inadvertently come into contact with our pallets.”
CHEP’s new program increases the amount that CHEP will pay recyclers by as much as 150%. CHEP will pay $1.25 per pallet returned via a CHEP/carrier truck. If a recycler delivers the pallet to a CHEP service center, it will receive $2.25 (less than 200 miles away) or $3.00 (over 200 miles away). Payments will be made within 10 days of receipt of a proper invoice. The new Asset Recovery Program is open to everyone according to CHEP. Even companies providing services to CHEP can participate as long as they can accurately segregate both physically and in paper records these pallets from those they come in contact with as part of their work for CHEP.
CHEP developed its new program after meeting with Sam McAdow Sr., president of Buckeye Diamond Logistics of South Charleston, Ohio. Sam has led the fight for recycler rights by suing CHEP over the ownership of CHEP-marked pallets that leak out of the system. Sam’s involvement has been a critical element in the negotiation process. Sam said, “I met with CHEP and talked about this proposal. It is a positive move in the right direction and is what CHEP should have done all along. However, the new proposal does not deal in any way with the ownership issue…Thus, the Buckeye case is still alive and well and moving forward.”
There are two key aspects of the equation that many recyclers believe are crucial to resolve conflicts with CHEP – litigation on the ownership issue and pricing. With its new program, the pricing issue may have gone away. It may depend on whether or not a recycler has had to pay to obtain the CHEP-marked pallet. But the ownership debate remains a live issue.
Buckeye Case Keeps Ownership Issue Alive
Despite high-level meetings, the Buckeye case continues to roll on. The litigation issue could impact the relationship between CHEP and recyclers, especially if the courts decide on the ownership of stray CHEP-marked pallets. Buckeye has filed a lawsuit challenging CHEP’s ownership of stray pallets. The lawsuit covers issues like deceptive trade practices and property abandonment while seeking compensation for recyclers. The outcome of the case could affect more than just Buckeye. It could prove legally persuasive in a four-state region including Ohio, Tennessee, Kentucky and Michigan and possibly become a benchmark for legal disputes in other parts of the country.
Buckeye has hired a top-notch law firm and claims to have a solid case. A CHEP spokesperson said, “CHEP is confident that it will prevail in the Buckeye litigation, including on all claims regarding CHEP’s ownership of its pallets.”
Both sides are claiming they will win, which is to be expected. Many in the industry believe that Buckeye stands a good chance of winning at least some of its claims. However, CHEP should never be counted out due to its large pocketbook and legal resources. Buckeye may be able to take this one the distance, especially if other pallet companies support its lawsuit.
Dave Rogers, former director of production for CHEP, commented, “I think that Sam will win his case (Buckeye lawsuit), and once it happens, it will be the beginning of the end for CHEP’s current pallet lease pricing system… Lease/trip costs would go up, which would put blue on a more level playing field with white.”
A legal defense fund has been set up for those wanting to join this momentous legal battle. Sam McAdow Sr., president of Buckeye, has guaranteed that parties providing funding for the case will be involved in the decision process. For more information, e-mail Sam McAdow at buckwoodp@aol.com or call 937/462-8361.
What’s a fair price?
Even though CHEP has raised its offer and eliminated sticky conditions that chased away many recyclers, it remains to be seen how many blue pallets will begin to flow back into CHEP’s network. Everything always boils down to price. Gordon said, “We are not trying to get something for nothing here.”
CHEP managers voiced a willingness to pay a fair price. Of course, the interpretation of “fair” depends on your point of view. CHEP management does not want to place a bounty on CHEP-marked pallets, which would encourage pallet theft. At the same time, recyclers want more than just to cover costs. They want to make a profit for their effort. Although CHEP claimed its retrieval program was working well, CHEP’s presence at the NWPCA meeting showed it still has room to improve.
A major problem for CHEP is that recyclers may receive more money by filtering CHEP-marked pallets through CHEP customers than by directly returning them to CHEP. Sometimes when a CHEP customer is deficient on a pallet audit, it will pay more than CHEP does to avoid expensive penalties. Unless CHEP clamps down on recyclers selling pallets to CHEP customers, some recyclers may continue to walk away from CHEP’s program.
Will the new pricing structure be enough? It will likely prove attractive for some recyclers, especially those sitting on a large stockpile of CHEP-marked pallets with no other outlet for them. Some companies may never help CHEP because they believe that in the long run it is just like cutting their own throat. Others are less passionate about CHEP and appear interested in turning blue pallets into money.
Shifting Winds
Until recently CHEP seemed to consider the ownership issue a prerequisite for paying recyclers. CHEP had connected payment for return of CHEP-marked pallets with recyclers consenting to CHEP’s ownership of CHEP-marked pallets regardless of whether or not they have leaked out of its system. But in its latest program, CHEP has dropped all such terms and conditions. CHEP’s new approach indicates that something has happened to change the company’s mind.
This shift in CHEP’s demands is especially interesting given the fact that CHEP broke up negotiations with some recyclers not too long ago because of the ownership issue. Consider the case of NEPA Pallet & Container in Snohomish, Wash. A major pallet company on the West Coast, NEPA had filed a lawsuit against CHEP back in 2000. NEPA sought compensation for retrieval and recovery fees from CHEP before the leasing company launched its payment plan. The case had been mired down in the courts for a couple of years. After the NWPCA meeting, NEPA attempted to negotiate with CHEP. And both sides nearly came to an agreement if it had not been for the ownership issue, according to CHEP.
This makes one very curious as to why all of a sudden the company would change course less than two months later. CHEP claims its new program sprang from its talks with recyclers. Maybe CHEP figured the only way it would get some of the recyclers sitting on large volumes of CHEP-marked pallets to return them was to stop requiring contracts. As pallet demands starts to increase in the spring and early summer, CHEP will likely need more blue pallets. And of course it is much less expensive to recover and repair existing CHEP-marked pallets than it is to build new ones.
Brambles, CHEP’s parent company, has experienced stock troubles over the past year. Brambles stock dropped to a seven-year low of $3.81 in the first quarter of 2003. Brambles shares have plunged as the company reported lower than expected profits. With a strong focus on improving CHEP’s earnings, the company is likely looking to offset problems in Europe by improving profitability as much as possible in the United States and other areas of the world. However, paying recyclers for their services will not be cheap either.
Another factor may be the Buckeye lawsuit. As the court day approaches, CHEP will want to show the court that it has put forth a good-faith effort to work with the industry. Regardless the reason, CHEP’s new program marks a definite change in the company’s philosophy. Although the changes will be welcomed by many in the industry, CHEP’s waffling back and forth may still cause some recyclers to keep a close eye on CHEP.
CHEP’s White Wood Pallet Proposal
CHEP receives millions of white wood pallets each year due to its dock sweeps and pallet programs at Wal*Mart, Home Depot and Sams Club stores. CHEP owns these pallets and would like to find a more lucrative use for them.
Until now, most of the white wood pallets coming out of the Wal*Mart stores were sold directly to ProPak. According to informed sources, many of these pallets were sold at relatively cheap prices, which has led to downward price pressure. Currently, CHEP does not have any specific arrangement with third parties that would prohibit it from selling these cores for a higher price or using them as bait to trade for stray CHEP-marked pallets.
“We got into white wood pallets almost by accident,” said Gordon of CHEP’s upper management. “We have not been very successful at marketing these pallets in the past.”
CHEP wants to fix its white wood woes by establishing long-term contractual relationships on a regional basis. CHEP would supply its white wood cores on a regional basis through one contact, which limits the size of the network it must manage. Smaller players are viewed as too risky. CHEP management prefers to work with major players (probably 25-50 companies) capable of handling high volumes of pallets. According to CHEP’s management, the leasing giant desires to negotiate a fair long-term agreement not the deal of the day. CHEP plans on releasing specifics about its new white wood program in the very near future.
Beyond filtering its white wood into the market, CHEP wants these partners to actively go after reclaiming lost CHEP-marked pallets from other recyclers in its region. This may prove difficult given the competitive nature of pallet recycling. Don Black, president of CORE, said, “Picking a ‘big guy’ for a specific geographic area will divide recyclers and alienate the small guy, who already feels that this may all be an attempt to force them out of the loop. The local pallet ‘czar’ is a formidable opponent.”
CHEP wants to separate white wood from its blue pool because if a white wood pallet enters its regular depot network, CHEP must pay sortation fees. Currently, CHEP sells white cores directly to others at Sam’s Club and Home Depot facilities. It sells through ProPak cores coming from Wal*Mart stores. According to CHEP, the size and mix quality of its white wood cores varies by region.
Elton said that CHEP will continue to operate an asset recovery program. Both the asset recovery program and regional alliance network will complement each other.
CORE’s Challenge
CORE Recycling Council held its first-ever-public forum at the NWPCA leadership conference. From the start, CORE’s president identified the organization’s goal is to preserve the free exchange of the white wood pallet market. Addressing CORE’s relationship with the NWPCA, Don said, “We are not attempting to duplicate the function of the NWPCA…we intend to augment it.” CORE intends to go after activities that the NWPCA cannot because of the split interests of its membership.
CORE plans to protect the identity of its members since it may engage in
political, legal, marketing and grassroots activities that some find controversial. Many people came to the CORE meeting looking for specifics. But they tended to leave with more questions than answers. CORE leadership decided to limit what it would publicly divulge due to legal concerns. CORE finds itself caught in a tough spot because it does not want to divulge its strategy but needs to justify why pallet companies should join.
Many in the audience were stunned to discover that CORE has played no active role in any of the pending lawsuits against CHEP, including the Buckeye case. One attendee asked a particularly relevant question when he wanted to know what was CORE doing to achieve its goal if it was not involved in any litigation.
According to CORE, the two biggest benefits of membership is the information provided through legal briefs, conference calls, private Web site, etc. and the structure to unite independent recyclers against what CORE claims to be unfair business practices. CORE plans to conduct action projects, including legal defense funds and lobbying, as needed to further its cause. It will develop defensive marketing materials aimed at educating packaging users about the benefits of the white wood market. Don said, “This is not a head on collision with CHEP… we are just trying to level the playing field.”
CORE has opened its membership to recyclers, manufacturers and suppliers. Dues range from $600 to $1,200 per year. For more information, call CORE at 800/445-3864.
Taking Sides in Uncertain Times
People want to know the real CHEP. Has CHEP management truly turned over a new leaf? Is CHEP the corporate bully described by critics or the kindler, gentler face? Some of CHEP’s upper management has changed over the past couple of years. Most significantly, Victor Mendes took over as CEO of CHEP International last year after Bob Moore left the company. Under Mendes, relationships between recyclers and CHEP have improved. But many feel it still has long to go. This leads one to ask how much of the problems in the past can be tied to former management?
Given all the uncertainties surrounding CHEP, what should a pallet operation do? Is CHEP a viable option for new business? Will CORE really make an impact? How will the legal issues surrounding proprietary pallets, especially CHEP, impact the market?
Numerous companies have made a decent profit by manufacturing pallets or operating depots for CHEP. Thus, CHEP has been good for business in some cases. Each company must decide what makes sound business sense for its long-term success.
