What?s In Store for Big Blue?

As part of CHEP’s global media tour, Chaille Brindley, the Pallet Enterprise’s assistant publisher, sat down for an interview with David Mezzanotte, President of CHEP USA. They explored trends in the industry, CHEP’s new services and how the rental giant interfaces with the pallet and lumber industries.

            CHEP operates the largest pallet and container pool in the world with approximately 250 million pallets and containers. The pallet pooling and leasing giant looks to be on the forefront of technology and trends. By its mere size, what CHEP does has a ripple effect within the industry as a whole. Anyone doing business with, or affected by CHEP, should find this exclusive interview quite revealing.

Enterprise: What will it take for CHEP to really rollout the use of plastic pallets in a big way?

Mezzanotte: One is that through engineering and innovation the cost of the plastic pallet needs to continue to come down. As its cost comes down, then the premium that we need to charge for it can come down as well…The other is it needs to continue to be exposed to all the potential users in the supply chain so that the benefits that we’ve identified can be validated by those users. Plastic tends to be more hygienic than wood. It’s easier to wash, and there aren’t splinters. Would this pallet make more sense to be used in a food processing facility where everything has to be food grade? If their answer to that is ‘Yes,’ then we’re ready to supply a plastic pallet for those applications. Everybody in the industry needs to be aware of plastic’s availability and validate the benefits.”

Enterprise: Is there a price point you’re looking at where plastic makes sense for CHEP? It cost you about $20.00 for wood pallets, right?

Mezzanotte: It’s in that ballpark today for a wooden pallet, but we don’t have a specific price point for plastic pallets. When I said the price needs to continue to come down, it’s simply so that that premium can shrink relative to wood. Obviously if we could get a plastic pallet of the quality that you’ve seen today at the price of a wooden pallet, we’d be buying them tomorrow. But think about the simple economics of the whole thing.

            Plastic resin costs 40 to 50 cents a pound. The pallet weighs about 50 pounds. You’ve got $25.00 worth of resin in a pile on the floor before you even build a pallet. Your materials cost $25.00. The plastic pallet, as long as it’s engineered to the specifications that are identical to the wooden pallet, is going to cost more.

Enterprise: Right now the costs for lumber and nails are facing historic highs. How is CHEP handling these costs? Is it passing them along to its customers?

Mezzanotte: You know we have a pool of 70 million pallets in the USA today. The cost of wood on a new pallet doesn’t impact those. Our rental charges don’t change significantly based on the cost of wood. We do have some lumber surcharges to insulate us against dramatic fluctuations, but the normal price fluctuations in the marketplace are not reflected in our pricing.

            CHEP has surcharges in our customer contracts that can get triggered whenever the prices get well outside normal ranges. The same is true with fuel. Anybody in the transportation business has these built into their pricing. If the price of diesel fuel went to $3.00/gallon tomorrow, then the price of every commodity in America will go up because things move around on trucks or on trains…The fluctuation in the cost of nails is not reflected at all in our pricing.

Enterprise: CHEP USA has begun sourcing much of its lumber from countries outside of North America. How do you see CHEP’s lumber sourcing changing over the next few years?

Mezzanotte: I have to qualify this by saying, ‘I’m certainly not an expert on the lumber market or lumber pricing.’ But I will tell you that the approach of CHEP is to utilize the best available material at the lowest possible price. And to the extent that it’s available overseas verses domestically, then that’s how we’ll source it.

Enterprise: Would CHEP say that it has an official endorsement from Wal-Mart or is just one of the approved suppliers?

Mezzanotte: You’d be better off to get Wal-Mart to comment on whether or not we have a different status versus other suppliers. I certainly don’t view it that way. Here’s my sense. We have an excellent relationship with Wal-Mart. It goes back several years. We provide them real and significant value with our total pallet management service, and Wal-Mart recognizes that. As a result, Wal-Mart does advocate for CHEP, but not to the exclusion of all the other alternatives. And I don’t know that we’d want it any other way. I mean we’re in business to compete, and we do that everyday. We don’t need a particular retailer to impose something like that.

Enterprise: What sort of penetration does CHEP have into the Fast Moving Consumer Goods (FMCG) sector, especially Wal-Mart?

Mezzanotte: I can’t really comment on specific levels of penetration by customer. That sort of information is protected by the confidentiality agreement that we have with those customers. I will give you an overall average for the FMCG market. CHEP believes that its penetration into the FMCG channel is in the range of 30-40%.

Enterprise: FMCG move through the supply chain fairly quickly allowing CHEP to turns its pallets on a regular basis. As CHEP goes outside of the FMCG market, it will face price pressures because those assets will not turn as quickly. What do you see happening as CHEP gets outside the FMCG channel? Or is CHEP planning on keeping its focus pretty much on FMCG for the foreseeable future?

Mezzanotte: I think you captured the situation very accurately. CHEP either won’t go into those markets. Or CHEP will have to price according to its cost. And that’s exactly the way CHEP has viewed it. Throughout CHEP’s history in the US, the company has focused almost exclusively on FMCG, but that’s simply because the opportunity was biggest there. FMCG is so big that it consumed all of CHEP’s resources. It still consumes almost all of CHEP’s resources. In the last couple of years, CHEP has started to look at other channels. CHEP has looked at virtually everything from automotive after-market to office supplies, pet food, electronics and even paper.     The only one that we’ve really aggressively moved to penetrate outside FMCG is the home improvement channel due to CHEP’s relationship with Home Depot. Home improvement is the next major growth channel for CHEP because it appears to have characteristics that are somewhat similar to FMCG. CHEP has a good partner in Home Depot.

Enterprise: Do you see CHEP’s growth over the next two years as being primarily organic, new customers or new markets?

Mezzanotte: If you look over the next two years, most of CHEP’s growth will be organic. With 30 to 40% penetration in FMCG, you can see that CHEP has plenty of room to grow. Of course, CHEP’s relationship with The Home Depot is just a couple of years old; CHEP has barely penetrated into the home improvement channel. If you take a two year time horizon, that’s were the bulk of CHEP’s growth will be. Looking beyond that, obviously there are other market channels that interest CHEP.

Enterprise: Which ones would you say mostly fit your business model, outside FMCG and home improvement? Where might CHEP concentrate its focus next?

Mezzanotte: Well, I’ll let you pick them. Here are the characteristics they must have. They must be fairly concentrated with a relatively small number of highly concentrated retail outlets. Think about the big box guys. The big box retail model works well in CHEP’s pooling system. Highly fragmented markets, such as convenience stores, are not appealing to CHEP.

Enterprise: A major problem for CHEP’s system is Non-Participating Distributors (NPDs). What is the key to converting more NPDs to CHEP’s program? Describe CHEP’s plan to deal with this issue.

Mezzanotte: CHEP has been executing its plan to convert NPDs to Participating Distributors (PDs) for almost two years now. Last year, CHEP converted well over 1,000 NPDs to PDs. CHEP has an entire sales team focused on nothing but that. They call on these people everyday.

            Many companies are NPD’s because they just didn’t know about the CHEP program. CHEP has had terrific results over the last year or so converting these companies because our value proposition is not focused on any one place in the value chain. There are benefits for everybody.

            One of the other things that CHEP has done is enlist the support of product manufacturers to help convert NPDs. Now why would they want to do that? Well, because they’re paying a surcharge to ship to NPDs. It’s not altruism; there’s a financial incentive for them. NPDs add cost to the entire system….So, we’ve teamed in many cases with product manufacturers… And that’s what’s driven the kind of conversion result we recently have experienced.

Enterprise: What percentage of the pallets that CHEP rents out would you say are going to NPD’s?

Mezzanotte: Less than 5%

Enterprise: One negative from a financial perspective about renting pallets is that many localities charge sales taxes. CHEP has been working to change these laws to be more favorable toward reusable packaging. What progress has CHEP made on this issue?

Mezzanotte: While I can’t give exact numbers, CHEP continues to work toward exempting reusable packaging from sales taxes. CHEP is always making progress. But it’s a step at a time process. Either a locality or a particular state will exempt some or all of our products from state sales taxes, and we firmly believe that they should be because they’re a product of interstate commerce.

Enterprise: How do you believe the increase of international commerce will impact your business and the U.S. pallet industry overall?

Mezzanotte: You’re going to see more international trade because more and more goods for the US are supplied from outside the country everyday. CHEP is uniquely positioned to have a perspective on this because we operate in 42 countries. CHEP is one of the few companies, maybe the only company, which can actually support international movements.

            Primarily in the past, goods imported into the U.S. have not been palletized. This is an example of the classic problem of people only looking at their part of the supply chain. If you’re an Asian producer of DVDs, you want to get as many DVDs in a sea container as possible. You don’t want to pay to ship air so you don’t want to have twenty pallets in a container. Now, what happens when the container gets to the dock in San Francisco? Some longshoreman, who makes $35 per hour, has to unload the container onto pallets, which might take him six to eight hours. You’ve got the labor cost associated with unloading the container and the cost of a pallet. Costs that have now entered the supply chain that the manufacturer never accounted for. He was only looking at what it cost him to get the product to the port in San Francisco.

            The goods move palletized downstream primarily to a distribution center and then to a store. The obvious question is, ‘Why wouldn’t you palletize the load in China or wherever it came from.’ You would effectively eliminate the labor cost to unload it. More and more customers are beginning to look at that because we’ve helped them look at the whole supply chain cost. And they say, ‘Well, labor is less in Asia and materials are less; a pallet can cost less over there too. Why don’t we procure one there?’ Some are just beginning to do that. I think you’re going to see more and more loads coming in palletized simply for that reason.

Enterprise: So, you don’t think that the space savings caused by not having loads palletized outweighs the higher labor and materials here in the United States?

Mezzanotte: I don’t. And the math on that is relatively easy to calculate. You’re talking about only a few percent of the total container volume taken by a pallet. And the labor and materials cost on the other end is huge.

Enterprise: Is CHEP looking to start an operation in China to supply customers wanting to ship on CHEP pallets to North America?

Mezzanotte: We already have operations there. We have CHEP Asia-Pacific with operations in at least six far Eastern countries. CHEP has been doing some importing into the U.S. from those countries for sometime. It just hasn’t been a huge volume. And I think that volume is going to pick up.

Enterprise: Would CHEP have a hard time maintaining quality control if it had to source pallets for the U.S. market from overseas? How would CHEP maintain the proper distribution of pallets in its global pool?

Mezzanotte: CHEP won’t import any pallet into its U.S. pool that doesn’t meet the U.S. pallet specifications. CHEP’s specifications are pretty clear. They haven’t varied.

            CHEP wouldn’t ship lumber from here to make pallets in Asia. Instead, CHEP would source lumber from over there or others parts of the world.

            To answer your second question, CHEP pallets that are used to underpin loads coming into the U.S. will subsequently become part of the U.S. pool. If the CHEP pool wasn’t growing in the United States then this could become an issue. We’re not going to fill a boat with CHEP pallets and send them abroad to fill demand. These pallets would have to be used in the US. And of course, as long as our business is growing sufficiently to absorb that level of imports, we’re fine. Instead of sourcing and buying a pallet in the U.S., we offset that with an import from South America, Asia Pacific or Europe. It’s just a one for one exchange.”

Enterprise: CHEP recently has made drastic cutbacks in its new pallet purchases. Will this change any time soon? How will CHEP’s new pallet purchases change over the next year?

Mezzanotte: A couple of things are going on here. One is that Victor Mendes, CHEP’s CEO, has put an emphasis on assets productivity. That’s true across the board at CHEP. Every region, every country is getting more efficient at utilizing the assets in its pool. And the U.S. is no different in that respect. That means CHEP won’t have to buy proportionately as many pallets as the company has bought in the past.

            Now, having said all that, keep in mind that as a business, CHEP grows every year. If CHEP grows on average 10% per year, when the pool has 50 million pallets, it will add five million pallets in a year. When the pool has 70 million pallets, it will grow by seven million pallets. CHEP’s sheer size means that over time its pallet purchases will grow as the size of the pool grows.

Enterprise: Retired pallets…What kind of numbers are we talking about?

Mezzanotte: We have a consistent level of provisioning for scrap out of our pool. It’s less than one percent of the asset population. The need to replace scrap pallets will be with us forever. That hasn’t changed.

Enterprise: The European pool has had some recent price increases as CHEP has tried to develop channel pricing. Will the U.S. pool face any similar type of situation in the near future? Or is the only real price increase in the U.S. going to come as CHEP launches premium services?

Mezzanotte: You’re really talking about two different things. What CHEP Europe is going through is similar to what CHEP USA went through a couple of years ago. The process is basically making sure that prices are consistent with the cost to serve for that particular customer or supply chain. If I’m renting a pallet to you and you’re going to keep it for two years, then you will have to pay more than if you’re just going to keep it for thirty days.

            The premium service offer is a different issue. Plastic pallets or RFID-enabled pallets –those would be examples of premium service offerings.

A Closer Look at CHEP’s RFID Program and New HT Service

            Deb Spicer, CHEP’s corporate spokesperson, answers key questions on CHEP’s radio frequency identification (RFID) program. CHEP has rolled out a program called PLUS ID to help customers be ready for tagging pallets with RFID. CHEP also plans to provide heat treated pallets for customers wanting to ship internationally on CHEP pallets. CHEP is currently looking for suppliers willing to provide heat treating services. Deb’s responses are in blue.

1.) What is PLUS ID?

            CHEP is providing a value added PLUS service to our existing customers, as well as prospective customers. PLUS ID, which includes our CHEP Standard pooling solution combined with the added value of a 100% read-capable tag, will help our customers meet market requirements and help them take additional cost out of their supply chain.

2.) If the data from RFID tracking is owned by whoever scans it, will the various parties involved in the process share data?

            The real benefits of RFID (EPC) accrue when trading partners are collaborating and sharing data. A good example is where retailers share real time data with manufacturers for more efficient inventory management.

How will this process work?

            The tag on the pallet will carry an electronic product code or basically, a license plate for the pallet. Similarly, the case tag will also be an electronic product code. The user can associate the unique electronic product codes with information stored on their database to managing their business. Data will be shared through a central repository which is possibly EPCIS (EPC information service).

For example, will P&G share scan data with CHEP and Target? Is there any kind of RFID-related data that CHEP expects will not be shared among the parties involved in shipping a load?

            Benefits will only accrue through the sharing of data, so we see sharing across the supply chain. Information captured, could have different uses for different supply chain partners.

All of this data is shared through the EPCglobal system… right?

            Yes, this is one of the possible data sharing options. The other option could be trading partners sharing data between themselves. How does that work? This process is still being finalized by EPCglobal through various working groups with representation of supply chain participants.

Will CHEP share data with other pallet/packaging companies if they are involved in the supply chain on a particular product line?

            Yes, we will share pallet data with our customers consistent with our customers’ requirements.

3.) When talking about RFID, Victor Mendes, CHEP’s CEO, said that this is not “plug and play technology.” What is the difference between what CHEP is offering and just putting a tag on a pallet (let’s assume that the tag will work and give the desired read accuracy)?

            Not just any tag will provide 100% read capability, particularly within the dramatic changes of the supply chain environment (it is much easier to get a 100% read in a laboratory environment.). We invested a great deal to ensure the tag is placed in the best possible location for 100% read-capability, the performance is maximized given physical constraints and our customers realize the benefits of our CHEP Standard pooled pallet service offer. It is more than just a tag on a pallet. PLUS ID includes the pallet pooling services benefits where customers do not need to invest in added processes or other expenses.

4.) According to CHEP, it has patents/patents pending on its RFID technology. What exactly does CHEP have patents on?

            We have a patent pending on the 90 degree tag application. How will this impact others looking to meet the technology requirements required by major retailers? It is not on the technology, the patent pending is on the application of an RFID tag to a CHEP pallet.

5.)Why did CHEP decide to go to the expense to develop its own Innovation Center when it could have simply outsourced the testing part of its R&D efforts to others, such as the VA Tech Pallet Lab?

            As a global company, we see the Innovation Center as a strategic investment to enhance our customer satisfaction. Our Innovation Center is designed to be much more than a testing lab. In addition to testing, we do joint development with our key customers and suppliers. We use the facility as a design space and validation center for selective product and technology initiatives to improve existing and new pooling products, as well as testing customers’ products. Additionally, the Innovation Center is used for key customer meetings to address their pallet and container supply chain needs.

6.) Initially, how many pallets does CHEP plan to put tags on for its Plus RFID program?

            We will tag pallets based on customer demand.

Will it put tags on old or new pallets?

            Tags initially will be installed on pooled pallets at our service centers.

7.) How does CHEP currently plan to treat pallets for the phytosanitary issue?

            We also offer a value added pallet service for Intercontinental transfers. We call this PLUS PS. PLUS PS provides our customers with pallets that meet IPPC phytosanitary standards.

Is CHEP in the process of having possible suppliers bid or has CHEP already decided who it will work with?

            We have a list of certified suppliers who are ready to provide PLUS PS pallets, and we will be looking for additional high quality companies as demand increases.

If somebody wanted to supply CHEP with treatment services, what should they do to be considered?

            Contact any of our Plant Operations Directors at 1-800-243-7872.

Criteria?

            Meet CHEP stringent supplier standards, as well as IPPC certification requirements.