British Pallet Company Grows to Leading Role by Acquisitions

ROSYTH, Scotland — About 30 minutes driving time northeast of Edinburgh and across the River Forth toll bridge is the head office and a major plant location of Europe’s largest and fastest-growing pallet company, Scott Timber.

            Scott Timber’s growth rate has been “amazing,” according to press reports. It is also a story of entrepreneurial success.

            John Scott, the company’s managing director, inherited a tiny business that made fencing when his father died and John was only 18. He has developed it through a combination of organic growth and acquisitions into Europe’s largest pallet manufacturing company.

            The company with annual sales of less than $2 million only a decade ago is now enjoying yearly sales of about $80 million. In the process it has exploded from a single location to a dozen and has gained a reputation as an innovative, customer service-centered supplier.

            Scott Timber has been headquartered in Rosyth, Scotland for about five years. The decision to locate there was driven by the company’s use of Latvian lumber. The imported lumber arrives in bulk quantities at a port only a few hundred yards away, reducing inbound freight charges.

            Inside the company’s plant is a stock of pallet nails, prudently purchased before nail prices soared some 40% higher. They are a reminder that the company’s success has provided no shelter from the same forces currently plaguing the pallet industry on the other side of the Atlantic. Scott Timber finds itself dealing with substantial price increases for nails and lumber as well as regulations for export pallets.

British Petroleum Keys Growth

            No one in John’s family previously was in the pallet business. “It started when my parents purchased a house and with that house came a sawmill,” John said, describing the company’s origins.

            When his father learned he had a terminal illness, he urged his son to have a go at the business but believed it wouldn’t amount to much. He cautioned John not to let the business become an albatross around his neck. It turned out to be a problem John would not experience.

            His father’s business originally employed four workers making fencing material. “From there it progressed into pallets,” said John, now 33, “for no other reason than the fencing market was quiet, and we decided that pallets were the future.”

            In the early days of the company, when it had annual sales less than $200,000, John recalled how he tried to convince British Petroleum (BP) to give Scott Timber some of its pallet business. At the time, BP spent more than $700,000 a year on pallets, “so they basically looked at us and told us we were too small.”

            Determined to convince BP that Scott Timber could serve a customer that required a large volume of pallets, John persuaded some of his friends to take a day off from school to give the company a larger presence. “We had some nail guns and had them nailing into benches. They weren’t even making pallets,” he recalled, “but they were making an incredible racket. So when BP visited, they got the impression that we were doing a lot more than we actually were. They then gave us 25 percent of their business.”

            That doubled Scott’s sales and put the company into the black. “That was the first time we really started making money,” said John. Before taking on BP, the company raked in about $200,000 a year but carried losses of about $50,000. “We were on the brink of disaster,” said John.

            Picking up the BP account was a key point in Scott Timber’s development. Suddenly it was in a situation where it had to buy cut stock, schedule extra shifts, and operate seven days a week. The high profile account also brought greater responsibilities.

            “BP was quite a demanding customer, looking back on it,” said John. “They would call for one load, and then they might suddenly call for another one, so we were always pushing to make sure we had a load of pallets on the ground. We managed throughout that whole time to always have that extra load. What happened three or four times throughout the year, the other supplier let them down, and we were able to put in an extra load.  They never knew what we had in store, so we made them think we were coping with it just fine.”

            Like other pallet companies, rapid growth for the small business brought many challenges. “Every time they (BP) ordered anything extra, it nearly killed us,” John recalled.  “Every now and then the axle on the forklift truck would break, and we couldn’t afford to repair it, so we had to work without it. The things we did then you wouldn’t be allowed to do now from a health and safety point of view.”

            When Scott Timber landed the BP account, it had just four employees, two of them former classmates of John. “It was a great team, people who were committed, decent and hard working, and that’s what allowed us to get to the next stage,” he said.

            The following year, BP increased Scott Timber’s share of its pallet purchases from 25% to 50%, which in turn resulted in another 50% increase in annual sales for Scott Timber.

Acquisition Strategy

            As the company’s sales volume grew, the number of employees grew. “Really, over the last 15 years, there was only one year where we didn’t grow,” said John. The first seven years the company experienced growth prompted by increasing sales.

            In 1997, John decided to grow the company further through acquisitions. He acquired two other pallet companies in 1997 and 1998, Precision Pallet & Case and Joseph Jack Materials Handling.

            The first two acquisitions quickly put Scott Timber into a position where it was losing money as it struggled to develop a management structure to control costs and personnel. It was another significant turning point in Scott Timber’s evolution, John noted. Developing a management structure to oversee multi-site operations enabled the company to return to profitability as well as provide the organizational framework to make more acquisitions in the ensuing years.

            Scott Timber has continued to grow via acquisitions, and it has acquired one or more companies every year since then. “There has continued to be a lot of organic growth, also,” said John. “We’ve been winning a lot of contracts and national deals, but the main thrust of the growth has been through buying up our competitors.” In the past five years the company has grown from nearly $18 million in annual sales to $80 million.

Growth in Recycling

            With its steady acquisitions, the company now has 12 locations. Scott Timber is primarily a manufacturer of new pallets, but sales of recycled pallets have grown rapidly in recent years to about 15% of annual revenues.

            “We see that customer demand will increase for reconditioned pallets,” John observed. “And because it is environmentally friendly, there are tax benefits to using reconditioned pallets. The reconditioned pallet is exempt from the packaging waste tax. So we are looking to grow that side of the business, and that’s why our most recent acquisition was mainly a reconditioning company, and it gave us a foothold in the north of England.”

            Scott Timber has evolved from being a regional pallet supplier to being able to supply pallets nationwide throughout Great Britain. “It’s quite interesting,” John joked, “because over the years we would supply pallets from here to London, and we would tell our customers in London that there was no problem dealing with a company 500 miles away. But now that we are in London, we’re telling our customers you need to have a local supplier.”

            “We are now very well positioned around the whole country, whether it is from supply or manufacturing perspective,” John added. “I think we now have sufficient platforms to not only add new business but perhaps to consolidate parts of the business as well.”

            One challenge facing British pallet companies relative to other European countries is an overabundance of pallet specifications. Scott Timber probably produces over 2,500 different types of pallets, John estimated. While standardization makes sense, the fragmentation of sizes makes that a daunting task.

            However, things are gradually changing. For example, Scott Timber has helped several customers reduce the number of different pallets they required. “One company was using 45 different specifications, and we reduced it down to eight or nine,” said John. “There was a savings for them and an improvement of margin for us, so it was quite a good deal.”

Pallet Pricing

            Pallet prices have been depressed in recent years, even falling, according to John. Because of pricing pressures and the various approaches to pricing by the different businesses acquired by Scott Timber, the company undertook a detailed analysis of product pricing. “It is a huge exercise because there are so many specifications,” he said. The analysis showed the company was charging too much in some instances and not pricing pallets high enough in others.

            “We are trying to standardize our pricing and go into the marketplace with a consisten pricing model,” said John. “We are strong in that we don’t always cave in on price. We are going out and walk away from business if necessary. If someone wants to do it cheaper, let them.”

            In dealing with cut-throat pricing from competitors, John stressed the importance of understanding Scott Timber’s cost structure. “We know within half a percent what it costs to produce,” he said, “so we will walk away from business rather than run on anyway. If someone wants to do it cheaper, then let them.”

            It is critical to communicate to customers when the cost of materials increases and make them aware of the added costs, John noted. “I think the big thing is that for the last six or seven years, pallet pricing has been about price reduction. Now the costs for everything are going up, and pallet prices are going up. Customers who have been used to reduction, reduction, reduction every time are now faced with year on year increases. It is really difficult, and it is a challenge for pallet manufacturers in the UK to communicate that.”

            “We are coping with it and our customers are responding reasonably,” he added.

            Scott Timber does not do any business with CHEP — new or recycled – except for returning incidental stray CHEP rental pallets that are recovered in recycling operations. One of the companies acquired by Scott Timber once negotiated an arrangement with CHEP under which the pallet pooling company agreed to pay £1 (about $1.79 U.S.) to charity for each returned pallet, but John was not sure if the agreement was still in effect.

            British companies that use pallets typically are large, high profile businesses, John noted, such as BP or ICI. “Blue chip companies are quite sophisticated in the way that they buy products, and they are asking their suppliers to come on board,” John explained. The challenges of complying with procurement policies of large businesses have “…pushed some smaller pallet companies over the edge to the point where they’ve closed the doors and gone into liquidation, or they just continue to lose money.”

            “There are still a lot of pallet companies losing money,” John said, “and it’s because they don’t have a handle on what it costs to produce. They don’t know what it means when a customer says he’ll take 10 loads this week instead of three because the reality of it is that you then have to go out and buy more timber.” When you dip into the lumber market, the material may be more expensive, he noted.

            John feels that one of the strengths of Scott Timber is strong management analysis. “For every part of our business, at every site, we have a weekly production cost,” he explained. “We know on a daily basis what every site is producing, how many men it took to produce it, how many loads went out that day, what the average price of timber coming through the gate is, and so on. With the amount of pallets we produce – 200,000 odd a week — we have to have that detail. The business has become so huge you just couldn’t do it otherwise.”
            As the business grows, incremental cost reductions can translate into big savings. For example, at annual sales of about $80 million, a 1% savings in costs can add about $900,000 in profit. “That 1% can be the difference between somebody putting a full load on a vehicle versus somebody putting on two-thirds of a load,” John said.

Nailing Equipment

            As the company has grown, so has John’s role. While he was deeply immersed in production when the company was young, now his role is one of administrative overview.

            “My background was production, and I feel that production is one of my strengths,” John said. When the company put in a new piece of equipment, he would run it and work alongside the other men. “I understand production and can motivate men. I think that’s where I perform the best, but I’m becoming more like an accountant where I have to number crunch and sit and look at figures every day.”

            Based on his experience in operations and production, John prefers machinery and equipment that is simple and not overly technical. “It’s easy to fix, and it’s easy to see what’s going wrong,” he explained.

            As a result of Scott Timber’s acquisitions, the company has many different types of automated pallet assembly equipment, including Viking and Cape nailing machines. The acquisition of Hammond Pallets added a Corali nailing system.

            The Corali system, made by an Italian machinery manufacturer, “is the most sophisticated line we’ve got,” John said. “It’s absolutely the best I’ve ever seen, but there is a lot to it. When it is running, it is the best thing we’ve ever had. When it’s down, there are a lot of engineers scratching their heads. That’s a new experience for us.”

            When Hammond was acquired, the Corali line was operating only about 40% of the time. Scott Timber devoted resources to learn about the machinery, train staff and maintain the Corali line. “In a very short time we’ve got it so that it is running two shifts,” John said. “It has never done that.” As a result, the Hammond unit has returned to profitability in only three months.

            Scott Timber has in-house maintenance engineers at its main sites. It also recently established a mobile engineer position; the traveling engineer will perform planned maintenance on all major pieces of equipment. “It’s an investment on the front end to ensure that things are running longer,” John said. “If we know that something is wearing, we want to replace it before it stops the line.”

            Scott Timber works closely with several UK sawmills. It buys mainly cut stock from Baltic countries. The company also buys some rough lumber that is cut to length for specialty custom sizes; John sees an opportunity to improve production in the lumber remanufacturing operations.

Health, Safety Program

            Scott Timber puts a strong emphasis on worker health and safety. Before touring the plant, I was required to put on some protective gear. Worker health and safety are increasingly regulated, John has found.

            “Whatever we do here (in terms of health and safety) we have to do times 12,” he said, referring to Scott Timber’s locations. “I think we’re up to 550 to 600 people within the company, so it’s quite a big job just managing that.”

            “The good thing is that while pallet companies have a better understanding of health and safety, so do our customers,” John added. “They want a supplier they can come and visit and feel comfortable that the company is acting responsibly, and there are more and more customer audits.” Interest by customers in supplier health and safety practices is new, he noted.

            Work procedures are documented and recorded at every site. “I think we have a procedure for everything, even looking out the window,” John joked.

            “It’s tough for the owner or manager,” he said seriously, “but at the end of the day, no one wants to have an accident where someone gets hurt, especially because of bad management or lack of investment.”

Organizing for Growth

            John’s schedule is consistently busy with some very active peaks. He travels frequently, about three days out of the week. He jokes about being on a first name basis with Easyjet, a regional European airline.

            Actually, he has cut back on business travel since marrying a year ago. “I’ve spent the last six weeks here, which is terrific because it allows me to do more analysis and do more of the things that will provide real benefits.”

            John hopes to reduce his need to travel and to position the company for sustained growth by assembling a strong management team. “I might think that I can do it better, but I can’t be doing everything, and I know that we’ve got good quality people who are now running their own departments and sites,” he observed. The managers are “bringing efficiencies within the company that I didn’t think were achievable.”

            “Running a pallet company is a good training ground for anyone doing any type of manufacturing,” John said. “You have high volume, labor intensive, short lead times, extremely price sensitive — and these are things you have to be acutely aware of in all parts of your business.” With the procedures and management controls that Scott Timber has in place, John feels the company could add products in the future.

            The company’s shares are held between John and his brother, Norman. A recent key hire has been John and Norman’s elder sister, Karen Hunter, who was appointed as national sales and marketing manager.  She recently completed an MBA to complement her management experience in another industry.

            “Up until a year ago we didn’t really have a sales staff,” John explained. “Customers came to us. We chased business to a degree with our existing management staff, but no one was defined as a sales person.”

            While creating new sales is important, John sees a key component of Karen’s role as maintaining relationships with existing customers. “It is about customer care, making sure we are doing what they are expecting, so we are now thinking about how to ensure that the lines of communication are open both ways,” he said.

            One area where communication has been a necessity has been in the confusing realm of heat-treating requirements. Scott Timber takes a multi-faceted approach to meeting the increasing demand for heat-treated pallets; it buys heat-treated lumber for export pallets and also has a dry kiln to heat-treat pallets made of green lumber.

            “I think the concern is that there is going to be a shortfall in heat-treating capacity in the U.K. next year because there aren’t enough kilns,” said John. “I’m not basing that on anything other than that’s what other people are saying.”

            Scott Timber is organized with individual plant managers and a group production manager. The company recently hired a regional director to oversee five plants; if the approach is successful, more regional director positions may be established.

‘Plenty of Opportunities’

            “We are still excited about the business,” John remarked. “There are still plenty of opportunities within the marketplace. We are in a fortunate position. We’ve managed to take over a number of businesses, often loss-making ones, and, to date, converted them into profitable ones.”

            Because Scott Timber has grown so quickly, it has become the target of substantial  speculation. “They say, ‘Look at that company; it is growing too fast,’ instead of saying, ‘Look at what they are doing that is different,’ ” John said. “They say it can’t last, but we’ve been doing it for a number of years.”

            Several other pallet companies with annual sales of about $18-20 million when Scott Timber was at just under $2 million have since declined. “These were companies that had the same opportunities that we did,” said John. “The majority of business is in England, but we’ve grown and developed from Scotland, so it is quite strange. Business is good in spite of a tough market.”

            “I think it will be interesting to see how the next five years go,” said John, “because I definitely want to be able to take more time out from the business and let people do their jobs and let them run the company. That allows me more time to come up with new ideas, look at other acquisitions, products — who knows.”

            “We are definitely committed to the business long term,” said John. “I’m 33, my brother is 35, so there are a lot of years to develop it more. The great thing is we have such terrific customers. They are quality companies, and we have good relationships with them. There may be opportunities there where we haven’t even scratched the surface. We won’t rule out anything to do with a pallet.”