Latest CPC Interest in U.S. Could Launch New Episode

The CPC will need a strategic partner to have a significant North American presence. The obvious suitor this time is PalEx, soon to be merged with IFCO Systems. IFCO’s SMG division already is steeped in the CPC rental and retrieval business. Will IFCO take the plunge, or will it choose to focus its resources on the returnable plastic container business?

Speculation about possible expansion by the CPC into the U.S. has surfaced frequently this decade, so it is tempting to dismiss the latest episode as yet another sequel to The Boy Who Called, ‘Wolf.’

There are some important differences this time, however, that favor an actual U.S. launch. Foremost is the heightened interest of CPC pallet users. In the past, the idea of expanding into the U.S. seemed to draw the most attention from pallet industry members and CPC staff; pallet users, on the other hand, saw no payback in helping to subsidize such an expansion.

Things have changed. Mike Therrien, CPC’s new president, remarked at this year’s annual meeting that U.S. expansion would be a top priority. CPC is losing market share in Canada because it does not offer a “North-South” solution to Canadian subsidiaries with U.S.-based decision-makers.

“They…are questioning why they need to support two kinds of pallets in their distribution system,” he said. “The temptation is to convert to another one-pallet system unless the CPC can provide a competitive solution.”

Critics of U.S. expansion have perennially bashed the CPC’s repair problems, saying it should clean up its own house first.

This seems to have been accomplished. The 25% annual repair requirement of the enhanced program gradually is clearing up damage problems.

I have a hunch that the membership probably would be more likely now to accept an increase to the annual repair commitment. CPC consultant David Luton recently studied records of CPC pallets coming across distribution center docks. He recommended that members should repair another 15% annually in order to maintain the pool at a high level — an annual repair rate of about 40% of inventory.

Surprisingly, member audits account for only 5.5 million of an estimated 7.4 million CPC pallets. About 25% of CPC inventory is unaccounted for, according to David’s calculations. The ‘missing’ pallets are believed to be in the hands of members who under-report inventories or non-members. The concern is that these pallets are not being repaired, thereby increasing the repair burden on responsible CPC members.

In order to flush out pallets held by non-members, legitimate CPC members should not exchange CPC pallets with non-members. Some of the large grocery chains are very strong in this area, but more of them need to take this approach. Members who under-report inventories could be brought back into the fold by a more stringent auditing process. Conversion to a depot system would achieve the same objective.

The use of companion stringers for pallet repairs also has been a concern in the past for U.S. acceptance, but the phase-out of this practice is going extremely well. By year’s end, when such pallets must be taken out of circulation, only about 2% of the CPC inventory will have double stringers. With a 2×4 stringer specification also under review, CPC seems to be in the process of addressing some of the nagging damage and weight issues that previously have dampened the interest of potential participants.

The CPC strategic plan, which David helped to craft, suggests a number of paths for the organization to consider. These options were presented briefly at the annual meeting but were not fleshed out in detail. Words such as “alliance,” “depot system” and “privatized” seem to be strategically placed and likely will flavor the outcome.

The depot system, for those unfamiliar with it, is a form of third-party retrieval. It is a one-way system in which a pallet user ships his pallets and has them retrieved by the depot provider. Canadian distribution centers already have partly gone down this road, according to CPC executive director Belinda Junkin, with third-party pallet retrieval an accepted component of the grocery pallet environment.

Belinda told me recently that nothing has been decided about expanding into the U.S. My guess is that the role of U.S. alliance partner is there for PalEx to take if it wants it. However, it would depend on its attractiveness relative to other investment opportunities and in relation to its resources and competencies. For any member of the U.S. pallet industry to get involved, there would have to be some sort of exclusivity to make it worthwhile. We’re talking a full depot retrieval or rental system in the U.S. with the existing CPC pool either remaining in the enhanced program with a 40% repair commitment or also moving to a full depot system. Even though these options would increase the cost-per-trip to CPC members, some believe the CPC could maintain its mission of providing the lowest cost pallet option. Retrieval still would be cheaper than rental, and either option would help increase competitiveness in the grocery rental pallet market.

Ironically, I always thought one of the CPC’s main potential benefits to grocery pallet exchange would be its value as a “generic” prescriptive standard for pallet exchange and repair, a role it has played in Canada. In the U.S., it had the potential to help eliminate problems associated with low quality pallets and market confusion among pallet manufacturers and recyclers.