In April Wal-Mart sent its pallet pooling suppliers a letter that dramatically changed the operating environment surrounding Wal-Mart’s pallet pooling practices. The Pallet Profile Weekly (April 18 and 25) and Recycle Record (April) were the first publications to provide an analytic news coverage of this dramatic pallet development. Unfortunately our May magazine was already at the printer so we had to delay our Pallet Enterprise coverage to my June “Letter from Ed.”
Wal-Mart has been a major thrust behind helping CHEP to expand its pallet rental program. The retail giant has encouraged its suppliers to ship on CHEP. While white wood pallets have continued to flow through its distribution system, Wal-Mart has worked in close conjunction with CHEP, which has both supplied pallets to Wal-Mart vendors and provided services to Wal-Mart’s Total Pallet Management (TPM) program.
Wal-Mart’s new pallet initiative is directed toward providers of pooled pallets within its supply chain. Although it is not limited to CHEP, certainly CHEP is the biggest part of this service at this time.
While Wal-Mart appears to plan on continuing to work with CHEP pallets in its distribution system, it also plans to make some significant changes in the arrangements. First, Wal-Mart will charge pallet poolers $0.43 a pallet for managing and sorting. Since the company handles tens of millions of pallets every year through its doors, this will be a significant cost to CHEP. According to the company this fee reflects what it believes to be the weighted cost of pallet sortation across its network.
Poolers will need to provide sufficient trailers to load their pallets and must provide prompt removal of loaded pallet trailers or else face fines and other sanctions. To keep poolers from using Wal-Mart’s facilities as free depots, the retail company will charge the owner of pooled pallets a lot space fee of $50 per day per trailer for all loaded trailers the owner fails to remove within three days of notification.
Other restrictions include possible fees if empty pallet inventories become excessive. Wal-Mart indicates that it will not be responsible for any shrinkage or damage to pallets that occurs in the ordinary course. The retail giant also stated that it will not be responsible for the quantity of pooled pallets in its inventory at any location. All these new conditions went into effect on April 4, 2008.
Naturally, CHEP tried to downplay the significance of these developments when the financial market reacted negatively to the news. Brambles, the parent company of CHEP, lost $1.4 billion (US) in market value as its stock dropped over night; its market capitalization dropped as much as 10% on one day.
The major reason that the market reacted the way it did was reported to be the changes in Wal-Mart’s TPM program. Wal-Mart has decided to shift its TPM business to other suppliers besides CHEP. This includes primarily IFCO Systems, Rehrig Penn Logistics, and ProPak. These companies stand to benefit while CHEP will lose some of its ability to influence local markets because it no longer has large numbers of white pallets to use as a bargaining chip.
Many independent recyclers may not be happy with the new arrangements because cores coming from Wal-Mart are likely to go to competitors that could use them to dominate and damage some local markets.
CHEP countered its sudden stock market drop by stating that its core business of renting pallets to product manufacturers is not directly impacted by TPM. While this is true, the real issues are the new logistics costs that Wal-Mart is levying on CHEP and other pallet poolers. These new policies could influence other major retailers, which would impact the business model of rental pallets compared to white wood.
No matter how you slice it, the new ground rules will cost CHEP money in Wal-Mart’s distribution system. Since other retailers are not likely to stay on the sidelines and let a big competitor share alone in this cost sharing benefit, the dollar cost to CHEP could be much greater than just the fees to be levied by Wal-Mart.
CHEP claimed that it will offset new logistics costs by charging Wal-Mart for the large number of pallets that it uses rent-free once the original load has been removed. This issue has been raised before; it remains highly questionable if CHEP has the power and clout to make this happen. Plus, Wal-Mart’s new rules provide the retailer justification to downstream pallets if inventory levels as the distribution centers reach a certain point.
Of course, CHEP may try to pass cost increases through in the form of higher pallet rental fees, but that could have a very negative impact its sales growth. Wal-Mart’s new policy shifts logistics costs back to pallet poolers. In the long run, this could help level the playing field between white wood and rental pallets.
Wal-Mart’s mandates create new challenges for pooled pallets. To read more analysis on this issue and keep up with emerging developments, call us at 800/805-0263 to subscribe to the Pallet Profile Weekly or Recycle Records. These valuable industry reports keep readers up-to-date on these and other important industry issues
