Pallet pools have found success in many countries around the world. Successful pallet rental models in particular have allowed companies such as CHEP, PECO and iGPS (version 2) to prosper in the United States, while several other operations run profitable businesses in other parts of the world. Pooling businesses don’t always work out, however. Just ask Bank of America about rolling the dice and losing the millions it invested in iGPS (version 1) hype, or investors behind other failed pooling efforts such as Axios Mobile Assets and several others.
Axios Mobile Growth Stalls as Cash Runs Out
Building a pallet pool can be a money hungry business. Less than a year ago, Axios Mobile still seemed like a niche pool provider that might have a bright future in front of it. The progressive young Canadian company had developed a structural thermoset composite pallet, including RFID tracking.
Axios found traction with a dominant U.S. retailer for the delivery of eggs from its egg suppliers, starting out small. In the wake of initial success, the retailer approved it for use with egg producers in other parts of the country. By October 2016, Axios had finished its rollout in the Midwest and Northeast, and was expanding into the Southeast and South Central regions. It had its own trucking operation, and boasted two regional pallet wash facilities – with three more planned. It served four of the five largest U.S. egg producers. It was expanding quickly, and required funding for continued growth.
According to its 3rd Quarter 2016 report, the company had received a $3 million loan in the summer of 2016, plus another $2 million from Export Development Canada in September to help finance increased pallet production capacity and new pallet wash depots. In its interim report in November, Axios warned that it would need more money to keep afloat.
The company was unable to raise additional funds in the second half of 2016, however. In February 2017, it stopped all operations except for empty pallet retrieval. Having a blue-chip retail customer and a high velocity product category such as eggs was not enough to entice investors to take a chance on the red ink laden pooler.
The Axios story speaks to the challenge of finding investors to support the rapid growth of a pool, particularly one that is already losing money. In hindsight, Axios probably would have benefited from attempting to establish the basis for a profitable model in one or two regions that would be more compelling to investors rather than going national right away. It also might have been wise to outsource some of the many activities including pallet production, RFID development, transportation and depot operation which it chose to undertake itself. While doing it yourself can make sense for a large-scale operation, it seems Axios was getting too far ahead of itself.
iGPS Version 1: A $600 Million Cautionary Tale
Investors are enticed by businesses with the potential to disrupt markets, and in its day, the lighter, high tech (RFID) and sexy iGPS pallet was no exception. The iGPS pallet did not absorb moisture and was said to be more compatible with automated systems. And thanks to superior durability and RFID tracking which would supposedly eliminate pallet loss, it was believed that Version 1 could offer its more attractive plastic pallet to users for similar pricing to the cheaper CHEP wood pallet and still remain profitable. That, in a nutshell, was the disruptive value proposition.
Some of the assumptions behind the Version 1 model turned out to be accurate. For example, the pitch to investors that pallet users would embrace a plastic pallet offered for the same price as wood did turn out to be true. Major contract wins came quickly and the company grew rapidly – arguably too rapidly to successfully manage.
Some of the other assumptions didn’t hold up to scrutiny. In court documents, the company revealed that it had lost 1.5 million of its 10 million pallet pool in spite of the RFID tags and control system that it said would keep loss to a minimum. And in spite of pallet durability claims, it was revealed that damage was more common than anticipated.
As Chaille Brindley wrote in 2013: “The plastic pallet was supposed to be more cost effective because it would last years without needing to be repaired. But the company revealed that it experienced higher damage rates than anticipated and struggled to get replacement pallets after a legal battle ensued with its pallet manufacturing partner, Schoeller Arca Systems (SAS). Some plastic pallet experts familiar with the iGPS design told me that it was never designed well enough to stand up to the warranty and claims made by iGPS and SAS.”
At the end of the day, the original iGPS business model failed for reasons listed above, not to mention other questionable management decisions. Faulty assumptions led to much higher costs than projected, and its rapid growth resulted in the need for further investment that became increasingly less attractive. Looking back, it is hard to believe that investors would have put up that much money for an untried pallet and an unproven business model.
Making Sense of the Sizzle
For both Axios, with its thermoset composite pallet, and iGPS Version 1 with its plastic pallet, the combination of high tech pallets and RFID capabilities offered the potential to be game changers. Both propositions initially enticed investors, but neither one worked out.
My advice to potential pallet pool investors and pallet customers alike is to proceed with caution when it comes to claims about pallet performance, as well as the ability of a pallet rental company’s business model to provide a long-term solution. Based on the narrative above, I would look for field results as well as lab reports when it comes to pallet performance and endurance.
Identifying a successful business model is a little more challenging. Because pooling models can have a large minimum efficient scale. In some respects investment does involve a leap of faith as the pooling organization grows. Having said that, pooling companies are better served to try to control growth and traffic lanes, as PECO did 20 years ago by targeting private label goods. A good pool operator will look for ways to achieve a smaller minimum efficient scale in order to achieve profitability earlier, and to create leverage with potential investors.
It is one thing to offer an alternative pallet at the price of wood in the short term. It can be quite another to keep on serving those customers when the money and the pallets are gone.
