According to an old adage, it only takes two bidding parties to make a competitive market. That is mainly true. The complete truth is that it only takes one bidding party with the perception of the second.
I talk with pallet companies constantly. As a market analyst for Pallet Profile Weekly, I call pallet companies every week to gather information about raw material prices, pallet prices and other market conditions. As part of our relationship with these pallet companies, the information they provide is kept in the strictest confidence; we never divulge information about individual companies.
The access I have to these pallet companies, and the information they provide, give me insights into regional markets that even the players in those markets may not realize.
One person whom I talk with regularly (we’ll call ‘xyz pallet’) always seems to be under the gun for pallet prices. He’s an astute businessman and runs a tight ship. His cost accounting is as good as anyone’s in the pallet business. He understands his costing structure like the back of his hand. Yet, he seems to constantly struggle with customers just to keep his pallet prices out of the red.
One day after talking with him, I was on the phone with someone from another pallet company in the same state. He had been asked to bid on some business. He sharpened his pencil and went in with a price he felt was very competitive but a price he could live with. He received the results the day I called. When I began to ask about pallet prices, he bristled and told me about the bid. He said, “Someone needs to tell ‘xyz pallet’ that he’s leaving at least 50 cents on the table!” In other words, ‘xyz pallet’ won the bid, and from this person’s point of view, the ‘xyz pallet’ bid was 50 cents too low.
I was shocked. ‘Xyz pallet’ had been victimized by his perceptions – perceptions that are based partly on truth. ‘Xyz’ had been hammered on by his customers so much and for so long that fear of competition drove his prices far below where they should be. In this situation, ‘xyz pallet’ had been victimized by the pallet price ‘boogeyman.’ Because of our commitment to keep information in the strictest confidence, I could not share this with ‘xyz pallet.’
Pallet suppliers have experienced gradually eroding margins due to stable costs and competitive markets over the past couple of years.
Pallet prices began edging higher over the summer. The price movement was not due to a shortage of wood, which is usually what drives pallet prices higher.
Most of the movement was blamed on fuel costs, but overall energy costs — along with skyrocketing steel costs that drove up nail prices – were also part of the equation. Some pallet suppliers had more success with fuel surcharges – often because they felt it was a path that would meet with the least resistance.
This leads me to one of the more intriguing calls I have received this year. It was from a pallet user. He was looking at all his costs in order to justify a price increase to his customer, and he wanted to compare pallet prices of August 2007 and August 2008. His pallet supplier subscribed to our market report, Pallet Profile Weekly, but he did not want to ask him. “If I ask him for that information, he is sure to raise my pallet price,” he told me.
Price fear goes both ways. This pallet user knew that costs were on the way up, and he basically admitted that a pallet price increase was overdue.
During our conversation, I told him that the typical cost of goods sold in the pallet industry was around 80%-85%. I could practically see him cringe on the other end of the phone. He essentially said the pallet industry cost structure was absurdly low. “As plagued by overcapacity as the paper industry is, and as competitive as our prices are, we never get close to those levels,” he told me.
The lackluster housing industry has caused great difficulty for the hardwood grade market. Both demand and prices for grade hardwood are depressed. Mills are running very limited capacity, which is very unusual for summer. The limited production means less downfall going into industrial hardwood markets. This has set the stage for what could be a very difficult winter. Pallet suppliers need to have their prices in line to protect them from potential price fallout this could cause.
Moving prices higher to maintain profitability can be very tough. One of the pitfalls to avoid is competition that is amplified fear.
(Editor’s Note:
