The idea for this month’s column came from ideas that culminated from about four or five phone conversations.
One of the business buzz-words from the late 1990s that is still in play today is ‘lean.’ Businesses were trimming fat from their budget in everyway possible; pallet users/customers that were looking to trim fat turned to the pallet industry, looking for concessions.
The pallet industry already knew lean. In fact, the pallet industry already knew lean all too well. Financial studies of pallet industry over the past 30 years show that the typical cost of goods sold is somewhere around 85% and trending in the wrong direction.
Knowing that the problem of razor-thin profit margins exists simply is not enough. Anyone who has been in the pallet industry any length of time is keenly aware of how thin margins can be.
First Call: Cost Creep
I was on the phone with one of my better market contacts. He began to detail what he called “cost creep.” It was a fitting term. You probably already know what he had to say. Diesel prices and delivery costs are skyrocketing. Prices for anything energy related, including electricity, is moving upward. Taxes are not going down. Wages, insurance and workman’s comp costs are headed up. Steel prices are up dramatically, driving equipment costs higher. A more widespread impact of rising steel prices is felt in the rising prices of nails. Nail prices are suffering a double whammy as nails imported from China are exposed to a 19.12% tariff.
Second Call: Profit Compression
If you think that thin profit margins are limited only to pallet manufacturers, then you need to think again. A prominent recycler, who is also an excellent contact, had begun to voice concern nearly a year ago. Recycled pallet demand had begun to taper off. He pointed to several reasons why he didn’t like the way the market was trending.
The pallet recycling industry went through several years of hand-to-mouth supplies. During that time the competition for cores was fierce. Naturally, this led to higher core costs. Once demand slows and distribution centers begin to reduce inventory, the market quickly turns from under-supplied to over-supplied. The impact is much more instant for the larger recyclers that work with distribution centers, but it begins to trickle down.
Two trends surface from the supply turn. The first is heavy inventories. Larger recyclers can deal with having a lot of cash tied up in inventory. The smaller players are not so content.
The second market reaction is a direct result of the first – recycled pallet prices sag. The combination can be ugly. Core prices do not retreat easily. Recyclers’ efforts to drive down core costs can often be half-hearted due to their fear of losing their supply line.
The two trends are similar to a candle that is lit at both ends. Core prices are at their peak while pallet prices are retreating. It is another form of “cost creep.”
Third Call: The Newcomer
My phone rang. It was not an unusual call — someone looking for data to see if the pallet business is everything he thought it would be.
This was slightly different – someone in the recycled pallet business who was looking at purchasing a pallet manufacturer. During the conversation, pallet pricing became the central focus.
I turned the conversation from pricing to marketing, mainly because I sensed that the caller – like so many in the pallet industry – equated pricing as the main focus of marketing efforts.
It is a somewhat understandable predicament. After all, customers are looking to find better margins, and the first place they look is in their vendors’ pockets.
I told him of a company that employed a different strategy. This company sold service. It is not an easy thing to do, but this company’s service saved their customer money without taking it off of its own bottom line. In fact, the customer was so thrilled with the results that they wouldn’t even listen to the competitors that would cold call. How is it done?
Fourth Call: Selling Sizzle
I already had the idea for this column before placing the fourth phone call. This contact had made a statement during a market call that had piqued my interest. I had asked this owner of a very prominent pallet company about cant prices and how market conditions appeared ripe for a downward price adjustment. His response was that he didn’t think his supplying sawmills could survive the current market if they were forced to make concessions. He added that he viewed his vendors as partners, and that pallet companies needed to realize that their vendors are that important.
His concept of partnership with his vendors led me to call and ask if he was able to garner the same style of respect from his customers. His answer was not unexpected. He said that his results were mixed. “I keep telling my guys, ‘You have to sell the sizzle and not just the steak,’ ” he said.
His company was doing a lot of creative services, much like the previously mentioned company. Some of the services that companies are offering are:
• Inventorying a customer’s commonly used sizes for quick delivery.
• Same day delivery of e-mailed or faxed orders.
• Vendor-managed inventory on the customers’ site.
• Consigned inventory on the customers’ site.
These are just a few of the ideas that pallet companies have come up with to save the customer money without taking it off of the pallet price.
Sometimes ancillary services are provided that are not being sold as part of the sizzle. Recyclers who drop trailers for customers are basically providing the customer with auxiliary warehouse space.
Selling the sizzle requires some creative thinking. As much as I dislike the cliché, it requires ‘thinking outside the box.’
Pallet pricing is much like a Rubik’s cube. The market dictates a general level to a degree. Pallet suppliers have to find a way, while working within those predetermined parameters, to improve margins. That is certainly easier said than done, but creative thinking can be one of the better tools at your disposal.
(Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call (800) 805-0263 and ask for Jeff.)
