Many years ago I wrote a column about a fictitious company named Thermosplat LLC. Thermosplat was a mature operation that molded kitchen countertops out of its proprietary composite material. While looking around for growth opportunities, its sales team stumbled over a multi-billion dollar opportunity right on its loading dock – the U.S. pallet market! Even better, their research informed them that the market was entirely uncontested. There were just a bunch of mom and pops making them out of wood!
Then as now, an enduring stream of entrepreneurs and investors have carried the torch with new “disruptive” pallet technologies, and more often than not end up carrying the can, financially. From celebrated multi-million dollar flops such as the original iGPS, Duraskid and Sol Plastics to a great many other misses, perhaps a billion dollars or more has been lost by investors in alternative pallet ventures gone sour. There are some key lessons that can be unearthed by visiting some of these trainwrecks. They are worth considering before you get behind the next big thing in pallets.
Duraskid
Duraskid seemed like a sure thing in the late 1990s. The raw material was just inexpensive recycled plastic and wood fiber derived from scrap wood. Because the profiles were extruded and cut to board lengths, Duraskids looked like wood pallets and could be made to a variety of sizes without expensive molds. In 1998, the company spent almost $3 million on research and development and ended up showing an overall loss of $31 million in 2001.
When Dura Products International, the parent company, and its investors looked at the fragmented state of the pallet industry, it seemed like a sure bet. According to a Dura Products document of the day: The company believes that the fragmentation of the industry, together with widespread dissatisfaction regarding performance, quality and handling difficulties associated with wood pallets has become increasingly frustrating to pallet users. Customers are recognizing the significant benefits of returnable packaging and are demanding an integrated system approach to meet their needs.
Progress did not go according to plan, however. The share price of Dura fell from $4.40 in 1997 to a nickel over the course of four years. A number of problems surfaced. A slippery deck concern was resolved through the introduction of a sandblasting process to scuff the surface. Successful automated fastening was also a challenge, given the density of the material. When I visited the plant in 2000, I saw pallets being screwed together with hand tools. And did I mention that the pallets were heavy? The company and its investors had big plans, but Duraskid never really got off the ground.
Sol Plastics
In 1998, Sol Plastics opened what it billed as the largest plastic pallet plant in the world. The 100,000 sq. ft. facility in Montreal was capable of producing a million low-pressure injection molded pallets per year. It had invested around $33 million (Canadian) in the project. When the company declared bankruptcy in 2009, it owed creditors more than $26 million against assets valued at $13 million.
iGPS (Version 1)
iGPS Version 1 was a $600 million “can’t miss” investment that at bankruptcy ended up being a $39 million fire sale. “The big problem is that most of the iGPS hype was based on a number of assumptions that turned out to be misguided and wrong when tested in the rigors of the real supply chain,” Chaille Brindley wrote in 2013 that iGPS lost more pallets than anticipated – to the tune of 1.5 million out of 10 million, and didn’t turn them as fast as they hoped.
Some Things to Consider
1. Make sure that the product performs well. One alternative pallet company not listed above invested in significant production capacity only to discover the product didn’t perform. At a test involving a Fortune 100 prospect, the pallet failed, and a huge potential deal was scuttled. (A secondary tip is to make sure that you are there to support your product in the test. The company did not send a representative.)
2. Make sure there is a market at your price point. There may be a half billion pallets purchased annually in the United States, but understand that the market for $100 pallets is still a niche. A successful cost-per-trip model is one way to avoid sticker shock, in applications where it makes sense.
3. Make sure that the product can be manufactured efficiently. A failure to anticipate manufacturing roadblocks (think of the unexpected snag with automated fastening above) and additional costs has been a dagger for some.
4. Don’t go too bullish on building expensive production capacity before there is demand. Purchase orders are going to come far more slowly than you think, so don’t blow the budget on manufacturing equipment that will be sitting idle for the next five years.
5. The dollars are in the details. When assumptions are incorrect, as Chaille noted above, your business model can be in a world of trouble. Whether manufacturing costs, pallet life, or cost components of a cost-per-trip model – get them wrong at your peril. Pallets are a volume business, and small mistakes can aggregate in a hurry.
6. Have a path to profitability. Customers can be enthusiastic about giving alternative pallets a look, especially if they have the same rental fee as wood. For many applications, however, price matching will not be a profitable strategy to take. It is prudent to think about where durable alternative pallets have the best chance to be profitable – in closed loops where leakage is low and the number of turns is high.
7. Develop workable pools and channels. If you can’t service customers in such a way to get back most of the pallets, it doesn’t matter how good the pallet is, the process will fail. And you need to make sure that you can build enough pallets to scale and properly position them to service customers. Otherwise, you will be spending a lot of money to reposition and ship pallets, which can significantly hurt your chances of success.
The wood pallet rental price point remains a barrier to achieving higher pricing for alternative pallet cost-per-trip models. Eventually, that ceiling will be broken and provide wider opportunities for alternative products, but cracking it is still a work in progress. My advice to alternative pallet ventures is to go slow until they have validated their model through actual operations and stick to the business that can realistically be profitable. Investors should be prepared for the long road and not a quick payday.
The old saying goes there is a sucker born every minute. You just want to make sure that you aren’t the sucker.
