Mention blue pallets to anyone in the industry, especially recyclers, and you will solicit a variety of reactions. Some see red in terms of lost business or heavy-handed retrieval practices and competitive market pressure. Others see green as they provide services to CHEP, the world’s largest pallet rental company. Still, others could care less.
Regardless your attitude, CHEP has significantly impacted the U.S. pallet industry. Over the past year, CHEP’s pool has grown to somewhere between 51 to 60 million pallets in the United States. Look at almost any stack of pallets in retail stores or distribution centers and expect to find at least one blue pallet marked with “Property of CHEP USA” stenciled on the side. CHEP’s close alliance with Wal*Mart, the world’s largest retailer, has driven the company’s growth while causing some challenges as well. From lawsuits to stock market problems to upper management changes, CHEP continues to make pallet industry news.
If you want to know what lies ahead for CHEP and how it may affect your business, read on to find out. Although Pallet Enterprise contacted CHEP for a response, it refused to comment on many of the issues mentioned in this article.
All Rise — Court Battles Leave CHEP Bruised But Not Out for the Count
Probably nobody on earth knows how far CHEP will go to reclaim pallets marked with its logo than Edgar Lozano, president of Atlas Pallet Co. After years of legal wrangling, Edgar has cleared his name, settled his malicious prosecution lawsuit against CHEP USA and rebuilt his business. Although the terms of the settlement have not been disclosed, Edgar’s suit sought damages of $750,000 or more; thus Edgar likely walked away with a sizeable amount of money for his troubles.
Edgar first made news in 1996 when police raided his San Antonio, Texas pallet recycling plant. Police responded to allegations made by CHEP that Atlas Pallet stole its rental pallets. Atlas Pallet contended that it obtained CHEP pallets in the normal course of business and refused to simply hand them over without receiving fair compensation for its sortation, retrieval and storage costs.
A long legal battle ensued. Police raided Atlas Pallets’ facility twice. On one occasion, police confiscated forklifts, nailing tools and other assets. Work ground to a halt while the equipment remained locked up. Atlas Pallet successfully got its equipment back although the company did experience down time as a result. San Antonio prosecutors failed to convict Edgar and Atlas Pallet on two separate occasions. The first case was thrown out on a technicality. Prosecutors later presented the second case to a grand jury, but the grand jury refused to indict him, and the charge was dismissed in November of 1998. After being jailed twice, numerous court appearances, police raids, widespread media coverage and a costly legal defense, Edgar was cleared of all charges.
Emotionally drained and teetering on the edge of bankruptcy, Edgar fought back by filing a lawsuit against CHEP. He accused CHEP of lying to the police and seeking malicious prosecution. “CHEP knew full well that no criminal activity existed, and yet they pressed this to enrich themselves. They used the police to make money,” said Edgar.
The debate is a familiar one for pallet recyclers across the country. What do you do with the unwanted blue pallets that trickle and, in some cases, flood into your yard? Although some people do actively steal CHEP pallets from behind stores, many CHEP pallets simply leak out of the system and eventually end up on a recycler’s yard. Many recyclers contend that the CHEP pallet issue should be settled by civil not criminal courts.
Most recyclers have responded to CHEP’s pressure by selling pallets to companies needing to fulfill return quotas, using them in their facilities, grinding the pallets, or returning them for a pre-arranged fee. CHEP has worked out special arrangement with a few prominent recyclers in an effort to stop the leaks in its pool. But there are few companies that have chosen to go head-to-head with CHEP. These companies challenge CHEP’s ownership claim, “unfair” business practices, and use of the police to enforce pallet recovery.
Edgar said, “It is shameful the way that people have acted in this industry. CHEP has been able to get away with what it has because the industry has cowered to CHEP and accepted its lies.”
Edgar contends that CHEP has convinced recyclers to accept two major lies as truth. First, is that the mere possession of CHEP pallets by a non-depot recycler indicates theft. The second, is that CHEP always owns blue pallets marked with its logo. Edgar points out that ownership carries responsibility. At what point has CHEP abandoned its property due to lax recovery procedures? When CHEP opened up its pool to non-participating distributors, did it jeopardize its ownership claim?
The only way to get a definite answer on the ownership question is for a high court to set a legal precedence on the matter. “All we have to do is get into a courtroom, and the big lie of CHEP’s ownership will be exposed,” said Lozano. “It’s to CHEP’s benefit to keep the issue clouded and confused, especially to people outside the pallet industry.”
All things considered, CHEP likely wants to avoid the courtroom, especially when confronted by a formidable legal team. Courts open up CHEP’s claims to legal scrutiny. The burden of proof for wrong doing is much higher in a criminal than a civil case, but don’t expect CHEP to shy away from calling on local law enforcement authorities to enforce their ownership claims. CHEP recently worked with police to setup a sting in Ohio to catch a young man selling pallets marked with the CHEP logo on the Internet. But for those willing to go the distance, CHEP will likely settle before the ownership issue gets discussed in court. A negative ruling could be very damaging to CHEP’s enterprise and its reputation among investors and stock analysts.
Today, things are looking up for Edgar and his business. Atlas Pallet is approaching profitability again after a long hard fight. Edgar’s ordeal with CHEP put significant emotional strain on him, his family and his business. He suffered clinical depression, headaches, and fatigue. In 1995, Atlas Pallet employed 87 people. Today, it has less than 30. However, the company continues to grow.
Edgar said, “I was just about broke, and an old neighbor offered me a company that he no longer wanted. I bought it for cost.” Thus, Edgar jumped into the drums and paving supplies business. Thanks to a good relationship with his bank, Edgar bought a storage trailer rental business as well. Given these new ventures and growth in Atlas Pallet, Edgar is as busy as ever.
Although contacted for this article, CHEP refused to comment on the Lozano case or any of his allegations.
Looking back on the legal showdown, Edgar said that he does not regret standing up to CHEP. If faced with the same situation again, he said that he would go through it all again just to protect his rights and the future of his marketplace.
And it may not be over yet. Atlas Pallet still has 20,000 blue pallets marked with the CHEP logo on its property. After trying to work out a compensation arrangement for expenses, Edgar said that he has given CHEP a deadline to deal or else. If some kind of arrangement cannot be worked out, Edgar plans to sell the blue pallets on the open market. Of course, that may start the entire battle over again. But as Edgar said, “This Mexican does not work for free.”
In other legal fronts, Buckeye Recyclers continues its suit against CHEP alleging a variety of things including deceptive trade practices, ownership loss, the right to recycling/recovery fees, and unjust enrichment. Hiring a highly respected law firm, Buckeye Recyclers and Sam McAdow Sr. have brought a case that could shake the very foundation of CHEP’s U.S. business. He continues to solicit financial assistance and information from other recyclers concerned about CHEP’s impact on the industry. CHEP continues to fight the suit. Don’t be surprised if CHEP tries to settle this one too. But this time, Buckeye Recyclers may not be willing to deal.
NEPA, a leading Northwest pallet company, is pursuing its case against CHEP for non-payment of services provided by the recycler. While this is case will not set any real legal precedent, it signals a more aggressive stance being taken by a a major pallet company.
Meanwhile, recyclers and their attorneys continue to look for legal loopholes to shield themselves from CHEP’s lawyers and the police. Edgar’s staff, especially Carol Dean, has worked to revamp the Pallet Law Web site, a resource on legal issues facing the industry. They plan to launch updates soon. Be sure to check out www.palletlaw.com.
Wally World Strikes a Deal, CHEP Appoints NEW CEO
Brambles Industries has reached a five year agreement with Wal*Mart on the provision of pallet services. According to Brambles, Wal*Mart will strengthen its advocacy of CHEP’s services to Wal*Mart’s suppliers. In return, CHEP will continue to provide a total pallet management solution to Wal*Mart. No details on the specifics of the deal have been released. Despite Wal*Mart encouraging suppliers to ship on CHEP pallets, many suppliers have stayed with non-rental pallets.
The relationship between CHEP and Wal*Mart has been a mixed bag for CHEP. According to various industry insiders, Wal*Mart and other retailers have been using CHEP pallets after the initial load has gone through the system because rental pallets are generally stronger and more durable than white pallets. Retailers are not supposed to hold onto these pallets and use them in their distribution centers or stores. Instead, these pallets are supposed to be returned to a CHEP depot. Thus, the dwell time for CHEP pallets sent to these major retailers has been much higher than projected.
Dwell time affects the rate on return for each pallet. On the other hand, Wal*Mart has been able to encourage some suppliers to start shipping on CHEP pallets. The rationale goes that if a company ships on CHEP for some of its needs, it will utilize CHEP for all its retail customers. Some product manufacturers have found it less efficient to use both white and rental pallets. Both companies have been relatively silent about the conversion success or lack thereof in some cases. One stock analyst estimates that about 35-40% of Wal*Mart’s suppliers currently ship their products on CHEP pallets.
Dwell time was one of the major issues that any long-term agreement would have to address. According to a Brambles report, “The new agreement will ensure that Wal*Mart has an uninterrupted flow of quality CHEP pallets filling the majority of its distribution center pallet positions.” This statement indicates that Wal*Mart will continue to use CHEP pallets in their distribution centers even after the initial load has been removed. The announcement does not clarify if Wal*Mart will pay any fee for this benefit, which is highly unlikely given their reputation for driving a hard bargain. Wal*Mart may have offered other concessions to entice suppliers to join the CHEP program. Currently, Wal*Mart charges a penalty fee for poor quality non-CHEP pallets used by suppliers for shipments.
As this issue went to press, Pallet Enterprise learned that all may not be well between CHEP and Wal*Mart. Informed sources confirmed that a major pallet recycler had been approached by Wal*Mart to take over dock sweeps at two east coast distribution centers. Wal*Mart continues to use CHEP pallets in these facilities.
On the management front, CHEP International has appointed Victor Mendes as the new Chief Executive Officer. He replaces Bob Moore, who was a controversial figure according to industry analysts and even former CHEP employees. Moore pushed growth and helped the company achieve its dominant position. Yet, some critics question if Moore’s tactics have led to the deterioration of CHEP’s U.S. pool as it grew beyond the company’s ability to maintain quality and control. Under Moore’s tenure, strained relations with many recyclers went from bad to horrible.
Victor Mendes is expected to bring a new tone to the company’s top spot. He has successfully developed Brambles’ information management division, Recall, into a leading and fast growing enterprise according to a CHEP announcement. Prior to joining Brambles, Mendes worked for General Electric and held a number of positions in its industrial automation business. A CHEP spokesman said that the new CEO has been known for reconciling difficult situations. It remains to be seen what will come of the change in leadership. CHEP will likely continue to focus on growth while seeking to patch up holes in its pool.
CHEP’s Financials & Industry Projections
With slumping net profits and problems in its CHEP business, Brambles, CHEP’s parent company, has received some negative reviews from stock analysts. As a public company, keeping investors happy remains a key concern for Brambles. Some analysts have changed their recommendations from “buy” to “hold” and lowered earning estimates over the past year. Regardless of current market problems, most stock experts give CHEP’s long-term core business model high marks. With limited competition around the world, it remains a strong growth company heading toward a monopoly position.
CHEP’s competitors range from the white wood pallet/exchange pool in the U.S. to the Canadian Pallet Council program in Canada to regional rental companies such as PECO in the U.S. and Le Pallet Rouge (LPR) in France. Despite regional/national success in some cases, none of them present a strong global competitor to CHEP.
LPR is expected to launch a pallet pooling service and expand beyond its hub of operation in France. However, LPR offers only a minimal threat for now due to CHEP’s size and the capital required to compete on a multi-national basis. CHEP estimates that LPR has only nine million pallets compared to CHEP’s 180 million. CHEP CFO, David Turner, said, ” It’s a small business; it’s predominantly in France; it’s competed well in France but there’s no threat to us at present outside of France.”
PECO continues to build its U.S. pool and establish relationships with national retailers and food manufacturers. PECO focuses primarily on private label products and food manufacturers using forward distribution centers, which constitutes about 40% of the grocery pallet market. CHEP’s pool continues to dwarf that of PECO leaving it virtually a monopoly in the United States. Packaging users want a major rental competitor to CHEP. But pallet rental is a very capital-intensive business with a high entry barrier.
CHEP appears to be on the move making significant changes to affect its various incentive programs, operational efficiency, customer relationships and supplier relationships. Here are some of the efforts currently underway according to a Brambles report:
• Channel pricing and surcharge on CHEP pallets destined for non-participating distributors
• CHEP developed a unit dedicated to converting non-participating distributors into participating distributors.
• CHEP has just launched a reimbursement program for pallet recyclers. (For more information see accompanying story below.)
• CHEP has thoroughly reviewed its depot infrastructure and plans to make changes to optimize operational costs.
Some of these changes may have a profound affect on the industry, especially reimbursing pallet recyclers for costs. But it remains to be seen how long this will last. One thing is for sure — CHEP has forever changed the landscape of the pallet industry.
CHEP Pays Recyclers For Expenses — Is This A Kinder, Gentler CHEP?
CHEP has announced a program to compensate recyclers for transportation, sortation and other costs generated by returning pallets back to a CHEP depot. Brambles (CHEP’s parent company) is now willing to pay $2 for CHEP pallets that are delivered more than 200 miles from a recycler to one of its depots. For pallets delivered less than 200 miles the company is willing to pay $1.50 each. Brambles also indicates that it will now pay $.50 per pallet loading fee for CHEP pallets that it picks up from a recycling location.
This new reimbursement program is open to all pallet recyclers in the United States. Brambles indicates that it plans to pay within 30 days of delivery. Some recyclers have indicated that they find the deal satisfactory. Others want more money. Recyclers located close to a depot are more likely to accept the offer. Longer distances add to the transportation costs making the deal less appealing. For some the anti-CHEP sentiments run very deep making it highly improbable that they will ever be willing to return pallets to CHEP.
There are “conditions” in this new program that many recyclers may find unacceptable. Upon endorsing a CHEP reimbursement check the recycler agrees to the following: CHEP is the exclusive owner of all CHEP pallets, the recycler has no right to sell or deal with CHEP pallets in any manner other than as specifically permitted in the conditions, the recycler will not intentionally seek to obtain CHEP pallets, the recycler will disclose its supplier list if requested, and any lawsuits against CHEP will fall under the laws and jurisdiction of Florida.
CHEP has gone through various periods of paying and not paying recyclers for retrieval/transportation costs as the company’s leadership has changed. With a new CEO guiding the company, is CHEP signaling a new attitude toward recyclers in general? You be the judge.
It is well known that over time the recycling industry accumulates a large number of CHEP pallets. Some are picked up by CHEP when recyclers call them, some are put back into circulation through pallet users, some are ground into mulch, some are dismantled into pallet stock, some are put into use at recycling yards, and some—well who knows what happens to them.
Before you decide to participate in the program, consider the following costs: sortation, storage, fuel, transportation (equipment and driver), and office overhead. Read the fine print before endorsing any check or agreeing to any “conditions.” The ramifications could be significant especially if CHEP changes its position on reimbursement, which it can do at any time.
For more information or to become involved with the new CHEP program, call Brambles at 1-877-362-2437.
