Sometimes you just have to say no when customers make a big ask.
That’s what Brambles Ltd., the parent company of CHEP, decided when faced with the dilemma of spending hundreds of millions on a new plastic pool or risking the loss of business from Costco Wholesale Corp. The club store retailer announced years ago it planned to move to plastic for efficiency and mostly safety reasons.
CHEP was the logical choice for Costco to work with since it already supplies much of the retailer’s needs and has experience in running small plastic pools around the globe. CHEP invested under $20 million in its three-year pallet trial for Costco. The experience gave CHEP real-world data on the pros and cons of plastic compared to wood. In recent disclosures and press conferences, the company refused to give specifics on just how far short the Costco trials were from making a large plastic pool viable. But the fact that the largest private pooler in the world, which already has experience in plastic and risks losing a major partner in the United States, would say no suggests that the numbers weren’t even close.
The decision was complicated by inflationary pressures that have affected both wood and plastic. Brambles stated, “In the current market environment, the price premium and commercial terms required to offset higher total cost-to-serve and deliver an appropriate return for Brambles’ shareholders were prohibitive for Costco and its suppliers. The higher cost-to-serve includes a 50% increase in the capital cost of a plastic pallet since September 2021.”
“The supply chain efficiencies of plastic are significant, but they aren’t enough to offset four times the initial capital costs,” explained Chipchase. He also said that it would be difficult to pass along the cost increase to Costco. All the retailers are looking really hard at inflation and passing along the cost to customers.
The surge in plastic resin prices alone could have sunk the deal. But it appears that pricing and terms with the retailer played a role too, based on what Brambles executives said in their press briefing. The pallet rental giant admitted that Costco remains undeterred from its goal of transitioning to plastic.
Brambles CEO, Graham Chipchase, admitted, “It is our understanding that Costco is continuing to assess alternatives to transition the supply chain to plastic pallets.” He added, “We are committed to supporting Costco through any transition should it occur.”
The company outlined its assumptions about any Costco conversion plan, suggesting it would take multiple years to complete and that no pooler has enough pallets to comply with Costco’s needs and U.S. fire regulations to deploy into Costco lanes at scale immediately or in the short term.
Chipchase projected, “Any reduction in Costco volumes is expected to be replaced with new business wins…The intention is for this growth to be addressed progressively as wooden pallets are released from the Costco system and overall wooden pallet supply and availability improves.”
So, what does this mean in the whole plastic versus wood pallet debate? It suggests that until plastic costs come down and plastic pallets get the price premium they deserve, wood will still be king in the U.S. supply chain. There have always been, and always will be, closed loop systems and slave pallet applications where plastic works best.
The trial did outline some of the benefits of plastic pallets. Loss rates and damage rates proved to be successful. The key decision drivers are the unit cost of the pallet and ensuring that the commercial terms are accepted by customers. Chipchase confirmed, “We were seeing efficiencies in the network from things like transport savings, lower damage rates and lower loss rates.”
One of the biggest cost savers is the attempt to develop a new business model where pallets are sorted and scanned at the distribution center, bypassing the traditional service center step. Chipchase said, “As the largest pallet pooler in the North American market and the global leader in plastic pallets, we have a unique perspective and strong capabilities, which we have leveraged to conduct an extensive trial to assess the viability of investment in a plastic pallet pool for Costco. The key focus of our trial was to identify and test a more efficient business model.”
So, what worked best? The plastic test model used Costco’s network to sort and directly issue pallets to manufacturers. This enabled CHEP to eliminate one leg of the traditional process. Damaged pallets were sorted at the location to be sent to CHEP for repair. This highlights the potential for even more savings if even wood pallets could be sorted at the customer location or close to it. If retailers want to save on pallet costs, more Total Pallet Management (TPM) locations may need to be deployed in the future.
CHEP also developed a high-quality plastic pallet that has a modular design, which makes it easier and faster to repair. Also, the pallets were embedded with RFID tags. This enables more accurate reporting and billing. CHEP stated that it plans to continue experimenting with RFID in wood pallets.
Nessa O’Sullivan, chief financial officer for Brambles, explained, “Part of why we want to develop across our wooden platform digital solutions is because with digital solutions, this enables you to explore these other ways of managing your pool that can potentially mean that you can take out extra transport legs. This whole setup of using TPM is something that we have used in the wooden business, but if you add digital on top, it just makes it all a lot more feasible and viable to do. You have that – you get the added benefit of the velocity of the pallet pool as well as reduced transport costs.”
Costco is ideal to test plastic due to its unique flows, willingness to embrace the TPM model and collaboration around technology integration. Brambles made it clear that it was not looking to deploy plastic across its wider U.S. network. The reasons seem clear: more complex supply chains, high loss rates, slower cycle times and less efficient returns.
So, if CHEP wasn’t able to get plastic to work for Costco, this decision should give any investor pause before investing hundreds of millions in a large plastic pool in the United States. Not to say it can’t work. But it certainly isn’t a sure thing.
CHEP isn’t saying no forever to plastic on a big scale. Now just isn’t the right time. This decision is taking place at a time when Brambles has already had pallet delivery issues. These concerns have somewhat tarnished the deliverability reputation of CHEP’s brand. Putting more effort behind wood pallets will help the company serve customers and restore belief in the ability of its pool to deliver for both small and large accounts. CHEP is going to look to grab market share from white-wood suppliers, but it isn’t clear when or if Costco will move forward with its decision to go plastic. Alternatively, the retailer may only transition the fastest moving product lanes. Regardless, CHEP anticipates having plenty of customers given the high price of recycled wood pallets and a desire for higher standardization moving forward.
Chipchase forecasted, “At a macro level, the current operating conditions are leading to high demand for wooden pallets while supply is limited. These dynamics are not expected to change in the near term, and therefore, we don’t expect a shortage of demand for our pallets in the United States.”
