In a world full of artificial intelligence, self-driving cars, cutting-edge pharmaceuticals, technology startups, why would private investors care about the little ole wooden pallet? One word… RISK.
Just think about it, pallets are essential to modern life. They can go down in demand, but pallets never go out of style or get replaced by better technology. If you want a sure return on investment, pallets can be a stable part of a hedge fund’s portfolio. No, you won’t see out-of-this-world returns, but you will see stable, consistent performance. The riskiest part of the sector is recycling and lumber prices. But if you are smart, you can play those to your advantage as well.
The world is going through an unprecedented time of bad news in global commerce, and most pallet companies are surviving. Some are thriving. Pallets are everywhere. And they truly do move the modern supply chain. CHEP Americas, the pallet rental giant, just released its recent financial numbers for the quarter, and the company experienced 9% revenue growth. Although the rental giant experienced higher costs, the rush by consumers to stock up on consumables helped CHEP revenue grow during the pandemic.
True, Big Blue has gobbled up a lot of the grocery sector. But there is still room for other companies in pallets for consumables. At the same time, pallet buyers are increasingly moving toward national programs and accounts for big volume contracts. A lot of the work is done by local pallet companies. But the entire programs are run by national players. Those variables explain why private equity has discovered the pallet industry over the last few years, and the industry may never be the same again.
For years, big investors have ignored wood pallets. But not now. Bernie Kamps, CEO and founder of Kamps Pallets, recently sold majority ownership of his national pallet company to an investment fund. Kamps laughingly commented on a panel discussing pallet industry consolidation, “Pallets were under the radar for so long… Now, pallets are sexy… what can you say.” More seriously, he stated, “Cash flow is a big thing. I think they also are noticing that pallets are a very important commodity in our supply chain.”
The pallet industry is a $4.5 billion sector that is growing around 3% per year. Consolidation of sales is providing an opportunity for private equity to diversify and get access to large, national brands. The stability of the pallet sector is another reason.
Does the idea of more private equity moving into the industry mean trouble for small to mid-size pallet companies? It could provide an exit opportunity for strong companies with good customer relationships and management infrastructure where there is no likely successor. It also means bigger competition, and a need for pallet companies to become more sophisticated when it comes to data, personnel development, customer service and more.
In a recent industry panel, Kamps envisioned, “In the recycling side, I could see a couple of billion-dollar companies in our space. And I could envision 2-4 companies in the pallet manufacturing area that are 300-400 million in sales. And I could see the rest like it is today. You will continue to see private equity and some large players grow larger.”
Howe Wallace, the CEO of PalletOne, the nation’s largest pallet manufacturer, said on the panel that the little guys will find a way to survive. He pointed out that there have been efforts in the past to build large national players that could roll up a lot of national business, such as PalEx and IFCO Systems. PalEx later became PalletOne and the pallet division of IFCO is now 48forty Solutions. While these companies have done, there are still many small to mid-sized pallet companies that are thriving.
Amy Olson, co-founder and co-owner of Rose Pallet, sat on the panel and offered hope for independent pallet companies. She forecasted, “The big players will get bigger. But there are a lot of customers out there, and big players can’t handle them all. The smaller companies will be okay.”
What does all of this mean for independent pallet companies? Now is the time to get better at customer relationships, reduce production costs and improve management and staff training.
What makes a company attractive to a buyer? Kamps responded, “Private equity likes to see businesses that have a lot of run room and that has a good plan. They are not wanting to pick up a company because the owner is tired and wants to check out…They want a strong management group with strong sales staff and management depth.”
Wallace agreed that people are a huge piece of the puzzle. He pointed out, “We are not looking to buy fixer-uppers…We want something that adds value to us day one, and we are able to add to them day one. Then it’s a good match.”
This highlights the need for companies to focus on human resources and training their core management teams. These people are part of what will attract buyers. They are also the key to developing a profitable business in the first place.
In the end, you can’t worry about the competition. Keep an eye on them while doing everything you can to make yourself indispensable for your customers.
