August 31, 2011 / 3:41 PM / 7 years ago

Pallet industry David tries to slay Goliath

CHICAGO (Reuters) - Most of us only care what they hold, but for David Lee shipping pallets are the prize.

David Lee, CEO of Peco Pallet Inc, stands in front of a stack of shipping pallets in this undated handout photo. REUTERS/HO/Michael Hawk Photography

“People refer to them as necessary evils and I think that’s sad,” said Lee, 62, the CEO of fast-growing Yonkers, New York-based Peco Pallet Inc, which rents wooden pallets used by consumer products makers to move and store goods.

“Without them is like without the plane,” he said. “You can’t get across the pond. You can’t get from state to state easily.”

Lee should know. He helped build the rental pooling system in the U.S. as an executive at industry giant Chep, which entered the U.S. market in 1990. Now he’s working for an upstart aiming to take away its business.

“We repair the products continuously,” said Lee, who resigned from Chep in 1998 after what he described as strategic changes that sacrificed quality and service. “This is where we work to differentiate ourselves very strongly from anybody else.”

J.B. Pritzker, whose investment firm The Pritzker Group took a majority stake in Peco in March, said Peco’s potential to disrupt the entrenched player was enticing.

“In order for us to be willing to acquire the David against the Goliath, we really had to believe they had something better and differentiated from the big guy,” he said. “The only thing that was really preventing Peco from becoming a really terrific growth story and competitor to Chep was capital availability.”

A spokesman for Chep, which is owned by Australian global support services company Brambles, declined to comment.

David Lee, CEO of Peco Pallet Inc, stands in front of a stack of shipping pallets in this undated handout photo. REUTERS/HO/Michael Hawk Photography

To gain market share, pallet suppliers must be willing to put up large amounts of cash, mostly to purchase pallets to handle the new business. Even winning a small food customer with 1 million yearly shipments requires an outlay of $5 million or more, Lee said, adding: “That’s when you catch the tiger by the tail.”

DISCRIMINATING PALLET

Lee is an encyclopedic repository of pallet information: their history dating to World War II, dimensions (48 by 40 inches); weight tolerances (minimum 2,800 pounds); environmental compatibility. He’s also a vigilant defender of the benefits of a well-managed system.

“You’re going to get safety, which is really the most critical thing at the moment in warehousing,” said Lee, who was recruited from a division of General Electric in 2005 to help transform Peco, founded by a group of independent pallet recyclers in the late 1990s, into an industry contender.

For the past 20 years, the U.S. consumer goods market has been shifting to a rented pooling model, one where manufacturers pay Chep, IGPS, Peco and a host of other providers for use of their pallets, which are tracked, returned and refurbished to meet industry requirements.

It was a process fraught with resistance, requiring manufacturing heavyweight Procter & Gamble (PG.N) to do the cheerleading.

“Whenever we called on someone, we had three P&G guys on our shoulder,” he said of his early days at Chep.

That’s because for years manufacturers purchased pallets outright. That was often a crapshoot, as pallets that went out on a truck dispatched by Kraft Foods, for instance - wending through various points to warehouses and retail destinations - weren’t always what came back.

“What you had was a free for all,” Lee said. “Pallets kept getting reused but it was an unofficial pool. It pandered to the interests of people who were least likely to put any money into it to discipline it.”

Discipline is what Lee favors. Peco’s decentralized business, which employs 90 and is adding staff, relies on field representatives throughout the country to closely monitor logistics as pallets make their way to and from 100 depots.

According to John Thelan, senior VP of depot operations for Costco (COST.O), Peco has been steadily winning new business due to a consistent track record. Seattle-based Costco is not a customer, but as a seller of goods it dictates standards for the 40 million pallets entering its retail warehouses each year.

“The feedback we get from our suppliers is that they like the business terms of Peco - they find them a little easier to do business with, and they like the consistent quality of the pallets,” Thelan said.

Costco also favors competition among pallet providers, which Thelan said helps keep costs down. He won’t disclose the share of pallets on Costco floors, but added “it’s a good slice, a growing percentage.”

STACKING GROWTH

Peco, which counts big consumer names among its accounts, but declines to name them, has booked consolidated average growth of 25 percent in revenue for the past four years; annual sales are now about $120 million. With an estimated 6 to 7 percent of the U.S. market for pallet rentals, it charges customers around $5 per pallet, Lee said.

That’s still just a fraction of the business controlled by Chep, which in its Americas market booked sales in excess of $1.53 billion in its 2010 fiscal year, according to research from Credit Suisse.

Lee said there’s plenty of room for Peco to grow in the U.S., where the shift to rentals is ongoing. And within the past three months, the company also began to roll out operations in Canada and Mexico.

To garner support, Lee is quick to expound on the importance of pallets, lobbying for manufacturers to view them as “essential assets.” That is, except when it comes to social situations like dinner parties, when his wife sometimes draws the line.

“If anybody asks what you do, don’t tell them,” he said she’ll implore. “Tell them about your civil service.”

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