PALLET COMPANY START-UPS: WHAT MAKES A SUCCESSFUL PALLET BUSINESS
By Paul Norman for Cantarero Pallets, Inc.
Honest assessment of business challenges facing pallet industry startups and guidance on pitfalls to avoid when buying an existing company or starting one from scratch.
It isn’t odd for us to receive calls from people who are new to the pallet industry when they are trying to learn how to survive and thrive in this business. As the major trade publisher serving the sector, we sit at a unique juncture and can assist newbies in knowing what to do and what to avoid. This article is my latest assessment of what you need to know given the competitive landscape of the industry.
The 1980s and early 1990s were the real glory days of the U.S. pallet sector when even poorly managed companies could make a tidy profit. Back then the recycling industry was just getting started and you almost never had to pay to acquire cores. Also, pallet rental had yet to chip into the grocery market in a big way. There was plenty to go around for everybody. Today, you can still make money in the pallet industry. But it is much harder than in the past. And a few strategic missteps can land you in bankruptcy.
You need to research the market to know how you can survive. The online industry databases is a treasure trove of information from case studies of success to equipment and machinery to industry trends and issues. Any real effort to research the industry should begin with researching the largest free databases of pallet industry content in the world. Besides reading as much of the relevant content of these databases as you can, there are also numerous published articles of the past and present; market reports, and academic research reports. There are many comprehensive blog articles as well, such as the extensive articles on Cantarero Pallets, Inc. blog (www.cantareropallets.com/blog) These reports are full of market information and industry news that can help you stay up to date and compliant with regulations or best practices.
Assess Your Local Market
The next most important step is to investigate your local market. Try to find out: Who are the major players? What is their expertise? And can you offer something that they don’t provide? Sometimes buying an existing company is a good way to get into the business because you start with some customers, industry know-how if you can retain key employees and a name/reputation in the marketplace. There are some opportunities to buy existing operations when owners reach retirement age and do not have any heirs or key employees who want to take over the business. Sometimes health concerns or other reasons can lead entrepreneurs to sell.
Not all pallet companies are created equal. But a good pallet company will have a wide base of customers and not be reliant on only a handful of accounts. Also, good companies will have a solid reputation in the market and will have some knowledgeable managers/staff that are willing to stay around to help with the transition. What type of equipment does the pallet company have? What about its supply lines for lumber or used pallets (also called cores)?
Has the company been cited by OSHA recently or had a major fire? What about the property? Is it leased or part of the deal?
Starting a pallet company from scratch is possible. But it is much easier to buy a company that has been around a while, and you think that you can improve upon it. Maybe the company does not have an active sales force, and you think you can expand by putting more focus on sales and marketing. Maybe the company has promise, but you notice manufacturing waste. As you look at possible acquisition targets, look at what they are both doing right and wrong. The areas where they need to improve may be where the hidden profit lies. Keep in mind that profits in the U.S. pallet industry are normally 10% or less. And in some cases, the profit margin is less than 5%. Do not use benchmarks from other industries when conducting financial analysis. The U.S. pallet sector is one of the most competitive industries in terms of price sensitivity. It is not odd for customers to leave for 5 cents or less per pallet. While this doesn’t really make sense when you consider how important pallets are to the supply chain, many customers only think about the purchase price and not the outcome of poor quality or service.
Pallet Manufacturing History and Growth
The wooden pallet made its debut prior to World War II and became established during the war. One could make a logical argument that the wooden pallet was to a great extent responsible for our victory in the war. Certainly, it played a big part. When our soldiers returned after the war was over, many of them brought a knowledge of what wooden pallets could do into our rapidly growing industrial sectors. The military continues to be a significant pallet customer, but the growth has primarily been in manufacturing and retail.
Wooden pallets are made mostly from low-grade lumber which is less expensive than higher grades of lumber and opened a lumber market that had been marginal at best prior to the introduction of the wooden pallet. The difference between using softwood lumber and hardwood lumber is covered in another article entitled “Pallet Lumber Basics.”
Initially a pallet typically meant a wooden pallet. More recently other materials have made some inroads. Plastics are typically much more expensive, as are metal pallets. Corrugated pallets are lighter which offers some shipping benefits, but they do not have the strength needed for many applications. In particular, corrugated pallets lose much of their initial strength due to the humidity found in warehouses and in many shipping and storage applications. So, despite the publicity that has focused on alternative materials to wood, wood continues to be by far the dominant material for pallets. It is strong and typically present the lowest price pallet material option. For people who are concerned about the future of wood, pallet professionals and most pallet using industries continue to look toward wood as the best option for manufacturing pallets in the foreseeable future.
Looking at the cost structure, the highest cost part of the pallet is the wood, which usually takes up 60-75% of the price. Then comes labor, machinery and overhead amounting to about 20-25% and nails rounding out the top three expenses. Lumber costs can kill you in a hurry if you aren’t careful.
When it comes to making pallets you have three options – producing them by hands on tables, using semi-automated systems or fully automated nailing machines. Producing pallets by hand is labor intensive and hard work. Many pallet companies still nail small runs or specialty sizes by hand even if they have fully automated lines. But labor costs are increasing, which has led to a renaissance of pallet equipment technology over the last few years. You can buy jigs for relatively inexpensive amounts of money or acquire fully automated lines starting at $250,000 up to $1,000,000 or more. Buying used equipment can be a good idea if you are getting started. Look at industry classifieds to find out who the reputable dealers are nearest you.
You will need lumber, nails, pneumatic tools (nail guns), tables for building pallets, and a forklift at the very least. Many companies also buy or create their own jigs (a pattern and/or structure to determine where to place boards to make various sizes and styles of pallets). Other companies will buy semi-automated or fully automated nailing lines, stackers for finished pallets, conveyors, heat treatment systems or other machinery.
The Emergence of Recycled Pallets
In the 1980s recycled pallets started to emerge as an option. At that time many pallet using companies had some difficulty getting rid of unwanted pallets; this was particularly true for warehouses and retail establishments. They received pallets under load and often had no application for them. So, they were willing to give them away to pallet recyclers or anybody who would pick them up.
Sometimes they were even willing to pay somebody to pick up their used pallets. Because the raw material source, called pallet cores, was so readily available at little to no cost, the stage was set for the emergence of the pallet recycling industry. During the 1990s, pallet recycling exploded at a rate of about 20% a year. More and more pallet users learned that used pallets are often as strong as new ones. It comes down to a combination of cost and performance. So, more and more pallet users discovered that different forms of used pallets, including combo pallets that combine new and used lumber and remanufactured pallets that are made from used lumber instead of new material, continued to grow in popularity. Since the recycling explosion during the 90s, recycled pallets of different forms have continued to grow and now are challenging new pallets for a dominant portion of the wooden pallet market.
It is very interesting that recycled and used pallets have become much more recognized as the industry continues to mature. When I first started working with the pallet industry, most people had no idea of what a pallet was. Now many people have become aware of wooden pallets because so many products are being made from either whole wooden pallets or the lumber from dismantled pallets. This relatively new practice is often known as pallet upcycling. People are making everything from furniture to art to bedframes or outdoor structures out of old pallet wood. The “worn” look is very popular. And some recyclers are making money by selling recycled boards because some companies have discovered how hard it can be to dismantle a wooden pallet by hand.
Many pallet recyclers are getting into other industrial recyclables as a way to make more money and provide more services for customers. The idea is that the pallet is the entry way for other and sometimes higher margin services.
Pallet rental has grown to absorb a continuously larger portion of the unit load market. Pallet recycling started in Australia after World War II as it developed a rental market for war surplus materials handling equipment. A pallet rental pool grew out of this effort. It spread to Europe and then Canada. They waited until the rental concept had attracted enough attention and proved itself to spread the concept to the United States, which was the biggest pallet market in the world.
While rental has become popular, particularly in the grocery and produce industries, new and recycled pallets have continued to grow as the overall wooden pallet industry in North America grows. Pallet rental is continuing to grow in European countries and is making additional beachheads in the Pacific Rim.
Rental pallets are typically rented several times a year, so they are built heavy duty. Block style perimeter-based pallets are typically found in the United States.
Due to the high capital cost involved in building a pallet pool, most pallet companies are not involved in pooling as an operator. But some pallet companies provide services to rental operators, such as repair or manufacturing of rental pallets. Others function as depots or provide return services for stray pallets.
Analysis of Getting into the Pallet Sector
Hopefully, you have seen that the pallet industry is a lot more than just hammering some nails on some wood. The following is a list of key questions or things to consider before taking the plunge.
1.) What do you know about pallets? Why do you want to get in this industry? Are you ready to jump into one of the most competitive businesses in the country?
2.) What type of contacts do you have with large users of wood pallets? If you don’t have a good contact list, consider hiring a pallet salesman or work with brokers. But remember if you do a lot with brokers, you are one step removed from the customer. And your profits will show it.
3.) Do you have the funding to float receivables for 60 to 90 days at minimum? Cash flow is one of the major reasons why some companies choose to work through pallet brokers. Terms are increasingly pushed out to 90 days or more in some cases. Stick to your guns or else you become the bank for major companies without even knowing it.
4.) Are you looking at pallet manufacturing or recycling? These are two very different and yet related businesses. Making new pallets is all about sales and low manufacturing costs and efficiency. Pallet recycling is all about core supply and service and finding ways to recycle more than just pallets for customers.
5.) What type of contacts do you have to obtain cores if you are a recycler or lumber if you are in new pallets? Do you have a sawmill that is part of the operation that you are buying? What about lumber supply contacts?
6.) Data can tell you a lot about a company. If a significant amount of company data is tracked on napkins or even just basic spreadsheets, the pallet company may not be ready for where the market is headed. Customers increasingly want data and online capabilities. From online ordering to order tracking and more, you may have to invest in new software if the company has taken a relatively low-tech approach in the past.
7.) What is the labor pool like in the area? The number one problem for most pallet companies right now is finding and getting good labor. The only way around that is expensive automation.
8.) Do you have wood in your veins? You may not be this type of person. But you need somebody in your key staff who understands wood and industrial manufacturing/plant operations.
9.) Do you like a challenge? Consolidation and cost pressures continue to make the pallet industry a tough place to compete.