KGB TV: Brambles' Tom Gorman

Brambles chief executive Tom Gorman explains how company turned around its chip operation, and why its outlook in Eastern Europe outlook is more upbeat than Australian and US markets.

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Brambles chief executive Tom Gorman tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

-- The company's chip operation in the US had lost focus on its customer base, but investments in quality control, new technology and leadership changes have turned it around.

-- One-time competitor iGPS failed because of an unsustainably expensive product that had little extra benefit to customers.

-- Further diversification of supply chain solutions in the US will drive 2014 growth, but it will be more subdued than the strong 2013 growth that was driven by winning back customers.

-- It has stemmed revenue loss through improving its 'control ratio' to keep track of lost pallets.

-- Though the US economy is improving, low consumer confidence in grocery markets is keeping growth subdued.

-- European markets like Spain remain problematic, but there is room for strong growth in newer markets in Eastern Europe.

-- Its outlook for the Australian market is 'muted' in the low-confidence, pre-election environment.

Alan Kohler: Tom, welcome to Business Spectator and thanks for joining us.

Tom Gorman: My pleasure to be here. Thanks very much.

AK: Now, before we get onto the specifics of the results, can I just ask you, shouldn’t this business be run in America? I mean, you’re American, the business is basically American and it’s crazy to run it from here, isn’t it?

TG: No. Actually, the business is global and we’re proudly Australian based. We’re listed here in Australia. We have a long history of running this business from Australia and we are truly a global company. We operate in over 55 markets around the world and, as I said, we’re proudly Australian-based. I do spend a fair amount of time in every one of the markets. I’m here in Australia about a third of the year, but the balance of that time is really split between the US, Europe and the emerging markets. For example, in the month of September I’ll be two weeks in the US and two weeks in Europe in that period of time. So I spend a lot of time in the air to be with our people and our customers, but we’re capable of running it from Australia.

AK: But where does your family live?

TG: Like a lot of global executives, my family is sort of all over the place. I own a home here in Sydney and my wife is here in Sydney. I have two boys. They’re both in university in the United States. One lives in Boston and one lives in Philadelphia. So we are sort of a global family, but as I said, we love being in Australia and our kids used to live here when I was at Ford. They spent four years living in Melbourne, so they really consider it their second home and they’re happy to come down here whenever they get the chance.

Robert Gottliebsen: Tom, it’s taken decades and decades for the Brambles chip operation to work in the US, but it’s clearly worked in this latest year.

TG: Yes.

RG: What did you do to make it work?

TG: I think, for me, it’s a credit for the turnaround. The US business would not only be incorrect but it would be unfair to the large number of our people who have worked very hard for a number of years. I think one thing that happened to us in the United States, if I could be very blunt, and I think this happens to many companies, is to become a victim of your own success. The US team has built a heck of a business from the early 1990s to where we’re at now. So we’ve got $1 billion to $1.5 billion business over that period of time to the early 2000s. I think what happened in that period, however, is that we started to lose focus on the customer. We were more focused on what was good for us and not what was right for the customer.

We lost sight of not only the quality of the product but the quality of the service, and we started to focus on our own margins and lost sight of the customer, very simply. We had an upstart competitor that came along and made some inroads and took some share from us, but that only happened because the customer was looking for an alternative. Had we been solely focused on customer satisfaction and delivering a good outcome, I don’t think that upstart would have ever had the opportunity to get a foothold. We reversed that completely in the last three or four years. I think the team is much more customer-centric. We’ve invested heavily to fix our quality and our services, and look, we are by no means complete in the United States, but we clearly are on a much better trajectory than we were three or four years ago.

AK: So what specifically did you change? I mean, was it the quality? Was it the actual way the pallets are made or delivered, or what?

TG: I think you realise we don’t manufacture pallets; we buy them from third-party manufacturers. What we really changed was the level of repair. We fundamentally changed the standard, so what we realised after a deep review is that the standard of repair that we were giving our customers simply wasn’t good enough, so we invested several hundred million dollars to raise the quality of the repair standard and that led to an increase in customer satisfaction. We also fundamentally changed how we approach customers. We organised ourselves a little bit differently in terms of our go-to-market strategy. We’ve tried to make ourselves easier to deal with in terms of web enabling, some of the interface with our company. And look, in a lot of situations like this, we did make some leadership changes. I think when people have a certain mindset, you work with them for a period of time to try to change that, but ultimately sometimes there needs to be a change in leadership. You can see that we’ve done that over the last couple of years. I’m very pleased with the team that we have running the US at the moment and I think they’re clearly focused on the things that are going to drive value in the long term.

RG: Hey Tom, that upstart competitor — it was a bit more than that. It was led by your former American chief executive, and it had on its board John Fletcher, who was an Australian chief executive of Brambles at one time. And it used plastic pallets instead of wooden pallets.

TG: Exactly.

RG: They went bankrupt last month. First of all, where did they go wrong? And how does their bankruptcy help you?

TG: Well, I’ll just start from the beginning. I don’t know Bob Moore or Fletcher at all, so these are individuals who have a history with our company that predates me. I think that generally people find intrigue in all this. It means very little to me. The way I view this is we have a competitor, and that competitor is trying to take something I think is rightfully ours. So whether they have a history or not with us, it’s completely irrelevant to me.

But what they did have is a different offering to a set of customers that were unhappy with us. So, irrespective of their background and where they come from, we allowed them to come into our market because we didn’t satisfy our customers. It’s plain and simple. And with that open opportunity, they knew where to attack because they did know the business fairly well. I think the area that they failed in is that, fundamentally, the business model didn’t work. They came to market with a much more expensive asset than we provide to the market and it really didn’t offer anything additional to the consumer, and that was proven by the fact that they got no pricing premium. So they brought a more expensive asset, same market place, same pricing structure and, over time, we always felt that the business model itself would not be sustainable. But in their early days when they were taking market share, our focus was really on regaining our own stature in the face of the customer.

Stephen Bartholomeusz: Tom, there’s a peskier view among some of the analysts that you’ve been so successful in winning over and winning back major customers in North America that some flattening of the growth rate in that wooden pallets business is inevitable. I assume you’ve got a response to that.

TG: I don’t believe that we’re without plenty of growth opportunities in the United States. I mean, if you look at that business, that business is a single stock-keeping unit business. We offer a 48x40 wooden pallet and we basically have one pricing model. What we’ve been really focusing on is a multiple step process of recovery. The first step was to fix what was broken. I think if you look at the last three or four years, you’d have to say that the team has done a heck of a job doing exactly that. So we’ve recovered a lot of our lost customers, we fixed the quality, we’re still on a trajectory to improve, but we got to a place where our customers are more satisfied with us and we fixed what was broken, to be very direct.

But what we haven’t delivered is the diversification that we’re delivering in other markets, and this has to do with a whole series of supply chain solutions in terms of the last mile, in terms of display platforms, and all of that work is underway and that’s going to accelerate the growth for us. I think what the market is seeing in our guidance in 2014. In fiscal 2013 we did a heck of a job winning customers back. We’re not projecting that same level of market share growth in the coming year and I think that’s brought our guidance down a little bit. But we have plenty of opportunities to grow well beyond fiscal 2014 and the team is absolutely committed to that.

AK: But what is your experience in other markets in terms of broadening your offering into more diverse supply chain solutions in other markets? What does that tell you about what you can achieve in America?

TG: This is why we’re confident we can do it in the US, because we do it virtually in every other market. If you look across our European market, first of all, we have six major different pallet types, not just one. We have multiple different price offerings and business model offerings to satisfy our consumer needs and we think we’re more than capable of doing that in the United States. Additionally, we have a strong RPC business in Europe. That business is growing rapidly in the US. We have an IBC business in Europe. That business is now growing rapidly in the US. So we see no reason why ultimately the US profile can’t look the same way that it looks around the globe.

AK: Could you just explain what those initials stand for?

TG: Oh, I’m sorry. The RPC business is reusable plastic containers – so think about when fresh produce comes from the grower directly to the grocer. It’s in very common use here in Australia, it’s emerging and growing rapidly in the North American market and it’s very common across Europe. Essentially, it eliminates disposable cardboard waste. The term that’s often used is 'from farm to fork'.

So, let’s take lettuce – you pick it, you put it in an RPC. That gets delivered directly to your grocery store – it’s actually used as a part of the display for the grocery store. We take it back, we clean it, we return it to the grocer and the cycle continues. So it’s truly a pooled asset. And an IBC – sorry for the acronyms – an IBC is an intermediate bulk container, so it’s just a larger container. Some of them are rigid, some of them are foldable. And in that we put all sorts of different types of materials from various parts of manufacturing. So in food manufacturing, think about tomato paste – it gets shipped in these large containers. So a whole series of products and customers that we can satisfy, where again they were using disposable, one-way packaging, we’re introducing a reusable, fully-recyclable solution.

AK: So why have you taken so long to introduce those into the US?

TG: Look, I think part of the challenge in the US is that the management team over the period from the ‘90s was really uniquely focussed on driving market share growth, and they were very focussed on a 48x40 platform offering and sort of squeezing their performance – driving overheads down, driving operating margins up – and I think for a period of time they felt that there was plenty of growth still on that platform. By the way, there is still growth on that platform, but we believe we’re capable of doing many, many more things. Also, the way we’re organised today, we are organised globally by business unit. So, there is one global head of pallets, and I believe that structure allows us to take the best of everything in the world and to try to drive that into each market – and that’s exactly what Peter Mackie is charged with doing. I think we’re now positioned to bring that diversification to the United States.

AK: You have a head of RPC and a head of IBC, do you?

TG: Yes, we do. We just announced today that Karl Pohler, who joined us through the acquisition of IFCO Systems – he’s been with us for the last two and a half years – Karl has elected to retire, but he’s being replaced by his long-serving chief operating officer who’s been with him for 13 years. So we have a very good transition there and very good global leadership. And on the containers business, we have a global head – Jason Rabbino runs that business for us. He’s been with the company for about a year and he’s really charged with bringing those businesses together and delivering the growth expectations that we’re looking for.

SB: Tom, you referred earlier to the fact that Intelligent Global Pooling Systems had a different offering to the Brambles offer in the States.

TG: Yes.

SB: Part of that offer was the GPS location for the pallets. Unfortunately it wasn’t very effective, but Brambles famously once lost a vast number of pallets and it kind of demonstrated to the market just how significant that issue of lost pallets is to your bottom line. What have you done there? And have you improved your ability to locate them?

TG: First of all, absolutely. We use a term called 'control ratio', which is a metric that we use on the control of our assets, and our control ratio around the globe has been steadily improving over the last number of years. There is no silver bullet. There is no technological solution. This really requires close connection with your customer. It requires speed on the street, it requires close relationships with distributors. It also requires that you know where your pallets are being sent. And if you send them into certain verticals or certain distribution channels, the likelihood of recovery is much lower. So we’ve done a much better job not putting them in those distribution channels. We’ve really started at the beginning. It isn’t just driving around looking for these things, it’s really a process of, at the beginning of the flow, know where they’re going and restrict the flow into areas where your likelihood of collection is quite low.

One of the things iGPS did is they touted a Radio Frequency Identification solution. First of all, that is not a new technology by any stretch of the imagination, and it is correct that putting a tag on a pallet is a relatively low-cost add to it. But it is a dumb tracking device, if you will. It only tells you who scanned it last – it doesn’t ever tell you where it is at the moment, so there’s no active component to it. And what really happens in our business is that once the product comes off of the asset – so, off the pallet or out of one of our containers – our customers really lose interest in it. They have the product that they want. It’s now our responsibility to make sure we know where those assets are.

And in the case of RFID, if you don’t scan an RFID tag, there’s no benefit to you at all. I’ve said this repeatedly from the beginning: these things do not walk home, and an RFID tag was not a technology to get these things to come back to you. All it did was tell you who scanned it last. But to the credit of iGPS, they did a great job marketing what they’re offering and I think some of their customers not only believed in it but they also saw it as an opportunity to introduce another competitor into a market where, frankly, our market position was quite strong.

RG: Tom, taking aside the individual parts of your business, what are you seeing in the overall thrust of the United States? Are you seeing improvement in overall demand? How do you read the US economy from your point of view?

TG: I think it’s a mixed story for us, to be honest. If you look at individual balance sheets in the United States, I think they’re actually improving. I think the housing crisis that the United States dealt with is now behind it, so home values are increasing. If you look at the housing starts data and the like, all of that is trending positively, notwithstanding the present equity market volatility.

If you look over the last year or so, you’ve seen a nice progression in terms of the equity markets. So I think Americans are feeling better about their personal balance sheets, which is positive. I think on the other side, however, we still have relatively high and sticky unemployment. We have uncertain fiscal policy in the US. I think you have that in a lot of markets around the world, but clearly that is affecting consumer confidence. And even though some of the GDP factors are positive out of the US, if you look at the consumer component of that, it’s really not in the businesses that are driving our growth.

What we really need to see is an uptake in demand in areas and products that basically go through your grocery store: food, beverage, pet food, personal care products. Those are the things that really drive our volume growth. Now, having said that, at the same time when you look at a downturn you don’t see our business dropping substantially. Our customers are really in a very defensive space, if you will, so the volatility is quite low. But we’re not seeing sustained consumer demand. We’re talking about one per cent organic growth. If that were to jump to two or three per cent, I think you’d see a significant difference in our performance because we think we’d get great upside leverage to that kind of growth.

SB: Can you give us a similar rundown on Europe, Tom?

TG: Look, I think you can’t paint Europe with one brush. I think it’s a little more challenging. When you look at the likes of Spain and France, you have significant unemployment problems, and when you segment that even further and look at youth unemployment – particularly in Spain – I think that’s a structural challenge for them to deal with for many, many years to come. And we have over the last couple of years seen our organic volume in Spain decline, and that’s quite unique in our business, but that was really driven by the population shrinking, so a lot of people left Spain looking for opportunities elsewhere. Home formations actually contracted, young people moved back in with their parents because they weren’t able to find employment opportunities. So that is quite unique, and I think southern Europe sticks out in that case.

I think when you look at the German market, for example, we’ve seen relatively resilient economic performance there. The German economy has been the standout in Western Europe, and that’s been a good news story. To a lesser degree, but also positively, we’ve seen resilience in the UK and Ireland. If you look at our results, we had a fairly good year in the UK and Ireland last year and I think that goes to the resilience of those economies.

When you move further east I think it’s all good news for us, our growth – particularly in Turkey and Poland. We moved last year into the Baltics and the Balkans. It’s still very small for us, but we’re there to support our customers and we’re going to get very strong growth in Eastern Europe, for sure.

AK: And finally, Australia. How are things looking here?

TG: I think we have sort of a muted outlook on Australia. I think that relative to some of the European economies, Australia is still in pretty good condition, but I think clearly there’s some uncertainty right now until the outcome of the election. One way or the other that will drive some certainty in the market. But consumer demand is below our expectations here. We have a very strong business; it’s a mature business, we’ve been here for a long time and the team here is very capable. We are innovating, so we are doing more with our PCs here in this market. We are growing our IBC business as well. We made an acquisition last year which really added to our capability here in that vertical. So there are opportunities here still, but we’re fairly conservative in terms of our outlook for consumer demand growth here in Australia. It’s going to be relatively muted in the coming year.

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