The pallet wars heat up

The new CEO of Brambles Tom Gorman has backed his predecessor Mike Ihlein and made a call that will determine the future of Brambles and the success or failure of his term as CEO.

Although Gorman never uses these words, in effect he is saying that the challenge being mounted by former Brambles executive Bob Moore and former Brambles CEO John Fletcher is going to fail and will lead to blood on the floor. Moore and Fletcher would respond that there might be blood coming onto the floor but it will be Brambles' blood.

Behind this intense battle is a massive global supply chain revolution which sees manufacturers, distributors and retailers undertaking large investments to substantially lower their costs of distribution, which will spark a new round of battles between manufactures and retailers as they seek to maximise their share of the future bonanza.

Just over a month ago I introduced Business Spectator readers to the looming battle between Brambles and the privately equity funded US based group Intelligent Global Pooling Systems, or iGPS.

Earlier this month, we updated the situation when Brambles announced its US re-organisation on the same day as Australia raised interest rates.

What I did not realise at the time was that this battle is much more than a plastic versus wood pallet encounter but extends into the future development of the global pallet business. At the same time the personal history of the players adds an intensity to the fight rarely seen in global strategic encounters.

Bob Moore and a number of executives left Brambles in 2002. Moore negotiated a four years no-compete arrangement. In the years that lead up to his 2002 exit, Moore was a strong advocate of the strategy of spending large sums on a pallet pool and Brambles took its spending rate on new pallets to 2.5 times its depreciation.

In 2002 Brambles announced big pallet write-downs and new management strategies for pallet operations in Europe and the US. Rightly or wrongly Brambles attribute some of the blame for those write-downs to the policies advocated by Bob Moore and his mates. These days corporate memories rarely go beyond five years, but the events of seven years ago are still deeply embedded in the Brambles strategic thinking.

As Brambles see it, Moore at iGPS is duplicating the old pre-2002 strategy and pouring pallets into his plastic pool. Moore's pallets are plastic and cost between $US60 and $US70 – three times the cost of a timber pallet. So in the Brambles forecasting book Moore is going to eventually run out of money – which is virtually what happened to Brambles in 2002. Moore says that iGPS will soon finalise a debt raising, which will give it a "significant amount of money".
Moore is charging American pallet users the same price to use iGPS $US60 plus plastic pallets as Brambles charges for their $US20 wooden pallets.

Moore would argue that the Brambles pallet pool loses about 10 per cent of its pallets a year. iGPS pallets have a radio chip in them and so can be located so iGPS does not have that cost.

Moreover iGPS is gaining much higher usage of its pallets. Brambles would reply that they have seen iGPS pallets emerge in strange places and the radio chip will not stop losses. Moreover iGPS is cherry picking fast moving contracts.

Moore says two of Brambles' customers intend to switch to plastic pallets once their contracts with Brambles expire at the end of 2009. Brambles is confident it will hold its US customer base and win back customers from iGPS so the next few months will be very important.

In their public announcements Brambles have been open about using plastic pallets in China, but in that country no fire retardant is necessary in plastic pallet construction and the turnaround rate is high. In the US iGPS uses a fire retardant called deca bromine which lifts the cost of the pallet substantially.

Deca bromine is now the subject of environmental inquires and Brambles is giving the issue a nudge. But not to be outdone, plastic pallet makers mention diseases and insect pests that come with timber pallets. There are no holds barred in this fight.

Brambles would also say that whereas timber pallets can be repaired, when a plastic pallet is damaged it must be replaced adding to overall costs.

Clearly Brambles has had to lift its game to meet the iGPS challenge which has required Brambles to undertake another round of write-downs and special expenditures. But when you are in a war of this intensity you must do what you must do.