is plastic really fantastic?

The lesson in Brambles’ battle
By Robert Gottliebsen
August 24, 2009

Brambles did not take the threat of new plastic pallets seriously. Now it is fighting for its life.


Brambles shares were among the hardest hit in the March stockmarket slump, falling from a high of about $8.58 in November 2008 to $4.29 as the dip in the market combined with fears about what would happen in Brambles’ US operation.

In last week’s profit report, Brambles directors confirmed significant changes in US strategy and major American writedowns. But behind these simple actions lies an intense global corporate battle. Long term Brambles shareholders should understand that the value of their stock depends on the outcome of this battle.

The Brambles CHEP wooden pallets were devised during the 1940s and almost 70 years later wood and the basic 1940s’ pallet design is still the basis of the Brambles business. For the past few decades the plastics industry has looked at wooden pallets and tried to devise a product to take the market away from wood without success.

The most serious attempt came from GE in the 1990s, when the current chief executive Jeffrey Immelt was in charge of GE Plastics and wanted to launch a plastic pallet. He talked with Brambles, threatening that the US giant would take on the Australian minnow if Brambles did not sign up. Brambles regarded the plastic pallet as inferior but invited GE to “have a go”. Immelt did just that, and took on Brambles but when the going got tough GE chairman Jack Welch pulled the plug. Brambles had won because the GE plastic pallet was not as good as their wooden product.

But it was a warning to Brambles that the next plastic pallet might be much better. Like newspapers and classified advertising, Brambles believed the timber pallet still had a long life ahead of it and was not active in the plastics area. Moreover, in about the year 2000, Brambles had to undertake dramatic re-organisation of its global pallet business.

The first chief executive to be thrown into this re-organisation was Sir CK Chow in 2001. He was there about two years before he lost the support of Brambles then chairman Don Argus and the board. But during that time Chow did not get on with Bob Moore, the head of CHEP US, Brambles’ American pallet operation. Moore had been attracted to Brambles in 1995 after a 19-year career at PepsiCo North America. Moore resigned from Brambles in 2002, the Brambles board recognised Moore knew Brambles’ pallet business and their customers better than anyone else so they had him sign a four-year non-compete contract, an amazing agreement given he had only been with CHEP US for seven years.

Moore did not compete with Brambles for four years but during that time worked with global plastic processors, led by Netherlands-based plastic group Schoeller Arca Systems, to devise a plastic pallet that would take on timber and win. And so in 2006, when his non-compete contract expired, he linked up with a private equity group to form Intelligent Global Pooling Systems (iGPS), which had at its base a long term plastic pallet supply agreement with Schoeller. Moore took three or four Brambles US executives with him and enticed former long-time Brambles employee and chief executive John Fletcher to come on to the iGPS board. So this is not just a battle between plastic and timber, but a battle between then old Brambles and the new Brambles led by current chief executive Mike Ihlein.


A plastic pallet costs about $60 and a timber pallet about $20, but the plastic pallet lasts much longer and requires much less maintenance. All the iGPS pallets have radio identification tags embedded to enable shippers and receivers to track and trace shipments in real time, and they are 100% recyclable.

I am not going to get into an argument over whether wood or plastic is best except to say that the plastic proponents say that their pallet is much better suited to robots, and that damage to the bottom layer of foodstuffs is eliminated. Brambles has responded in the US by committing to a two-year, $US77 million program to upgrade its pallets. In addition, it has made a $US99 million provision for scrapping pallets that have seen better days. That represents an $A200 million response to Moore.

Brambles says customer response has been positive and the company announced new wooden pallet contracts. “Although some business was lost during the year, the emphasis remains on winning new business and winning back lost business with improved service and pallet quality”, Brambles chief executive Mike Ihlein says.

On an annualised basis, Brambles say new business has offset business lost to iGPS. On the iGPS side, Bob Moore has signed a contract with Schoeller for 30 million plastic pallets over five years and secured contracts with several big companies, including his old employer Pepsi, General Mills and California Giant Berry Farms.

Moore also has called on the US Food & Drug Administration to launch a comprehensive investigation of wooden pallets and “the risks they may pose to the nation’s food supply”.

“One billion wooden pallets in circulation in the US are a breeding ground for harmful bacteria and carry other undesirable substances that can cross-contaminate food,” Moore says about his old employer. “Wood is inherently porous and can easily absorb bacteria and fluids, creating a risk for food products where Listeria, E coli and salmonella are a concern.”

I do not want to forecast a result of this war but Brambles is fighting for its life in the US and possibly the world.

The lesson for all companies and investors is that you have to determine the business you are in. If you are in the pallet business and have the biggest pallet pool then you must use the best available pallet product. If you are in the classified advertising market you must dominate every delivery mechanism, not just print. The lesson is repeated in history many times.

In the past decade, Brambles has had about three chief executives and a couple of chairmen. When there is churn at the top the focus turns to short-term results rather than long-term plans. That’s what happened to Brambles.

Mike Ihlein inherited this problem. The battle for the long-term pallet market between timber and plastic will be more important than Brambles’ short-term profits. Brambles’ underlying profit in 2008-09 was US38.5¢ or about 44.2¢ in Australian currency. At $7 they are on a price/earnings multiple of about 14, which indicates the market believes Ihlein will beat Bob Moore. The market might be right but there are no certainties: Moore knows the US market backwards.