Key highlights of Brambles’ decision not to proceed with plastic pallets for Costco
- Brambles’ decision not to proceed demonstrates its disciplined approach to capital allocation and has been informed by extensive trials over the past three years.
- In the current market environment, the price premium and commercial terms required to offset higher total cost-to-serve and deliver an appropriate return for Brambles’ shareholders were prohibitive for Costco and its suppliers. The higher cost-to-serve includes a 50% increase in the capital cost of a plastic pallet since September 2021.
- Brambles continues to have a strong relationship with Costco and its suppliers and is committed to supporting them through any potential transition.
- If a transition does occur independent of Brambles, it will likely be phased over multiple years and Brambles would seek to offset any associated financial and operational impacts through new business wins and initiatives. Any wooden pallets released from the Costco system during a transition would be redeployed to new and existing customers, resulting in lower capital expenditure.
Sydney – 30 June 2022: Brambles Limited today has confirmed it is unable to proceed with the investment in a plastic pallet pool for customers supplying to Costco in the United States. This follows the announcement by Costco in 2019 of its intention to migrate all pallet usage in its supply chain to plastic pallets over time.
This decision has been informed by an extensive trial and associated analysis of plastic pallet economics. Brambles has developed an industry-leading plastic pallet, which complies with US fire regulations. Together with Costco, a more efficient operating model was also formulated, which delivers system cost efficiencies. However, these efficiencies will not be sufficient to cover the additional capital cost of a plastic pallet, which is approximately four times higher than a wooden pallet. Neither Costco or its suppliers were willing to agree to the required commercial terms and price premium to enable Brambles to meet its Return on Capital Invested (“ROCI”) targets.
Commenting on the announcement, Brambles’ CEO, Graham Chipchase said: “Our decision not to proceed demonstrates our disciplined approach to capital allocation.
“As the market leader, we have leveraged our scale and expertise to exhaust every operational and commercial lever to find a viable solution for Costco’s supply chain in the current environment. The trial results confirmed the efficiencies in Costco’s supply chain and sound operational foundations of a digitally enabled plastic pallet pool. However, in the current economic and market conditions, a conversion to plastic pallets was deemed commercially prohibitive by Costco’s suppliers and, without adequate cost recovery, dilutive to Brambles’ ROCI.
“Costco remains a highly valued retail partner in North America and we will continue to work closely with them as they assess the viability of other options to convert to a plastic pallet pool. We believe today’s decision is the best course of action for our business as we concentrate on helping our customers the current challenges across global supply chains.
“Our Shaping Our Future programme is progressing well and we remain confident that transforming our business will increase our competitive advantage, improve customer service and deliver strong shareholder returns. We continue to expect the improvement in Underlying Profit between FY21 and FY25 to be weighted to the CHEP Americas segment. The business is focused on appropriately responding to short-term cost pressures while investing to digitally transform the business and unlock significant efficiencies across its operations, delivering astep change in the value it provides to customers and shareholders.”
The National Wooden Pallet & Container Association released the following statement in reaction to the Brambles announcement:
Millions of businesses constantly evaluate a number of factors in making decisions about pallets. After an extensive evaluation, Brambles announced its decision to not participate in Costco’s potential transition to plastic pallets. Today, more than 90% of goods move on wooden pallets because they best meet the needs of businesses and consumers. It’s clear wooden pallets remain the best environmental and economic choice.
Wooden pallets are the most recycled transport packaging on the planet. There are 2 billion wooden pallets in circulation in the United States and more than 4 billion in Europe. Most importantly, wooden pallets are safe, strong and sustainable and made from 100% renewable resources. The recent Environmental Product Declaration (EPD) certification for wooden pallets certifies that using them has a positive impact on the climate, enabling us to keep moving the world in the most sustainable way.
Implications of a potential transition of Costco to plastic pallets
While the likelihood, timing, and magnitude of Costco’s transition to plastic pallets is currently unknown, Brambles makes the following comments about a potential transition:
- Conversion to plastic pallets and associated implications will likely be phased over multiple years;
- Any reduction in Costco volumes is expected to be replaced with new business wins. ~50% of the US market is currently addressable providing material opportunities for longer term growth. The intention is for this growth to be addressed progressively as wooden pallets are released from the Costco system and overall wooden pallet supply and availability improves; and
- It is expected any short-term transition costs (e.g. pallet relocation costs) and inefficiencies due to the loss of
Costco volume will be mitigated through network efficiency and optimisation initiatives.
“Our business is well prepared for any transition scenario. While there will be revenue and profit implications associated with a transition, the investments we are making in automation will enable us to more effectively manage changes in network dynamics. If Costco flows do transition to plastic pallets, we anticipate an equivalent reduction in capital expenditure as we redeploy wooden pallets released from Costco’s supply chain to service our existing customers and pursue new business growth.
“The current operating conditions, leading to high demand for wooden pallets while supply is limited, are not expected to change in the near-term and we therefore do not anticipate a shortage of demand for our pallets in theUnited States. As the leading pallet pooler in North America, we remain focused on working closely with our manufacturing and retail customers to navigate through the current challenges and realise opportunities to eliminate waste and make supply chains more efficient,” Chipchase said.