by Melody Yuan
Pallets “are the industrial equivalent of oxygen,” according to Jonathan Victor, co-founder of Balmoral Funds, a private equity firm in Los Angeles. They are often invisible to the average person, seemingly ubiquitous and taken for granted, yet they perform an important role in the functions of daily life. Pallets are structured platforms designed to help stack, store, and transport anything from fresh produce to heavier parts. Large retailers such as Walmart and Costco, as well as supermarket chains from Kroger to Publix, use millions of pallets every day, and international shipments rely heavily on pallets to protect and transport goods.
Given the high demand for pallets, many different types of patented designs and materials are used in various regions. Since World War II, wooden pallets have dominated the marketplace. But a secular trend is undoubtedly underway toward sustainable, durable, lightweight, and automation-friendly plastic pallets. iGPS was one of the first companies to design, develop, and rent out plastic pallets. It went from a startup in 2006, to becoming the leading provider of rentable plastic pallets in North America in less than 5 years.
Plastic pallets, generally made from recycled natural gas byproducts, are more sustainable than traditional wooden pallets. “We’ve had a history of being a sustainable and responsible company to the environment,” says Jeff Pepperworth, CEO of iGPS. “We’re able to take post-consumer recycled material and incorporate that into our pallets. We also take any of our DBR (damaged beyond repair) pallets to recycle and create new ones.”
iGPS pallets are 100 percent recyclable and have been proven to be more durable than wooden pallets, which, in the long run, lowers the cost of use for customers. “Yes, we generate pallets that are used by our customers, but in the same breath, we’re taking millions of tons of material that may have been destined for landfills and, by recycling our DBRs, give that material an infinite life cycle in our pallets,” explains Pepperworth.
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A company with growth potential, and the investors who believe in it
iGPS was founded in 2006 and purchased by Balmoral Funds in 2013. The company was a pioneer in reusable plastic pallets and has recently accelerated its R&D efforts. However, awareness of the benefits of plastic pallets was low, and the trend of switching from wood pallets had yet to take effect, so iGPS initially had a hard time finding capital and a financial institution that believed in the company’s future.
“We actually came into contact with iGPS through a call from an investment banker,” says Robin Nourmand, managing director of Balmoral Funds. “We believed that the future would be in plastic pallets. The ability to capitalize on the market opportunity took several years more than we anticipated, which made some of the earlier years a bit more challenging, but we’ve caught up and things are much better.”
Balmoral Funds invested equity into iGPS (its largest investment to date) and went to East West Bank in 2017 to secure an asset-based loan. The additional funding helped further R&D initiatives, build new facilities, and cover other operational costs. “East West Bank believed in us from the very beginning,” says Nourmand. “They structured a facility that was twice the size as a prior facility, but still had a modest LTV (loan-to-value). They’ve truly helped grow the company. They’ve been solid partners in iGPS’s continued growth.”
From potential to production
So, when exactly did the tide start shifting toward plastic pallets?
“Costco announced about four months ago that they’re going to transition every single one of their wooden pallets to plastic pallets,” says Martin Valencia, senior vice president and relationship manager in asset-based financing at East West Bank. “We’re talking about 60 million pallets.”
“The growth potential is huge,” says Pepperworth. “As more companies move toward the preference of using plastic pallets, it gives us a lot of runway. Over the next 2-3 years, I expect the market share for plastic pallets to double, at the very least.”
Competition in this field is still relatively light in the U.S., as many pallet-making companies have focused more on traditional wood. “It would be very difficult for those companies to switch over to plastic because it would be very costly,” says Valencia. “They would essentially have to design, test, redesign, and produce their own pallets, which takes a lot of time, resources, know-how, and risk capital. Furthermore, iGPS already has pallet recovery infrastructure in place for its pallets, whereas other companies would have to build theirs from scratch.” For the foreseeable future, iGPS has the first-mover advantage.
Staying stable in a financial balancing act
“In our business, you have to control the ecosystem,” says Pepperworth. “You have all of these networks, and you have to ensure that you’re not in a stock shortage or having an overabundance.” Managing efficiency in supply and demand, as well as maintaining steady cash flow, can be overwhelming due to the many moving parts. Pepperworth explains some of the necessary skillsets to stay balanced.
1 Have foresight
Having a consistently reliable product and delivery performance requires robust supply chain function and superb communications between iGPS, its customers and the nation’s leading retailers. “We have to constantly be managing for and preparing on behalf of our customers, as they trust us to be their plastic pallet and pool provider of choice,” Pepperworth adds.
2 Have a process
“We have a well-monitored manufacturing process to make sure every pallet is getting out the door in a timely manner. With respect to the recovery of pallets, we account for attrition (shrink) via continuously improving processes in our pricing,” says Pepperworth. “There are a lot of controls that we have in place, both systemic as well as financial. As you can imagine, we can’t stop at the end of the year and then go to count all the assets in our fleet. Instead, we take daily snapshots, both operationally as well as through sophisticated mathematical algorithms, to ensure we understand what’s happening in our networks daily.”
3 Have a robust base of supply and demand
“We’re in a bit of a recession-proof business,” says Pepperworth. “If you think about it, we rent out a commodity platform that all products move on.” With a wide range of products stored and transported on pallets, the need for iGPS pallets remains strong. Furthermore, because these plastic pallets can be recycled to create new ones and have an infinite life cycle, iGPS saves money on raw materials and is able to be a sustainable company.