Article Originally Published on Pallet Enterprise

The last year has seen an unprecedented number of mergers and acquisitions (M&A) in the pallet industry. This is especially true in the pallet recycling sector.

Companies have been bought and sold in the past. But the frenzy of activity over the past six months is crazy. The big guys keep getting bigger.

Most recently, 48forty Solutions bought Relogistics and then shortly thereafter acquired Prime360. These moves combine the nation’s largest recycler (48forty), a major Total Pallet Management (Relogistics) supplier to Walmart, and the one of the country’s largest brokers and core suppliers (Prime360) all under one company. Kamps Inc. has made several purchases recently and just bought Buckeye Diamond Logistics, PALNET and H&S Forest Products. For more details, see the article on page 68.

There are a number of reasons for this consolidation trend. Pallet users increasingly want a limited number of suppliers that can offer national or at least regional pallet programs. Brokers have filled this role and now control a larger piece of the major pallet accounts. Although brokers have always been a part of the industry, they are increasingly becoming the gatekeepers for customers and cores.

Many older company leaders and founders are reaching the point that they want to retire or transition the business. Sometimes they have a good solution in a family member or employees to take over. Sometimes they don’t. Family business transition is a driver although it isn’t the main cause.

One of the biggest drivers is the equity markets finally taking a major interest in the pallet industry. Private equity funds are looking at the pallet industry as a reasonable place to invest for acceptable returns with a largely recession-proof industry. Lots of liquidity in the financial markets means that funds must go somewhere, and pallet companies are finally making some money after a period of strong demand and rising lumber prices.

Another big driver is that pallet companies see the big guys getting bigger and are concerned about the effect of consolidation on their market. This is especially true for pallet recycling where larger players control core supplies and access to national accounts. So, what’s an independent pallet company to do?

This letter outlines five strategies that smart recyclers need to do if they want to compete or eventually sell out to join one of the big boys.

1.) Develop A Network – You need to know more than just who your local competitors are. You need to know who are the brokers, national management companies and the regional players that you can work with. Smart companies will do more than just call a big broker. They will take time to find other like-minded companies. They will learn who has the capabilities to help. They will share referrals and know which companies are trustworthy. This doesn’t happen in a vacuum.

2.) Get Your Finances in Order – Unfortunately, many pallet companies are not in a place to effectively sell to a big player. Or at least if they do, they may not be able to justify top dollar. Your books are everything when it comes to showing your value. And if you have ignored some key paperwork and metrics for years, it will take time to fix. No amount of creative accounting tricks can fix some numbers overnight. Consider hiring a secondary accountant to inspect your books and look for weaknesses. What things would a potential buyer exploit to drive down value. What figures might raise red flags?

3.) Make Your Own National Management Company – While this step may not be for everyone, there is plenty of room for more than just 48forty and Kamps. Somebody is going to make the next big thing. All it takes is 6-10 regional pallet players to join together to create the next PALNET or some other national management company. This puts power for local markets back in the hands of the members of this company. Sure, you may have to invest to develop some national infrastructure. But it is a good way to build value and protect your local core interest.

4.) Evaluate Your Strategy – Are you relying on core sources that may dry up? How safe is your local customer base from the mega recyclers and brokers that are developing in the industry? Can you turn your focus to non-GMA accounts? How can technology change your capabilities? See the cover story in this issue for some interesting ideas. Are you set up to work with more e-commerce customers who are taking over a larger piece of the retail pie?

5.) Take Some Risks – You may think, “Sure, that’s easy for you to say. It isn’t your money or business.” But the danger of playing it safe may mean you are more likely to go out of business than if you don’t; it will just take longer to find out. Of course, that is the last thing you are thinking about now. Your prices are way up. You are making good money. The pendulum has swung in you favor now. But that could all change in a year or less.

Increasingly, fewer players will control big core accounts. You need to become efficient, nimble and smart. Does that describe your operation today? Which risks should you take? That depends on your strategy, operational needs and current market position. But the worst thing you can do is probably play it safe. See the article on page 58 for some ideas on how you can unleash a culture of innovation. The big key is you have to reward risk-taking that seeks to learn from mistakes.

So, the future sounds fun? It is very bright. Are you ready?