Brambles and the pathetic pallet pricing
Price at posting: $10.72
Brambles Limited (ASX:BXB)
BRAMBLES TRACES its history to 1875, when Walter Bramble established a butchery business in Newcastle. Walter gradually expanded into logistics and the company eventually entered the pallet pooling business with the purchase of CHEP in 1958. Nowadays, Brambles’ 345 million blue, wooden pallets are an essential part of the plumbing of global commerce.
Amid the global shortage of pallets experienced since the pandemic, Brambles’ earnings have only inched higher when some expected that they might soar. This is because, despite the shortage, Brambles have failed to meaningfully increase pallet rental prices. Whether they were unable or unwilling, Walter Bramble would at least be happy to know that the company has stayed true to its roots and butchered the opportunity of a lifetime. Shareholders have been less happy.
Global pallet shortage
CHEP and other pallet pool operators blamed stockpiling for the shortage of pallets in the pandemic. Their customers – think large supermarkets – were keeping more goods in warehouses as an insurance against further supply chain issues. This meant that less pallets were being returned to the pools and consequently less pallets were available to transport goods. CHEP also claimed that customers were hoarding pallets and sharing them between their own sites rather than returning them.
The problem has been exacerbated by the fact that the lumber required to make new pallets and repair older ones has become costlier and harder to source.
From the outside, it appears that Brambles have significant pricing power – defined as the effect of a change in product price on the quantity demanded of that product.
Brambles is the market leader in North America with a 45% market share. They are also the market leader in Europe with a 33% market share. They have meaningful market shares in many other locations. The shortage of pallets combined with the fact that Brambles operates one of the largest pools of pallets globally, means that a customer could hardly go elsewhere after an increase in price. Thus, demand for its pallets is unlikely to change.
Brambles have much more than just pricing power though. Brambles appear to have what Hamilton Helmer might call a cornered resource, that is, preferential access to a coveted asset. This is because Brambles’ stock of pallets cannot now be easily reproduced. The amount of lumber required to construct 345 million pallets is not available and so short of switching to a new material or method of delivery, Brambles have cornered a large part of the global stock of pallets.
To be fair, Brambles have lifted prices by 8% since the shortage of pallets was identified but this is like Uber adding 8% to your fare on New Year’s Eve – it barely increases revenue and does nothing to address the shortage. Furthermore, the increase in price has had only a modest impact on profits as inflation and costs of serving customers have also increased.
To put this price rise into context, consider what happens to that other key ingredient in global trade when there is even a hint of a supply issue – oil. In the two days following the Russian invasion of Ukraine, the price of WTI crude increased sharply by 33% from $90 to $120 a barrel. Supermarkets continued to buy fuel.
Currently, Brambles seem unwilling or unable to use price as a lever to increase returns but perhaps there is another way that long term shareholders can realise the value of their investment.
On 16 May 2022 in response to media speculation, Brambles confirmed that it had had preliminary engagement with CVC, a private equity firm, regarding an unsolicited takeover proposal.
The CVC approach seemed to represent a chance for shareholders to finally unlock the value in this company. Unfortunately, on 17 May 2022, Brambles informed the market that CVC had advised that it will not be putting forward a proposal nor seeking to conduct due diligence at this time due to ‘current external market volatility’.
This might not be the last suitor we see kick the forklift tyres.