When Kevin Buchanan announced he was leaving Palletline after seven years as MD, it was a surprise. When he was subsequently appointed group MD of fierce rival Pall-Ex, it was a shock.
Palletline is owned by its members, Pall-Ex is still owned by its founder, chairman and CEO (and former Dragon) Hilary Devey.
Both Palletline and Pall-Ex have claimed to have invented the pallet network model, both claim to be the leaders, innovators and quality operators in the market and both claim to offer a complete logistics service for corporate customers.
What is indisputable is that Palletline was founded in 1992, four years before Devey set up Pall-Ex.
“Palletline was the first pallet network, but Pall-Ex and others have improved and refined the sector through ongoing innovation. There is no doubt that for a period of time Palletline went to sleep. The sector grew around them.” says Buchanan.
Despite a burgeoning media career and some well-publicised health problems – she suffered a near-fatal stroke in 2009 – Devey is still very much on top of the Pall-Ex business. But she recognised that the network needed someone like Buchanan to re-energise it.
“It needed to be someone who Hilary respects and trusts,” Buchanan says. “We are both strong characters, so the question was ‘could we work together?’ We agreed that I would run the business on a day to day basis. Hilary’s role of chairman is more strategic and advisory.”
Buchanan is committed to Pall-Ex for the long-run, and is looking forward to unveiling his five-year strategy to take the business further in the UK, Europe and beyond. He states that reshaping Pall-Ex’s board, with a number of key executive appointments anticipated, is a major priority in his plan to meet the challenges of the coming years.
Board position
One of the board positions that Buchanan is looking to fill is the new role of sales and marketing director. Pall-Ex incorporates central sales and marketing functions and also helps members who have an excess of delivery work to develop sales and so increase their input.
“Commercially, Pall-Ex is quite sophisticated,” says Buchanan. “We have a member sales function, where we create sales leads for members to follow up and convert. Out of that stream, sometimes corporate opportunities come along of a scale that is not for a member with 15 trucks. We have a corporate sales team who pick up central accounts.
“Depending on the relationship, they could be working in conjunction with the local member or a group of members, or the client may trunk in direct.”
Central accounts can be contentious, Buchanan concedes. “If you're a member who's output- or input-imbalanced, you want to balance your trunks.”
Sales development is especially important for hauliers joining a network for the first time.
“Our member sales team makes sure the membership is balanced. We've had a lot of success at this,” says Buchanan. “We have a commercial support team that reports in to the network director. They are out selling for the members. For small members, the cost of employing a dedicated sales person can be problematic. Pall-Ex provides sales and marketing campaigns, a sales person who will go in and sell with our members for an agreed period of time and, just as importantly, take somebody from within that business and establish best practice with them.”
Buchanan is confident that the double-digit growth seen across the pallet network sector will continue for the foreseeable future.
“Because of the acute driver shortage, hauliers are using networks more than ever before,” he says. “You have got the perfect storm; you've got the shortage of drivers, partially driven by the Driver CPC, and in some instances a lack of finance to go and buy more trucks. A new truck now is a serious investment.
“They have the option to do it a different way, and that is to use a network. That has exploded over the last 12 or 18 months. All the networks saw fairly steady growth through the recession. Some were sat around 10% or 15% but they're up 25%, 30% over the last 12 months or so.”
Selective
Buchanan argues that it is time to start turning away unsuitable work and charging higher rates.
“As a sector, we need to be far more selective about what customers we handle, because that may take out some of the issues of freight that isn't ideally suited to networks,” he says. “We need to charge the right price, a fair price that means the business is sustainable, because there is a shortage of people who will be able to do the job at the delivery end. Unless they make money at it, they aren't going to be interested in coming into it.
“If you wind the clock back five, 10 years, general haulage maybe wasn't as profitable and networks were the golden goose. Everybody wanted to get into a network. If we can recapture that environment where we're charging sensible rates for the job, then hauliers will come in and they will do it.”
While Buchanan believes there are still enough network ‘virgins’ out there to sustain the pallet network model, he foresees that economic necessity will dictate that the larger networks will be dominated by “super” members, supported by smaller operators who may be in more than network.
“It's happening now,” he says. It's something we desperately try to avoid. But if you say ‘you are exclusively in one network and you've got to play only with us’ you get into some quite difficult legal challenges.
“It's not an easy situation to manage. What does it mean, being in one network? Are we talking legal entities, or individual operations? If you've got a company with multiple locations, can they be in one network in Brighton and a different network in Glasgow? I think networks will make their own choice about what that means. My worry would be, when you get any individual location working in two networks, it's very difficult for them to get the service right.”
But he accepts that in remote locations with low pallet volumes it may be necessary for hauliers to work for more than one network. “It's a trade off between that and ending up in a situation where the service is compromised because they've got so much freight coming in with three different working practices that they don't deliver it well,” says Buchanan. “My preference would be, if you're working with Pall-Ex covering X, Y, Z post code, that legal entity is exclusive to us at that location, and you do the job right and you give the customer a great service and you charge the right price for it.”
New members
Buchanan is looking to recruit around a dozen new members in 2015, with maybe six joining in the first quarter of this year, though he denies he is targeting Palletline members. “I will not be going out specifically targeting any network’s members. We will look to who is the best available partner in any given area. It might be somebody who's not even in a network, and, following the proposed closure of UK Pallets, Pall-Ex has been recommended as the network of choice for qualifying hauliers who are able to meet our network’s standards.”
Some networks are opening regional hubs, run by larger members rather than by the central organisation, so not every pallet goes through the main hub (right).
“That's not new,” says Buchanan. “We've got one in the north in Carlisle and are looking to establish a southern hub. That's definitely necessary, but more for efficiency reasons, both for a member and for a hub. The optimum size for your central hub is 350,000sq ft, with enough land around about it so you can get the vehicles moving. It's as much about the vehicles you can get through the gate as it is the pallets you can get through the building. You get much bigger than that, you start to lose efficiency with the distances that the forklift trucks can travel. When you get to that point you need to break out into regional hub structures.
“The most efficient way is to partner with a member. Again, there's nothing new there. You have a member running a regional hub, you don't have the dedicated infrastructure, so it's more affordable. If you put it in the right place, and you model it right, it should mean the members still get the truck fill but you save some trunking miles. And you've got more headroom within your central hub. That part, yes absolutely, I agree. But I am not so sure that last mile consolidation is quite what the market needs.”
Rates madness
When it comes to setting rates charged by the networks, the elements that are under their direct control is the hub fee and the delivery rate; the total price is set by the inputting haulier.
“I think, like Pall-Ex, the other networks are all revising their internal rates. When the model first started it was based upon the concept that everybody would balance their trunks. We now know that's just not possible in certain parts of the country. Therefore, although the delivery rates were engineered to be maybe 2% margin, it needs to be more than that in some challenging areas.”
Setting the delivery rates can have an important impact on the type of freight a network attracts.
“All you can do is make sure, within reasonable bounds, that the delivery rate for post codes is fair and reasonable,” Buchanan says. “We've had crazy things going on in this sector where the market leader, in terms of size, decided it was a great idea to have a scheme that just generates volume, whereby the delivery member has to do the pallet for £10 anywhere in the country regardless of the pallet size or whether it's economy or next day.
“What's that going to do? It drives the market price down. Absolute madness.”
He insists Pall-Ex will not be chasing volume in this way. “In terms of our strategy, we're going to focus on doing a quality job. We don't need to grow at 25% to 30% year on year, Hilary isn't that greedy. She wants to run an operation that's respected in the sector,” Buchanan says. “We're not going to be chasing volume, we're going to be very selective about what volume we do and focus on the quality end of the market. If parts of the sector want to go crazy and try to grow at 30% year on year in a mature business, that is not sustainable. They are going to have problems.
“I will drive this network obsessively on delivery performance and quality. There's a huge campaign beginning now to do things right first time, and deliver the quality of service we demand. If you're not paying the guy the right price, that's twice as difficult to achieve.”
So what levers can Buchanan pull to ensure members are more selective about the freight and customers they go after?
“It means a whole range of things,” he says. “We have to be disciplined at the selling end, we have to be very clear about our strengths. What we already do, and what we will do more of, is make sure that we support the members in that process and take more of a lead to make sure that their accounts are of the right type of business that they can make money out of.
“The other mechanism is at the other end, making sure that your delivery rates are fair to the delivery not just the inputting member, because if it's a fair rate it'll almost, by default, exclude the cheap end of the market.”
Buchanan argues that central hub fees are almost irrelevant when a haulier is considering joining a network.
“It's actually quite a small part of the cost,” he says. “They need to know that the internal rate system is fair and equitable so they can make a margin on it. They need to know that their post code area is one that they can cope with, both in the number of pallets, what they're going to input and what they're going to take out, and if they're not balanced, how they are going to deal with that imbalance.
“Some people engineer it, deliberately, not to be balanced because they have other traffic, which is fine as long as they know that. The delivery rate they get paid is crucial, and the post code volume and area. Because generally you want to have your post code region as small as you can.
“The other thing is they have to have a very clear understanding of how commercially active and savvy their network partner is. Because the world is changing at a phenomenal rate, and the number of opportunities for regional hauliers to win business in their area is diminishing. The decision making about who holds a freight contract is increasingly made outside the UK due to the sheer number of companies with foreign parent companies. As a result that decision isn't made by the local distributor or factory any more. Hauliers are going to need more and more help commercially to gain their freight than they've ever done before.”
Home delivery
How the pallet networks play in the rapidly growing home delivery market will be another key challenge, Buchanan admits.
“This again is another area that the sector needs to rethink,” he says. “We should be pricing differently for the home delivery market than for the business user. They do it in the parcels sector. You have people focused on B2C, some that just do B2B, and some with a little bit of B2C. The sector mixes it all up in an unsophisticated way.
“I do think, particularly with the growth that we've seen in the sector, that there needs some rethinking and we should have a different offering. The rate that's paid for delivery to a private address, the kinds of places that people are being asked to deliver to and the weights of the pallets - it's commercial madness. That needs to be some differentiation between the two.
“I think further improvements in technology will help us drive the differentiation forward. We're fairly close to being in a position where we'll be giving automated ETAs on all our shipments ahead of them being delivered, a bit like they have been doing in parcels for two or three years. That will help define the offering to a B2C user.”
Another B2C service would be for the delivery member to break the pallet down and deliver the individual parcels to homes.
“It’s possible,” Buchanan says. “Certainly there are companies who do it now. I wouldn't say no. I'd like to make sure we've established ourselves as clear market leader first, because the last thing you want to do is diversify when the product offering isn't quite right, and what I mean by that is that it isn't priced or defined quite right.”
Retail Plus
Pall-Ex already offers something similar – Retail Plus - a premium service for retailers where the delivery haulier unwraps the pallet, decants the products into the stock room and removes the waste packaging for recycling.
“I can see that extending,” says Buchanan. “That's probably where, if you get it right, it's most impactful to position yourself in the quality market rather than at the ‘stack them high, sell them cheap’ end.”
Pall-Ex has also been trialling Pronto, a national branded franchised courier business, but this is operated separately from the pallet network.
Another issue when it comes to the profitability of pallet deliveries is the mix of full, half and quarter pallets. A quarter pallet costs the same as a full pallet to collect and deliver, but Buchanan explains that the load factors on the trunk are just as important to overall revenues.
“When I was first at Palletline in 2007, we only had a full pallet rate and didn't offer a half or a quarter,” he says. “That meant we were too far away from the internal rates of our main competitors to compete. The other issue, when we actually walked thought the realities of costing, is that truck fill is often more critical in terms of the revenue you get on that payload than the C&D [collection and delivery] end.
“Most C&D vehicles are doing two, or maybe three, runs so stacking becomes less of a critical issue. But we were only averaging about 40 or 42 pallets a trunk. The sector average is around 50 to 55. That was because we didn't have those quarters and halves. You won't get your trunk fill, so there were occasions when we were running an extra half a trunk, which is far more damaging commercially then maybe an erosion of £2 or £3. Where the market had gone crazy is, in some volume-obsessed networks, is to price a quarter pallet at £6 or £7.”
Exporting the Pall-Ex model across Europe
One of Buchanan’s first moves in his boardroom reshuffle was to make former sales director Chris Tancock group deputy MD with specific responsibility for Europe.
Pall-Ex has led the way in exporting its pallet network model to the Continent, with national operations already established in Italy, Spain, Portugal, Romania and France, and plans afoot for Turkey, Scandinavia, Germany, Slovakia and the Czech Republic. Announcements are expected this year in relation to new partner networks in Bulgaria and Benelux.
“As group MD, ultimately I'm responsible for Europe,” says Buchanan. “But Chris is going to take a lead role in the development of Europe, along with project director Anand Assi, and he will have recruitment targets in terms of the countries that we want to see grow within the network.
“I believe that for us to be as successful as I want to be in Europe, the UK has to be an exemplary business. We've got work to do to make sure that the perceptions in Europe about Pall-Ex in the UK are so strong that potential partners will want to work with us as the brand of choice. What I'm going to do in the UK is absolutely linked to how we develop Europe. It will be the jewel in the crown, it will be the shining best practice model that we follow.”
Buchanan also wants to take a more active role in developing the Pall-Ex model on the Continent.
“Here, we can add even more value,” he explains. In regions where the pallet network model is relatively immature, like Romania, where Pall-Ex launched the first pallet network in Eastern Europe, competition will emerge. “I want our partners throughout Europe to be proud and confident that they are operating as part of the best and strongest brand.”
In some countries such as Italy pallet networks are now relatively mature, and the number of pallets Pall-Ex moves within Europe is now almost as much as its UK volumes. “The European business is growing very rapidly,” says Buchanan.
Few if any UK transport operators have made a success of venturing onto the continent, but Buchanan is confident Pall-Ex will succeed where others have failed.
“Nobody has successfully set up a single brand, pan-European shared user network, or network of networks,” he agrees. “We will be the first. The benefits are two or three fold; we're getting an income stream that helps us support developments in other countries and also here in the UK. Going back to my point earlier about what's happening in the market place, Hilary and I were recently challenged by some members about the strategy of developing Europe and what it means to them as UK hauliers. Due to the UK-centric nature of their businesses, they had questions about our European expansion.
“I told them, ‘the number of customer opportunities where the decision making is purely made in the UK, in your patch, is diminishing. Your opportunities, as a member of our pan-European brand, are dramatically increasing’.
“That's an important part of the strategy, in terms of protecting the core business and reacting to market change and market conditions.”
Buchanan’s aim is to develop a pan-European pallet network with international connections between each national network.
“There's an opportunity to further develop line haul and linkages between individual European countries,” he says. “When that starts to happen, and you've got really strong brand penetration in these countries all over Europe, driven from best practice here in the UK, the opportunities to link line haul, in and out of Europe, are significant.
“The ultimate aim is to provide the best service to the best customers that are out there,” says Buchanan. “I believe passionately, that to have the best customers, with the best relationship, with the best returns, you're going to need to be able to offer them more then just a domestic pallet service within the UK.
“That market will start to level out. At some point the underlying trend of globalisation will have an impact on the UK market.”
Buchanan says Pall-Ex’s Ellistown-based UK hub is currently running at about 75% of maximum capacity, and Pall-Ex has an option to buy 20 acres of land adjoining the hub which give them maybe another 150,000sq ft of space. “That will give us all the capacity we need in terms of the central hub,” he says. “We will also consider launching a southern hub as well as a Scottish hub over the course of the next couple of years, as and when we need it.”
Looking further ahead, would Pall-Ex look to export its model further afield, possibly into Asia?
“Absolutely,” says Buchanan. “There are other countries outside Europe where our pallet network model would fit. We haven't excluded that in the future as an opportunity to take the model to a different continent. There are places where this is ripe to happen; they don't have anything like this.”
