Brambles scraps Costco plastic pallets trial, dodges massive capex outlay

Brambles (ASX: BXB) shares briefly rallied 7.4% to a 6-week high after cancelling its investment in plastic pallets for customers who supply Costco in the US.

Over a three-year trial period, Brambles said it had developed an industry-leading plastic pallet, compliant with US fire regulations and at a more efficient operating model. 

However, these efficiencies were not enough to cover the additional capital cost of plastic pallets, which are approximately four times higher than wooden ones.

Stalemate

Brambles was unable to reach an agreement with Costco or its supplies that would enable the company to meet its Return on Capital Invested (ROCI) targets of at least 15%.

“... 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,” said CEO Graham Chipchase.

Aequitas Investment Partners said the plastic pallets capex would have "been enormous, with long-dated payback. Now they've backed away, and you would think, should alleviate some of the share price pressures."

This decision comes as US-based retailers seek to migrate all pallets used in logistics and supply chains to plastic over time.

Longer term conversion to plastic

Brambles said the conversion to plastic pallets will “likely be phased over multiple years” and intends to offset any reduction in Costco volumes with new business wins. 

Brambles expects to recover any short-term transition costs through network efficiency and optimisation initiatives. 

“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 ...” said Chipchase. 

“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 the United States,” he added.

Brambles share price chart