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Global logistics firm Brambles Ltd. (BXB.AU) confirmed Wednesday its CHEP wooden pallet pooling business has lost a contract with units of U.S. food and beverage firm PepsiCo Inc. (PEP), which will move to exclusively use plastic pallets supplied by a competitor from next month.
Florida-based Intelligent Global Pooling Systems, owned by private-equity firm Pegasus Capital Advisers, said on its website Monday that PepsiCo's Quaker, Gatorade and Tropicana business units will begin integrating the firm's all-plastic pallets exclusively across their supply chain from April 1.
A spokesman for Brambles told Dow Jones Newswires that while the loss of the customer from its core CHEP business was disappointing "nothing's changed about the validity of wooden pallets, they remain an ideal form for transporting goods through the supply chain."
At 0300 GMT, Brambles shares were down 8.1% at A$5.19 and traders said the market remains concerned about the threat to CHEP's business model from plastic pallets supplied by iGPS and other competitors, as a worldwide economic slump also impacts demand for their services.
"It's hard to see how Brambles can compete with the new iGPS pallets," said Patrick Crabb, senior trader at Goldman Sachs JBWere.
"They are 30% lighter than wooden ones, with no nails or splinters and they have a tracking system embedded in each pallet so customers can track products through the supply chain and it's 100% recyclable."
The Brambles spokesman said the PepsiCo units accounted for less than 5% of revenue from its CHEP Americas division, one of three operated by the global pallet pooling leader which leases around 300 million blue wooden pallets and plastic containers to cart goods across more than 45 countries.
For the year to June 30, CHEP Americas accounted for around 36% of the firm's US$4.36 billion in total sales, which also included nearly US$750 million from its Recall information management unit.
After posting a 28% fall in interim net profit last month, the firm refused to provide earnings guidance for the full year, saying the "sharp deterioration" in global trading conditions since November made forecasts difficult.
Brambles said at the time it will spend US$99 million to scrap seven million excess pallets in the U.S. due to the economic downturn and expects to incur up to US$30 million in costs after the world's largest retailer, Wal-Mart Stores Inc. (WMT), demanded a restructure of its contract last year.
"Theirs is a business model whose margins and volumes are at risk of slowing via death by a thousand contract losses," said Crabb.
However, Brambles' spokesman said, "we continue to win new customers and we're sorry to lose this one but we'll be working to win replacements."
Brambles shares fell 25% in the two days following its interim results and early this month hit a record low of A$4.08 as the threat of slowing global economic activity looms.
"Brambles has been extremely volatile and in an environment like this, I don't see any reason to own it or trade it," said Tim Breen an associate director at Melbourne-based broker Tolhurst.
"Even if you are a believer in buying cyclicals at this point, this is not a cyclical I would be buying," he said.
-By Bill Lindsay, Dow Jones Newswires; 61-2-8272-4694; firstname.lastname@example.org