11. May 2020
by Jacco Slegers and Casper Roex
The COVID-19 crisis has put global food value chains under pressure. Not only has the lockdown caused a spike in demand for food at grocery retailers, but some trade flows have been (temporarily) disrupted as governments exert more control over food exports. In that context, it is quite remarkable how well food supply chains have performed. Global food security has been largely upheld and prices did not extremely increase. However, operators of cold storage facilities, who are typically in the middle of the food value chain, have certainly felt, and are still feeling, the shock. In this article we briefly share our views on how the COVID-19 crisis affects the cold storage industry now, next and beyond.
In the short term, the crisis has created a shortage of cold storage capacity virtually everywhere. Food processors are scrambling to store products so they can be sold at a later time. In the UK, operators reported facility utilisation levels to have reached critical levels, but a similar trend is visible across the world.
The main reason for capacity shortage is the closure of restaurants and fast-food establishments, causing regular frozen food as well as additional fresh volumes destined for this channel to be frozen and stockpiled in cold storage facilities. On the other hand, food production has not scaled down accordingly, continuing to add even more capacity demand. Since most food that is consumed out-of-home is frozen in cold storage at some point, the size of the problem is substantial. A good example of a product that has been particularly stockpiled is French Fries, as most of its volumes are destined for out-of-home consumption and harvests dictate a continuous need for processing potatoes into fries.
With cold storage facilities running at full capacity, everyone is waiting for measures to be relieved and out-of-home outlets to reopen. But food consumption lost due to COVID-19 will not be regained and it will therefore take quite some time before stock levels will return to “normal”. In the meantime, some cold storage facilities will struggle to maintain their profitability as low stock turns mean less pallet handling, a major driver of revenues. This is the paradox of cold storage where more demand for storage capacity does not necessarily translate into financial gains for operators.
Additionally, it is likely that some governments and large companies will look closely at their current source of food and food ingredients going forward. A trend that has been frequently cited is nearshoring of food production, but that appears unlikely to happen at a large scale. Food value chains are global because certain products are better produced in some places than in elsewhere. It will be costly and inefficient to, for example, displace production of exotic fruits, potatoes or beef.
On the other hand, countries that rely heavily on food imports (e.g. UK, Middle East,…) may consider insourcing certain food processing steps or simply increase local food stockpiles to ensure food supply in times of crises. The larger the perceived dependency in times of crisis, the more capacity will be dedicated to such food stockpiles. To support these food security measures, more cold storage capacity will be needed in these regions in the coming years.
In the longer term, COVID-19 is accelerating demand for better food safety measures, especially in emerging markets. Selling less food in open markets and more in supermarkets improves visibility on food quality and safety. A more professional retail landscape will consequently result in demand for a more sophisticated cold chain, with warehouses and transportation ensuring a consistent temperature-controlled food journey. The increase in demand for more and higher quality cold storage capacity in emerging markets creates opportunities for investors and existing operators.
Finally, COVID-19 is accelerating online grocery shopping penetration. The part of the cold chain that is aligned to serve this channel will see things slowly changing in the coming years. Online grocery retail business models are still being developed and tested, so it is still too early to say exactly how this will affect cold storage, but two early hypotheses emerge:
- Online grocery retail requires a different distribution network compared to traditional grocers. Distribution centres need to be closer to consumers to ensure timely fulfilment of orders. DCs will be smaller and hold less stock, while offering a similarly wide assortment as traditional grocers. Cold storage operators that have a good location towards cities can function as a hub to serve these distribution centres faster and more reliably. In addition, strong stock management capabilities, IT integration and just-in-time delivery will be key.
- Online grocery retail DCs also have different needs. Traditional grocer DCs strip pallets to the case level for distribution to the store. Online grocery retailers go one step further and go the product level to pick customer orders. This extra step not only drives a clear need for automation, but it could also drive online grocery retailers to partner with cold storage operators that can provide pre-picking services, such as configurating the case mix on pallets. This adds capacity and efficiency to the sorting & picking process in the distribution centre, which is especially important in peak times. Cold storage operators that are able to provide these services efficiently will have an advantage to others.
The challenges that food supply chains are presented with due to COVID-19 underline the importance of a well-functioning cold chain. Due to the closure and slow recovery of the out-of-home channel, cold storage capacity will remain in high demand for some time. Food security and food safety measures will also drive demand in the longer term, especially in regions dependent on food imports and in emerging markets. Finally, the accelerated rise of online grocery retail will start to change parts of the cold chain.
In light of these developments, we believe cold storage continues to be a market that exhibits attractive characteristics for investment. In addition, as cold storage operators are faced with more need for investment in capacity, automation, cost efficiency, quality of service and breadth of value-added services, industry consolidation is likely to continue.
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EY-Parthenon previously published "Keeping it cool" , a perspective on the cold storage market. In the publication, we elaborate on why we believe cold storage can be characterized as a crucial part of the food value chain, an attractive investment opportunity, a consolidating industry, a challenging industry to grasp and full of strategic opportunities and challenges.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
The UK is also running out of cold storage warehousing for food, with the closure of restaurants and fast food outlets leaving fridges and freezers full of meat and other foodstuffs. Grocery market shifts have also led to congestion in warehouses used by stores.
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