2019 Cold Storage Warehouse Industry UpdateDemand, Growth and Private Equity in the Hot Cold Storage Warehouse Market
What’s Up in the Cold Storage Warehouse Industry?
Demand. Ceiling heights. New construction. Profitability. (All good things).
Now dominated by about 10 major players, the cold storage industry is hot, hot, hot. Rampant industry consolidation is leaving small time operators out in the cold but still thriving. The relatively new market forces including food delivery and subscription box services, online grocery delivery and huge rise in the use of biologic and specialty pharmaceuticals which require cold storage are all impacting industry growth, acting much like rocket fuel.
Cold Storage Warehouse Industry Growth
In recent years, the supply of newly constructed cold storage warehouse space has increased. Increased adoption of newer technologies including cascade refrigeration systems, high-speed doors, energy-efficient walls and automated cranes have helped to increase efficiency and decrease operating costs.
Since 2000, the U.S. cold storage warehouse industry has experienced a 43% increase in capacity, largely due to investment in larger scale facilities exceeding 2.5 million cubic feet of space. Cold storage warehouse operating profits (reported as earnings before taxes divided by revenues) increased 83% in the five-year period ending in 2017. Leveraging low interest rates for the financing of new construction, REITS and other institutional investors have been able to ramp up investment and increase participation in the industry. In addition, use of sale-leaseback agreements enables warehouse owner-operators to redeploy capital to other areas of the business such as for expansion, innovative technologies and other higher-return projects.
Major money has been flowing into the refrigerated warehouse industry. Private equity investors have staked their claim and the flurry of M&A activity continues. Before the recent discovery by private equity investors, the U.S. cold storage warehouse industry was dominated by smaller refrigerated warehouse operators. Today, approximately 70% of the industry’s total capacity is controlled by 10 companies. Of this, the top three cold storage warehouse operators own 48% of the market.
Investment seems to be fueled by numerous factors including:
- Pressure for larger, more technologically advanced warehouse facilities
- Increasing operating cost of cold storage warehouses
- American consumer preferences for fresh and frozen perishable goods, mainly meat and produce
- Increased popularity of subscription meal services
- Dominance of specialty pharmaceuticals, many of which require refrigeration or specialized cold storage conditions
- Growing popularity of e-commerce grocery
European powerhouse NewCold and third-ranked Preferred Freezer Services have been pouring hundreds of millions of dollars into new, large-scale cutting-edge warehouses. As is the case with fulfillment and distribution centers, cold storage warehouses are being built larger and taller, now to heights exceeding 100 feet. Increasing the vertical dimensions of a refrigerated warehouse makes sense as this facilitates increased amounts of efficiencies that can be created, driving more profit. With higher ceiling heights, cold storage warehouses can utilize more automation to decrease the cost of labor and aid in fresh-food e-commerce fulfillment efforts.
Innovative technology has already proven to be a game changer in cold storage operations. 48% of the cold storage inventory in the United States is comprised of pre-1980 warehouses, built before the introduction of full-automation. These older facilities are often inadequately insulated and suffer from higher energy consumption and shorter food shelf life. By contrast, newer automated cold storage warehouses with footprints half the size are able to reach the same storage volume with a reduction of up to 75% less labor and energy. Obsolescence is a noticeable challenge in an industry struggling to keep up with escalating demand.
Why Are Cold Storage Warehouses in Such High Demand?
With the advent of innovative technologies, it is now possible to transport fresh, perishable food products and biological drug products around the world while ensuring the safety and integrity of the goods. Key to the effort of bringing these goods to market is refrigerated warehousing and cold storage. Other temperature sensitive and temperature-controlled goods include:
- Nutrient products
- Flowers and plants
- Artwork and some types of high value cargo
- Biological samples and components such as blood and some vaccines
- Specialty pharmaceuticals including orphan drugs
- Raw materials for pharmaceutical products
- Some petrochemicals
- High-tech electronic goods
Perishable products have differing shelf lives, storage temperatures, allowed time out of refrigeration and sometimes specialized packaging and cold chain logistics needs. Sometimes inspections and tests must be conducted to ensure regulatory compliance or quality testing to ensure product integrity.
These days, more and more food processors and manufacturers are buying or building cold storage warehouses. Frequently, these companies end up taking on clients for the unused warehouse space and end up starting a third party logistics business.
More consumers, especially younger shoppers value convenience and have turned to prepared meal service offerings such as meal kits (think HelloFresh, Dinnerly, Plated and Home Chef) and online grocery shopping. This increases the burden on the existing cold chain structure, necessitating more refrigerated warehouses. In general, the cold storage/refrigerated warehouse industry is very highly occupied at the current time, partially thanks to increased tariffs on perishable food products including meat and agricultural goods.
The Economics of Cold Storage Warehousing
By its very nature in providing the means to prevent decay and help ensure food integrity via refrigeration, the need for refrigerated cold storage warehouses, distribution centers and fulfillment centers is inexorably linked to agriculture and food processing operations. As food is essential for the population, the demand for food goods tends to be resistant to changes in the economy, providing stability for the cold storage warehouse industry.
As more goods are foregoing preservatives, the need to refrigerate more products has increased. Although the current rate of online grocery shopping remains low at around 3%, the field is growing and is anticipated to reach 20% by 2025. Not only popular with Millennials, with 10.000 Americans retiring in the United States every day, Baby Boomers are expected to join the trend.
The increasing consumer preference for fresh food products and goods without preservatives is fueling growth of the cold chain infrastructure from the field to the dining table. This may include the pre-cooling of perishable agricultural goods from the field, refrigerated transportation of perishables to processors, storage or delivery to wholesalers or retailers.
According to industry experts CBRE, currently refrigerated warehouses compose 1-3% of the total U.S. industrial real estate market. Owners and operators of cold storage warehouses are anticipated to realize a 4% compound growth rate from 2018 and 2022, according to the Global Cold Chain Alliance.
- Cost: The added complexity of the equipment, resources and infrastructure, both initially and ongoing for cold storage warehouses is daunting and may scare away inexperienced investors, developers, contractors and asset managers. Cold storage warehouses are more costly to build and operate de to the sophisticated equipment, insulation, reinforcement and construction materials needed. Energy and labor costs are very significant drivers.
- Specialized expertise required: As this is a niche category, there are a limited number of experienced cold storage warehouse developers, contractors and warehouse operators in the market.
- Complicated nature of constructing cold storage warehouse facilities
- Risk to investment: Rarely is speculative development available as cold storage warehouses are not typically constructed without having a tenant contracted for the space.
Why Are Refrigerated Warehouses and Cold Storage Facilities So Highly Occupied This Year?
Meat and dairy products have been accumulating in cold storage warehouses across America. Here are the factors that have caused this increase in occupancy rates:
- Tariffs and trade wars
- Increased meat and dairy production by U.S. producers
- Flat demand in contrast to almost record consumption of cheese and dairy
Production of meat and dairy continued to increase after the recession, but demand is slowly returning to pre-recession levels. In addition, low prices and the operational efficiency of the meatpacking and dairy industries are also making an impact. By contrast, the demand for milk has decreased but the demand for cheese has escalated. This year, production continued to outpace demand, calling for more balance with the supply.
With the recent uncertainty generated by mercurial American trade policies, the market has experienced challenging times. Tariffs on chicken, changes to the North American Free Trade Agreement and retaliatory tariffs by China, Mexico and other nations have resulted in a glut in the market, requiring huge volumes of goods to be placed in cold storage warehouses, often for an extended period of time.
With the rampant outbreak of African swine fever in China, that country has had to purchase pork to help feed its large population. Despite a 62 percent U.S. tariff, the Chinese purchased 23,000 tons of pork, somewhat reducing the amount of meat which would have either been donated to food banks or put into cold storage warehouses.
The cold storage warehouse industry is one of the shining stars in the industrial real estate market, beckoning to real estate investors to participate in one of the most noteworthy top stories of profitability in recent years.
From St. Louis and Los Angeles to cities all across North America, the burgeoning success of online grocery and consumer preferences for fresh and frozen foods is spurring demand for cold storage distribution centers and cold storage facilities close to food production areas.
How 3PL Cold Storage Warehouses Can Add Value-Added Services to Help Increase Profitability
Looking for new revenue streams? Consider expanding your array of services and make sure you have the necessary technology to capture and bill for every service you provide to your 3PL customers. Here are some of the most popular to add to your repertoire:
From meat products to field fresh produce, these goods usually arrive at a cold storage warehouse in bulk. Providing the service that breaks down bulk goods into portion sizes and then repackaging them for storage in cold storage can include multiple incremental value-added tasks such as:
- Washing produce
- Mixing products (such as more than one type of produce together)
- Blending the product
- Packaging and labeling the product
Portion packaging is often done to customize products for sale to a specific retailer. By repositioning the goods into branded packaging, the products are made ready to be stocked on store shelves when shipped or transported to retailers.
For retailers, having a 3PL cold storage warehouse handle portion packaging eliminates the complexity and time of moving goods to a separate repackager.
Many cold storage warehouses now offer retort packaging, typically used for juice products, milk and meat products. A retort pouch, also known as a retortable pouch is food packaging that is made from a laminate of metal foils and flexible plastic. This type of pouch is used to allow for the sterile packaging handled by aseptic processing, an alternative to traditional industrial methods of canning. Retort pouches are lightweight, portable and are made to stand up on horizontal services, ideal for cook-in-bag meals and side dishes including rice, soup, sauces and pasta.
Many cold storage warehouses handle the process of conveying the vacuum-sealed pouch products through specialized equipment to sterilize it and kill microorganisms. Goods are then palletized and can be transited into refrigerated warehouse areas for future distribution.
A cold pasteurization method, products are sealed in their final packages then introduced into a vessel and subjected to a high level of isostatic pressure transmitted by water.
Custom Pallet Building
Although most full pallets contain similar products when they arrive at cold storage warehouses, the 3PL can reorganize pallets with the assortment of goods that the end user prefers. This eliminates delivery of multiple bulk pallets to a retailer’s warehouse, necessitating time to sort, re *
With the advent and adoption of innovative technologies, cold storage warehouse operators are realizing greater efficiency and productivity and are now able to keep profitability on track.
Resources used in this article include:
Datex FootPrint® WMS for Cold Storage Warehousing
Ideal for private and public cold storage warehouse operators
Here are a few of the specialized features of our award-winning WMS:
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Meet Vicki Childs
25+ Years’ Experience in Cold Storage Warehousing
10 years of experience at Datex
IARW/WFLO Warehouse Institute graduate
- Has experts with real world cold storage warehousing experience to guide you
- Is a longstanding member of IARW
- Has 40+ years’ experience implementing technology solutions in cold storage warehouses
- Collaborates with 3PLs, food processors, private equity firm and others on cold storage warehouse projects
- Is highly experienced in warehouse new construction technology projects
- Specializes in providing white glove concierge services