European Cold Chain Warehousing: Challenges and Opportunities

Increasing operating costs is one of the major issues at a company level. Labor and energy are the two dominant cost components at European facilities. In 2020, labor accounted for 44% of total costs, with energy accounting for 15%, according to the Global Cold Chain Alliance’s 2021 benchmarking survey. While the figures for 2021 have not yet been published, most attendees expected them to show a similar level for labor and a higher percentage for energy.

Labor Shortage: Better Working Conditions

Finding and retaining qualified workers was identified as another big challenge in the logistics industry. The challenge is even higher when the job entails working in a freezing warehouse. Besides higher hourly rates, many other aspects also need to be addressed to make cold storage jobs more attractive, especially working conditions.

Solutions for improving working conditions range from management effort, such as allowing flexible work schedules, to cost-minimal investments, such as drying cabinets for freezer clothes (see Box 1). Capital expenditure projects in automation are a strategic solution that help in many ways. Automation does not only increase productivity but also prevents accidents, reduces the work burden for workers, and creates a human-technology hybrid working environment that can be appealing to young generations.

Increasing Energy Costs: Adaption Strategy Needed Now

An average European facility in 2020 used 3.8m kWh, a 27% drop compared to the 2018 figure. This signals a significant improvement in energy efficiency enabled by, for example, better compressors and insulation materials. However, the spikes in electricity prices in 2H 2021 and Q1 2022 will substantially increase energy costs. The possibility of increasing the rates charged to customers to cover the increasing energy costs was discussed, yet many attendees expressed the difficulty to determine a reasonable rate. A main reason for this is the lack of operating-cost benchmarking among cold storage companies operating in the same European country. For US operators in each specific region, a cold chain index incorporating five major costs (labor, energy, supplies, repairs, and rent) has been developed by Global Cold Chain Alliance to provide justification to customers during rate negotiation.

As the EU commits to reduce dependency on Russian fossil fuels, the current high energy prices level will likely remain. Switching to renewable energy sources can bring cost savings. However, currently, less than 10% of European facilities have installed wind or solar energy, the two dominant sources in European renewable electricity markets. While solar PV is financially and operationally easy to install but limited in capacity, wind turbines are the opposite. An average onshore 3MW-capacity wind turbine costs USD 3m to USD 4m and produces more than 6m kWh annually, enough to cover one or two facilities. Investing in wind turbines, as in the case of Luik Natie Coldstore, is a good example of the industry shift from operational expenditure to capital expenditure (see Box 2).

Whereas investing in wind turbines is not an option for all, attention should be paid to the current development of Power Purchase Agreements (PPAs). A PPA is a contract between corporate companies and renewable electricity suppliers to purchase electricity at a pre-agreed price for a pre-agreed time period (usually 10 to 20 years). The electricity sold under PPAs can be from an existing or a newly-built project. PPAs are considered a main driver for replacing the fading government subsidies in renewable energy projects. Timely action is needed as PPAs prices are expected to rise (see Figure 1).

Will Consolidation Continue?

2020 and 2021 saw a high number of acquisitions in the European markets – 29 were counted. Will this pace continue in the coming years? “Yes” was the collective answer at the conference. The European cold storage markets are still fairly fragmented, with many companies privately (family) owned. Consolidation through acquisitions or brownfield/greenfield projects are a necessary step to maintain a high profitability in a sector that is under pressure from rising operating costs as discussed above. Stricter EU regulations on sustainability performance (see Fit-for-55 proposal) also add pressure.

Cold Storage in the Reconfigured Food Supply Chains

Covid-19 has pushed food companies to rethink their supply chain designs. The war in Ukraine and subsequent sanctions have accelerated this process. Because the reconfigured supply chains will change where materials and products are stored, the cold storage sector is directly impacted.

Major discussions at the conference were on nearshoring (regionalization of supply base) and the shift from just-in-time to just-in-case. Nearshoring is a long process. Subject to product category, it may potentially conflict with sustainability objectives (e.g. products sourced from distant regions can have lower lifecycle emissions, due to factors such as climate conditions). Many food companies might have opted for just-in-case because the sector has seen a rise in occupancy rates – up to 90% as shared by several attendees. This will increase revenue from storage, yet it also means reductions in other revenue types, such as handling, freezing, picking, and transportation.

While the uncertainty is high on long-term strategies adopted by food companies, cold storage companies should actively prepare by, for example, diversifying customer bases (i.e. not relying on a single customer) and increasing operational capability to serve different product categories and distribution channels (i.e. foodservice, food retail, or direct-to-consumer).

The 2022 European Cold Chain Conference

Joining more than 130 cold chain professionals from Europe and North America, Rabobank attended the 2022 European Cold Chain Conference and delivered a presentation on European warehousing KPIs. The conference was organized by the Global Cold Chain Alliance and was held in Rotterdam, from March 23 to 25.