Opportunities for Cold Storage Post Covid-19

Cold storage warehouses in the US currently hold a higher volume of products than normal. Apart from seasonal products like fruits and vegetables, volumes in US freezers and coolers in April 2020 are 2.5% and 10.3%, respectively, above the same period in 2019 (see Figure 1). Among them, butter and animal protein volumes are significantly higher than a year ago (see Figure 2). A record year of production for some categories combined with stalled exports and the slowdown of foodservice created higher-than-normal demand for cold storage. As social distancing stretches beyond two months, the risk of congestion at cold storage warehouses is becoming more prominent.

Post pandemic, many things throughout the food & agri supply chain are likely to change. Here, we highlight three potential opportunities that US cold storage operators could take into account for future investments.

1. Inventory Levels May Be Growing

According to US Census, overall inventory levels were rationalizing before 2008, as companies worked to reduce costs and optimize inventory levels (see Figure 3). There was a temporary sharp uptick in the inventory-to-sales ratio as a result of the recession in 2008/09. Similarly, as we expect to enter into a recession in the latter half of 2020, we expect a temporary increase in this ratio again due to the slowed consumption and inventory piling up. However, it is important to note that the declining consumption of food items won’t be significant until the later phase of recession.

The inventory-to-sales ratio gradually recovered after the 2008/09 recession, as companies continued to perfect the golden ratio, which fluctuated around 1.35. With the help of modern inventory management systems, retailers and brands can anticipate seasonal changes in sales and thus reduce redundancy and cost. The risk is that when an event like this happens, many are caught unprepared. With major retailers like Walmart cross-docking to minimize storage of inventory, the responsibility of keeping stocks falls on brands and suppliers. This pandemic may push companies to rethink their inventory strategies from ‘just in time’ to ‘just in case’, and may lead to increased inventory levels and thus a growing demand for cold storage. For example, the availability of animal protein to consumers was disrupted to a lesser extent during the extended meat processing plant closures recently because of the large number of frozen stocks available. This could also be a good opportunity to rationalize some of the legacy pricing issues for the cold chain sector as increased demand shifts some of the pricing power to cold storage operators.

2. Frozen Foods Get a Second Chance

Looking beyond agricultural products, cold storage is also crucial for processed products like packaged frozen foods. Contrary to the hip and sexy, the frozen foods category has been dormant on the back of the fresh and premiumization trends. During this pandemic, frozen food categories saw the largest increase, with YOY growth of 93% during the peak of March, and sustained a 30%-50% growth even into May (see Figure 4).

This is partly due to the pantry-stocking effect, as frozen foods have a longer shelf life and offer a variety of meal options in place of take-out. The frozen foods category seems to still be able to sustain the highest YOY growth compared to the rest, even as the pantry-stocking effect wears off. As economies gradually open up, frozen food sales will normalize, but it will also present a unique opportunity for frozen food manufacturers to re-introduce consumers to this category. Cold storage operators will benefit from this sector outlook and growing turnover in this category. Furthermore, cold storage operators that carry mainstream products, often from ‘Big Food’, with high volumes and national distribution will have a marked advantage, as mainstream products can weather the recession better than the niche and the premium.

3. Growing Omni-Channel Adoption

As consumers are housebound, there is growing adoption of omni-channel grocery shopping because online shopping and curbside pick-up show obvious advantages during the age of social distancing. This could reach a large amount of novice online shoppers and foster behavior changes during a sustained period. ACI Worldwide, an electronic payment solutions provider, observed 209% YOY growth in total global online transaction volume for April. Online grocery sales in the US are also displaying accelerated growth and reached almost 200% YOY at their highest peak in April, according to Earnest Research. However, operational challenges like delivery delays and stock uncertainties present significant obstacles to capitalizing on the demand. Despite these challenges and the eventual return of on-premise shopping post pandemic, we expect that Covid-19 will accelerate omni-channel adoption and that many will stay with online grocery shopping post pandemic. There will be a growing demand for specialized cold chain infrastructure, as online grocery requires different supply chain logistics to support its expansion, such as different locations and sizes of warehouses and different product handling requirements. Cold chain operators should therefore proactively explore this opportunity through, for example:

- Identifying hotspots with a growing population and prioritizing urban and suburban cities

- Partnering with specialized technology providers, like Ocado Solutions, to design and optimize warehouse automation for omni-channel grocery retail

- Investing in micro-fulfillment centers that cater specifically to grocery delivery companies, possibly through partnerships with pure-play operators or general retailers such as Peapod or ALDI