2018 3PL REFRIGERATED WAREHOUSE & COLD CHAIN TRENDS
The cold chain industry is changing fast. Between the increased development and usage of temperature sensitive biologic pharmaceuticals and consumer preferences for convenient, fresh foods, the cold chain must adapt quickly.
One main factor is dominating the cold chain these days: the power of consumers. Today’s consumer values convenience, wholesome food and just-in-time delivery. Consumer tastes have changed and continue to evolve towards a preference for locally sourced, ethnically diverse, healthier fresh food products in a wide variety of options.
Moving away from highly processed foods with a long shelf life to temperature-sensitive perishable food products requires an adjustment in the food supply chain. Because consumers value convenience and fast delivery, there are added complications. From U.S. ports to distribution centers, 3PLs and privately owned refrigerated warehouses, designing a cold chain that meets consumer needs can seem daunting.
The Future Looks Bright for Refrigerated Warehouses & the Cold Chain IndustryConsumers Drive Growth in Cold Chain Industry
The sheer number of consumers has increased across the world in recent years and continues to expand. Consumers value convenience, quality, service and real time information. Whether they order from Alexa, Amazon or the corner supermarket for home delivery, consumers want it fresh and fast. Industry experts anticipate that there will be 55 million smart devices in consumer homes by 2020. Think of all the orders that can be created by pairing the Internet of Things (IoT) with consumer desires for popular brands, a desire for convenient automatic replenishment and innovative “hot” new food products!
Today’s consumers, especially Millennials, expect variety. Variety=more and more SKUs as food manufacturers add new packaging types, flavors, sizes and other options. Because of the desire for fresh food products in increasing variety and need for convenience, food producers and manufacturers are altering what they are producing, where it is being produced and how it is distributed and transported to the door of consumers.
More fresh and chilled products are being ordered in smaller quantities from a wider range of product choices. This is causing a proliferation of new product development, product and packaging changes and updates.
Consumers crave information about the products they purchase and use their Smartphones, tablets and other devices to find and share information and their opinions on social media. This real time feedback loop can have a measurable impact on demand. Trending products can increase spikes in demand. Out-of-stock popular goods result in backorders and disappointed consumers who vent their frustration on social media, causing some potential damage to brands. It all happens so fast…
When it comes to food, 2017 was one of the most important years in history. The food and grocery industry is changing at breakneck speed, due to consumer buying habits and expectations. The food industry is changing faster than the supply chain can accommodate it. In less than 2 years, 17 CEOs of major food companies left their positions and were replaced by more “fresh-thinking executives”. The food industry is searching for a new consumer-centric retail model and the design of this new paradigm impacts the cold chain industry.
Consumer buying preferences have changed markedly. Today’s consumer prefers freshly prepared, locally sourced food products. This is altering the way many shippers do business. Setting up regional supply chain networks, accessing regional transportation routes and temperature-controlled logistics and warehouses is vital and transformative.
Consumers’ hunger for convenience helped create the meal-kit industry, a new menu item for today’s busy consumer. Now even Walmart has entered the cutthroat industry, competing with industry giant Amazon in the grocery wars. Add to this the proliferation of restaurant delivery mobile apps and the party is just starting to heat up.
What does all of this mean for cold storage warehouses? Better buckle up Buttercup. It’s likely to be a bumpy ride. No longer will refrigerated warehouses be able to exclusively enjoy the simplicity of pallet in-pallet out operations. The cold chain needs to change and must become as flexible and transparent as possible and that will take technology, forward-thinking business executives and investments in innovation.
Increase in Need for Refrigerated Warehousing of Temperature-Controlled Pharmaceuticals.
Of the 57 new drug approvals issued by the FDA in 2017, 28 of the 57 are temperature-sensitive products with 23 requiring refrigeration storage and transportation. Five additional products require cryogenic (below-zero) temperatures. In the 2017 Cold Chain Outlook produced by Pharmaceutical Commerce Magazine, the global volume of 2017 cold chain products is estimated to be $283 billion and is growing at twice the rate of the overall pharma market.
Currently global pharma industry is valued at $1.2 trillion. Between 2015 and 2021, this is projected to rise by 41%. Pharmaceutical products that require refrigerated storage are anticipated to increase by 70% within that time period. This is largely due to the transition to biologically-based pharmaceuticals in new product development. In addition, continual growth in vaccines and insulin products is also fueling growth in the temperature-sensitive product sector.
Pharmaceutical manufacturers are anticipated to increase production of temperature-controlled vaccines and biologic drugs for such conditions as rheumatoid arthritis and Type 2 diabetes, among other conditions. The increased volume of vaccine and biologic medication production combined with new transportation regulations is driving accelerated growth in the airfreight transportation of pharmaceuticals. Of the top selling pharmaceuticals thus far in 2018, nearly half are temperature sensitive pharmaceutical products, mainly biologics.
Biologic drugs as well as the manufacturing process involved with production, make these pharmaceutical products temperature-sensitive in nearly all instances. Lack of proper temperature-controlled storage degrades the pharma product, making it less effective.
Another trend increasing the need for pharmaceutical product refrigeration is the evolution of a variety of precision medicine innovations that range from cellular therapies to biomarker testing, regenerative medicines that use stem cells.
Some of the therapies involve extracting tissue or blood from patients which must then be transported to a facility for some type of genetic or other manipulation then returned to the patient. Each step in this type of therapeutic process is potentially a cold chain task, requiring stringent constraint on monitoring the condition of the shipment. Use of temperature monitoring electronics, insulated containers, refrigerants and other logistics practices are needed to ensure safety in human use.
The nature of many pharmaceutical and life science products makes it necessary to transport, handle and store them within an established temperature range. In some instances, new technology products are required when dealing with specific products, such as data loggers to monitor the storage temperatures of vaccines.
Expansion of Value-Added Services
3PL cold storage operators are optimizing the utilization of their assets. Because refrigerated warehouses are especially expensive to build and operate, extending services beyond merely handling and storing products makes perfect economic sense. Providing an array of value-added services also serves to help build a partnership between the 3PL and its customers.
According to the International Association of Refrigerated Warehouse’s 2016 Productivity and Benchmarking Survey, 56% of the revenue recognized by the cold chain industry comes from non-storage activities. Today’s multi-temperature warehouse customer is more likely to outsource work such as logistics management, repacking, labeling, packaging and other activities to save money and reduce the burden on their operations. Third party warehouses are also providing light processing to reduce the burden on food producers and manufacturers.
By shifting the cost of the warehouse investment from the customer to the 3PL, it can be spread across multiple customers. Value-added services provide additional incentive for customers to select the refrigerated warehouse operator and help reduce their overall expenses. In selecting a public cold storage warehouse, 3PL customers also benefit from the economies of scale, have a lower point of entry to the temperature-controlled supply chain and have access to already developed delivery networks and do not need to invest heavily in systems, technology and logistics expertise.
In addition to providing new revenue stream, 3PL cold storage operators have found that being able to provide a wide array of value-added services gives them a competitive edge in today’s crowded market.
For some 3PLs, however, the complexity of billing for value-added services for many different customers, inventory types, activities and metrics means that they are missing out on revenue. This typically occurs for 3PL cold storage operators that are not using WMS software with 3PL billing capabilities, using legacy systems or using systems not specifically developed to meet the needs of third party logistics providers. Just as with other issues in warehouse operations and inventory management, having the necessary tools can make a major impact on profitability.
Across the supply chain industry, businesses are reporting that they are suffering from a shortage of qualified candidates to fill essential positions. Whether it is a warehouse worker, truck driver, IT or operations professional, the lack of labor diminishes the capabilities of the business. According to industry experts, because many shippers have been outsourcing warehouse and transportation to 3PLs, they may not be aware of the extent of the labor shortage and the challenges this poses to the supply chain. This presents new opportunities for third party logistics operators, however. Many cold storage warehouse operators now report offering more value-added services to compensate for the lack of labor or need to reduce costs.
As labor pools tighten, many supply chain operations are looking towards technology for help in filling the gap. Because of the new focus on technology, workers need increased training. Whether dealing with providing new services or last mile delivery, cold chain workers need to become more skilled to meet these higher expectations.
According to industry experts, much of the funds projected for investment in cold storage and other building projects was put on hold until the 2016 election occurred. Now this money is being invested in infrastructure. The amount of quality labor as well as its cost is impacting warehouse operations and refrigerated warehouse construction. This is also affecting whether automated or traditional warehouses are being built. Because of these challenges, it seems apparent that many more cold storage warehouses will begin to adopt automation and new technologies.
Increased Adoption of Innovative Technologies Including Robotics and Automation
Warehouse automation, originally popular in Europe where labor and land are more expensive, is now reaching more widespread adoption in North American cold storage warehouses. Several factors are combining to increase the adoption of new technologies:
Shortage of refrigerated warehouse workersWorker safety, comfort and employment longevity issues from exposure to intense cold temperaturesAvailability and cost of new technologies that can streamline efficiency and replace manual workDesire to optimize storage within the available facility footprintAbility to reduce overall costs, especially energy expenses and cold loss
Private and public refrigerated warehouses have been replacing existing systems used in routine packaging and palletizing with automated systems. Many multi-temperature warehouse operators have shown an interest in adopting AS/RS warehousing.
Accelerated Inventory Turns
According to cold chain industry experts, long-term storage now accounts for a fraction of total warehouse income in many facilities. To improve inventory turn velocity, shippers are often relying on a Just-in-Time (JIT) strategy. This utilizes cross docking to ship products in and out on the same day to avoid warehouse storage fees, preserve the quality and value of temperature-sensitive goods and to save time in processing inventory.
Cold storage warehouse operators that rely on industry leading supply chain solutions have a competitive advantage. Having real time, accurate information that can be transmitted digitally is critical to speedy warehouse operations and fast inventory turns. This is because moving goods quickly requires that cold chain companies share detailed information accurately across the supply chain as well as bills of lading and other vital information.
Environmental and Sustainability Concerns
Whether it originated from consumer sentiment or the need to simply cut costs, cold storage warehouse operators have become increasingly aware of energy and water consumption. Many 3PL and private warehouse operators have adopted enterprise-wide sustainability initiatives, including:
Building features designed for longevity and sustainabilityUtilizing alternative refrigeration options such as NH3, low charge and fluorocarbon-based systemsReducing dependence upon HCFC refrigerantsImplementing reclamation, recycling and re-use programsEnsuring that supply chains are able to be flexible, stable and capable of moving the appropriate amount of goods to the correct locations at the right time is essential in meeting consumer expectations and reducing waste and damages
Multi-temperature warehouses are investing in ways to reduce energy consumption such as upgrading lighting, replacing traditional fan motors with electronically-commutated versions and installing smart controls. Cold storage warehouses often find that large inefficient coolers and freezers may be consuming 30-50% more energy than optimized equipment. Changing switch-initiation lighting to devices that rely on motion sensors and automatic dimmers can make a significant impact on expenses.
By anticipating demand, supply chain operations can be better positioned geographically to serve the end consumer. Because the products handled and stored in refrigerated warehouses are subject to spoilage, damage and diminished quality and value, getting the goods to consumers quickly is essential. Being able to tailor production and distribution to meet demand can reduce product waste and quality reduction that can lead to food safety issues.
Food Safety Issues
According to estimates from the Centers for Disease Control and Prevention (CDC), foodborne illnesses cause approximately 1 in 6 Americans (48 million people) to get sick. Of these, 3,000 people die and 128,000 are hospitalized from foodborne diseases. Issues regarding food safety have increased in number and at times, in complexity. Factors impacting the increased numbers of product recalls include but are not limited to:
New FDA Food Safety Modernization Act (FSMA) mandated track and trace documentation of third party product suppliersUndeclared allergens in food productsIncidence of foodborne pathogensMisbranding and mislabelingInadequate or lack of pasteurization documentationCounterfeit food productsConsumer expectations
To protect consumers, there is an enhanced need for worker safety training as well as for air quality testing, swab tests for listeria and a greater focus on efficiency to safeguard the quality of food products. Another major issue in food safety involves the cold chain itself. Perishable goods are subject to biological decay processes. Delivering perishable goods that are safe and of acceptable quality requires that the products are maintained within the appropriate specific temperature range during transportation and storage. Cold chain industry studies show that this remains challenging. Problems with precooling, transportation ground operations, commercial handling practices and other issues have been noted as weaknesses in the cold chain and need to be addressed to prevent product degradation and food safety issues.
Growth in Online Grocery Sales Anticipated to Increase Demand for Cold Storage Warehouse Space
The acceleration of consumer demand and increase in e-commerce grocery sales is expected to fuel demand for more refrigerated warehouse space. According to real estate experts at CBRE, the increase in online grocery sales is set to disrupt food product storage and home delivery.
As consumers gain more confidence from positive experience shopping online, grocery retailers are exploring new options to increase online grocery sales. Designed to reduce concerns regarding spoilage and diminished product quality, the new models include refrigerated lockers at terminal stations, instant delivery service with a one to two-hour delivery window; “to go” options to enable consumers to order online and retrieve at the retailer during a specific time window.
In a January 2017 report by Nielsen regarding a study by Nielsen Global E-Commerce, 4% of North American consumers surveyed regularly have purchased fresh and household groceries online, 6% have made these online purchases in the past but not recently and 36% are considering this in the near future. According to FMI/Nielsen, online grocery accounted for nearly 3% of total grocery sales in 2017, approximately $19 billion. Online grocery sales are anticipated to reach $100 billion, 13% by 2024, only 6 years from now.
According to the Global Cold Chain Alliance (GCCA), the average occupancy rate of a cold storage warehouse currently exceeds 85%. Most industry experts consider that to be a “full” facility.
Currently, there is 3.6 billion cubic feet of food-commodity cold storage capacity within 180 million square feet of industrial space, primarily in refrigerated warehouses as well as approximately 300 million square feet of space in grocery stores and other types of retail venues. The growth of online grocery sales has the potential to increase the demand for approximately 35 million square feet of U.S. based cold storage space, moving from retail stores to warehouses and distribution over the span of the next seven years.
To reduce costs and time of delivery to consumers, often refrigerated warehouses are situated near densely populated areas. The high cost of cold storage warehouse construction and ongoing operation, escalating land prices and capacity constraint have an impact on new construction and often encourage vertical development and use of automation. Because heat infiltration is greatest through the floor and roof, taller buildings tend to have better energy efficiency than lower or wider buildings of equivalent volume. Having common order profiles, even for multiple companies can encourage automation integration, highly useful for fast-paced e-commerce fulfillment operations.
Cold Storage Industry Consolidation Continues
With more than 600 refrigerated warehouse operators across the United States, the cold storage warehouse industry is dominated by the top 10 companies which own 80% of the market. This trend is poised to continue as the largest enterprises merge or acquire smaller cold storage warehouse operations.
Although some major food retailers own their distribution, others as well as manufacturers tend to collaborate with 3PL partners in hybridized versions of ownership/operating arrangements. Some companies are shifting from direct-to-store (DSD) to warehouse ownership in order to take advantage of economies of scale. This strategy does not always prove advantageous as there often needs to be considerable investment in processes and technology that lie outside the organization’s core competency. As one industry insider framed the issue, “food companies do not always make for effective distribution companies”.
Centers of Consolidation are Ideal Locations for Cold Storage Warehouses
As most of the food and grocery industry is low margin, keeping costs down is paramount. Food producers, manufacturers, retailers and 3PLs are continuing to work together to find ways to reduce costs. One way is to use centers of consolidation for import or export-oriented facilities. The idea is that the longer that the majority of products can be stored and transported together, the better the cost benefit. Processing the bulk of a product in one location prior to distribution or having it inspected in one location saves time and money. Centers of consolidation are often traced back to the chain of responsibility, such as an infrastructure center such as a port.
What is going on in the cold chain this year?
Consumers are driving change and growth in the cold chain industry. This means SKU proliferation, faster inventory turns and an increased need for real time data transparency and fast shipments. More individual orders, processed and delivered faster is now the norm.
Development and adoption of innovative new temperature-sensitive biologic pharmaceuticals is increasing the need for refrigerated transportation, transparency and cold storage warehousing as well as for new technologies to monitor and safeguard products.
The labor shortage continues and the investment in new technologies to compensate advances. Third party refrigerated warehouses have increased the range of value added services that they provide to shippers.
Cold storage warehouse operators have become increasingly aware of and invested in reducing energy consumption and adopting sustainable operations.
The continued incidence of foodborne illness is a major issue in the cold chain industry. Problems with insufficient worker training, precooling, transportation ground operations and commercial handling practices remain weaknesses.
The projected increase in online grocery sales is fueling demand for more cold storage warehouse space. An FMI/Nielsen report indicates a projected pattern of growth from $19 billion to $100 billion by 2024. Current U.S. cold storage warehouse occupancy rates already top 85%.
Location of refrigerated warehouses tends to be near population centers, agricultural areas and at or adjacent to centers of consolidation. This is to reduce transit time to consumers and take advantage of ways to reduce cost.
The cold storage warehouse industry remains dominated by the top 10 operators which own 80% of the market.
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