THE COLD ECONOMY: HOW THE COLD CHAIN IS WEATHERING THE STORM
HOW THE COLD CHAIN IS WEATHERING THE STORM
“All I can say is, ‘Thank God for the food business.’ Things may have slowed down a bit due to the economic downturn, but not the extent of other industries.” That’s what the Inland Cold Storage CEO Bill Hendricksen told nearly 300 participants at the 45th WFLO Institute in early February this year.
His comments, along with those of three other industry leaders who volunteered to serve on the 2009 Senior Executive Panel at the event, helped gauge the effect of the economic downturn on the cold chain industry. Nick Pedneault (Congebec Logistics) and Barry Fishetto (Millard refrigerated Services) also reported no significant disruptions caused by the economy, while Mark Smith (AmeriCold Logistics) discussed the critical importance of good management at times like this, in order to avert any serious consequences from the downturn.
As the panelists suggested, the cold storage industry is coping more successfully with the recession than in the larger third-party logistics (3PL) industry, of which the cold storage business is a part. This finding is supported by a recently released survey from Armstrong & Associates, the well-regarded supply chain consultant, which found that first-quarter revenues for third-party logistics provides (3PLs) were down almost 7 percent from one year earlier.
Of course, the 3PL industry is very diverse, and the overall drop included a nearly 5 percent decline in general warehousing and distribution revenues, a 12 percent decline in dedicated contract carriage, a 15 percent decline in international transportation management, and a whopping 37 percent plunge in the automotive sector. In sharp contrast, food and grocery 3PL revenues fell by just one-tenth of one percent- a nice indicator of the hardiness of the cold storage industry.
In mid-April 2009, the stock market was coming off a significant rally and U.S. government officials were predicting that an economic turnaround was nearing.
A rising chorus of analysts agreed. The Wall Street Journal reported in April that “there’s a growing body of evidence that the economy is beginning to make a cyclical turn,” and the newspaper said that the leading economists participating its latest survey expected the recession to tend in September.
The Associated Press wrote that “after a nerve-racking six-month descent, the economy appears to be leveling off,” while the Los Angeles Times proclaimed that “after months of nearly unending economic gloom, glimmers of improvement are emerging in the U.S. economy.”
Do the considered opinions of such a diverse group mean that the economy has turned the corner? Or was the March-April optimism just the proverbial “dead cat bounce?” As much as would like to be able to answer those questions, we can only say with certainty that the fallout from this economic debacle will be long lasting and widespread, and it is sure to impact the cols chain industry in myriad ways.
This is, obviously, a matter of interest not just to members in the United States, but to cold chain operations everywhere. It is said that when the United States catches a cold, much of the world sneezes, and with the cold chain industry increasingly evolving into a global enterprise, the health of the U.S. economy is important to the cold chain industry internationally.
In that context, the most recent meeting of the IARW-WFLO Past Chairmen’s Council (PCC) took on special importance. The PCC, which is compromised of all past chairmen of IARW and WFLO, serves as an informal strategic planning committee and is the closest thing in the cold chain to an industry think tank. The PCC, chaired by Sodus Cold Storage President Sandi Bishop, typically spends a day or two each year examining industry trends, customer issues, emerging problems, financial matters, or other developments of current concern to the industry.
TEN TOP ECONOMIC IMPACTS
In the midst of what is widely considered to be the worst economic downturn since the Great Depression, the 2009 meeting of the PCC focused on the economy and the impact of the economic downturn on the public refrigerated warehousing (PRW) industry and the cold chain industry as a whole. The PCC identified at least 10 ways in which much of the cold chain has been affected:
- Prices - There is a great deal of pressure on prices, a pattern all too familiar to veteran cold storage officials. Customers who have largely been spared the ravages of the downturn don’t want to talk about rate increases, while customers who are facing lower sales and disappearing profits are pleading with suppliers to reduce prices. If overall production decreases there will likely be heightened competition for the remaining business.
- Product Mix – There is a change in product mix from food service to retail. One well-known food processor saw sales shift from 60 percent food service and 40percent retail to 60 percent retail and 40 percent food service. There are more frozen vegetables being sold and less protein, with appetizer sales down dramatically. On the retail side, we are seeing perhaps the biggest jump ever in private label. There will probably be fewer new stock keeping units (SKUs) offered by manufacturers, while less successful older SKUs will be sold off or dropped. The weak economies will also likely slow growth in the organic market while expansion in the specialty food and beverage categories will probably be constrained as the average consumer’s food budget shrinks. Consumers who can still afford to pay premium prices may place an emphasis on purchasing environmentally-friendly, locally grown products. If food processors reach the point where they are telling growers not to plant as much, the impact could be felt over the next couple of years.
- Private Building – For a variety of reasons, less private cold storage space is being built. For many of the same reasons- slower growth, less product, and undoubtedly, less available capital- public building is likely to slow down as well. The flip side of this is that the tighter capital markets may lead some hard-pressed manufacturers and retailers to turn to PRWs for the first time, while existing PRW customers rework corporate logistics strategies in ways that result in reliance on PRWs for a greater portion of their cold storage requirements.
- Inventory – Many distribution-driven PRWs are seeing fewer turns and/or lower volumes. Production-driven warehouses aren’t impacted as much because they are storing bulk commodities. Still, a just-published study of U.S. frozen food and beverage retail sales shows that 2008 sales were up a healthy 6.5 percent over the previous year. The study noted that frozen foods appeal to American consumers with little money and time to spare, and projects that U.S. retail sales of frozen foods and beverages over the next five years will increase by $13 billion or more than 25 percent over 2008 revenues.
- Legal – Warehouse liens are more important than ever as more customers are having trouble with their accounts payable, getting credit, or are faced with the prospect of filing for bankruptcy. The result is that more customers and their lenders are instituting tighter lending policies and becoming more aggressive about seeking lien waivers and subordination. The problem can be especially acute when local banks are taken over by larger banks, such as Wells Fargo. Of course, properly enforcing the lien is an important as having the lien in the first place. Any warehouse that does not properly enforce the warehouseman’s lien runs the risk of being liable for conversion damages, which, in most states, includes punitive damages.
- Customer Mix – There is more competition than ever before for the grocery dollar. The traditional supermarket base accounts for a slowly but steadily shrinking proportion of grocery sales. The big shift is to club stores (Costco, Sam’s, BJ’s) discount stores, dollar stores, and even pharmacies. Target is expanding its grocery products in the face of slumping sales in other departments, while Restaurant Depot is assaulting established food distributors. There is a permanent structural change underway from supermarkets and the companies that serve them to the new marketers. The newly diversified base of customers, although is may hurt some PRWs, is probably better for the PRW industry as a whole. In the food service sector, there is a discernible shift from high-end meat and seafood restaurants to med-tier chains and fast food operators.
- Imports/Exports – Faced with weaker economies around the world, protectionist measures, and a strong dollar, there has been a marked drop in U.S. agricultural exports. Dairy shipments to Asia have slowed down as China has stopped importing most such products. Russia and China are facing serious economic problems and have both cut orders of poultry. A major reason for falling exports is the strong dollar, recently at a three-year high against the currencies of major trading partners. In the meantime, processors have considerable excess product sitting around, which could help the cold storage industry in the short run. If the dollar stays strong compared to other currencies, the United Stated could again see fast-growing food imports, particularly from Asia and South America. This may help import facilities, while working against commodity-type facilities, if it is accompanied by declines in domestic farm production.
- Role of Government – Several members of the PCC believe that mixing a difficult economic climate with the politics of the new Obama Administration may well affect regulatory policy and lead to new and costly regulation. In the aftermath of the toxic peanut problem and the failure of the U.S. Department of Agriculture and the Food and Drug Administration to quickly detect the crisis and prevent its spread, new food safety laws are almost certain to be enacted. Food safety rules as well as rules focused on the environment and worker safety can affect the entire U.S. cold chain industry both through the cost compliance and penalties for non-compliance. Larger companies may be faced with hiring more compliance personnel and smaller companies may need to hire more consultants. Large and small companies alike confront the prospect of new and higher fines to support government budgets that are stressed. Unions are likely to press for wage and benefit improvements if the employee Free Choice (EFCA) is enacted, although just how much of an impact EFCA will have in the current economy remains to be seen.
- Theft – There has been an increase in the number of cargo thefts and attempted cargo thefts in several areas of the United States, a trend that is likely to continue with so many people unemployed or otherwise hurt by the economy. Companies must be alert to this danger and take steps to raise awareness of the issue with drivers and operators. They must also take extra care in screening and choosing business partners. It is important to be more vigilant than before to the possibility of internal theft and measures to prevent it.
- Operators- The PCC noted that the current climate makes it tempting to cut corners. Vulnerable activities, including maintenance, training, cleanliness, crime prevention, insurance coverage, accounts receivables, legal advice, and government compliance, are areas that can be too easily ignored or deferred in an economic downturn. The PCC discussion is a reminder that these are all fundamental parts of the cold chain business, any one of which can result in lost business or losses of tens or even hundreds of thousand of dollars if neglected.
OUTLASTING THE STROM
At the heart of all this, as Bill Hendricksen told his audience at the WFLO Institute, “The unavailability of credit will continue to stymie growth.” There is considerable concern among customers about the credit worthiness of their customers. Much of the customer base is credit dependent, and with so many banks tightening credit it becomes more difficult to sell to customers who do not meet the tighter bank standards. And with some distributors going out of business, everyone wants to be more careful about to whom they sell. This all leads to reduced sales, lower volumes, less inventory, and fewer turns.
Faced with the dynamics created by a poor economy, in particular a customer base that may be injured of feeling vulnerable, 3PL providers who don’t maintain high levels of customer service do so at their peril. As panelist Barry Fischetto told the WFLO audience, “Our third biggest customer went bankrupt, but we are working with them because we view each customer as a strategic customer. Their success is our success.”
The other Senior Executive Panel members agreed. Bill Hendricksen explained that “We want to work with customers as much as we can,” and Nick Pednault advised cold storage operators, “See what you can do to help them and, at the same time help yourself.”
With so many factors in play, 3PL providers will need to be more nimble than ever before in order to flourish over the next decade. PCC Chairman Sandi Bishop reminds us that the cold storage industry has a long and strong record of serving the needs of customers with temperature-sensitive products. Her own company has been around for 95 years and has gone through more recessions and downturns than anyone can remember. “The best advice I have is to stay the course,” says Bishop. “The tight credit markets make outsourcing the cold storage function more attractive today than ever before. And no one is ever going to be able to freeze product in cyberspace.