Evolving Consumer Demand Continues to Drive Cold Storage Market Activity

— 8 minute read

Cold storage facilities play a crucial role for storing, distributing and preserving perishable products, including products such as fresh produce, dairy, meat, seafood, pharmaceuticals, and other temperature-sensitive goods. These facilities provide controlled environments with refrigeration or freezing capabilities to maintain product quality, safety, and shelf life. Market demand for these temperature-sensitive products continues to grow. However, the availability of cold storage infrastructure has continued to lag market demand, especially in secondary and tertiary markets.

Meeting the demand for more customized services has become increasingly important for public refrigerated warehouse operators (PRWs). This involves understanding the alignment of interests among shippers, especially when their product profiles or customer bases are similar. While larger shippers often receive more attention from PRWs, mid-size shippers collectively contribute significant volumes and may require specialized services provided by agile regional operators.

Cold storage facilities are in high demand.
Growing Demand: A Modern Cold Storage Facility Responds to Consumer Needs

Consumer Demand as a Driver permalink

Consumer demand continues to be a major driver for the growth of the cold storage market. Even prior to the COVID-19 pandemic, demographic and cultural changes in food preferences as well as increasing eCommerce demands were already placing unprecedented demand on cold chain infrastructure. The pandemic further intensified this demand, with frozen and refrigerated food experiencing significant growth. According to The American Frozen Food Institute (AFFI), the frozen food category witnessed remarkable growth in 2020. Sales increased by 22% to reach $65.8 billion, compared to a 2% increase the previous year. This trend continued in 2022, although not at the same supercharged level, with frozen food sales reaching $72.2 billion, an 8.6% increase from the previous year. AFFI also reports that more than 40% of foodservice operators increased their purchases of frozen food compared to 2019.

Factors Driving Consumer Demand permalink

Several factors have contributed to the increased demand for frozen and refrigerated food products. Habits formed during the pandemic have led to consumers developing new or stronger affinities for frozen and refrigerated foods. According to the AFFI, 29% of consumers reported they’ve expanded their freezer capacity since the onset of the pandemic. Consumers are also turning to frozen food to reduce food waste and mitigate inflationary pressures on food prices. Additionally, changing consumer lifestyles, technological advancements in food processing and packaging, and the continued growth of eCommerce have further propelled the demand for temperature-sensitive goods.

Market Projections permalink

The frozen food market in the United States is expected to grow at a compound annual growth rate (CAGR) of 4.7% from 2022 to 2030, according to a recent report by Grand View Research. The growth is driven by the availability of a wider range of both fresh and frozen product options, customization, quality, cost-effectiveness and convenience, which continue to expand consumer demand.

Supply of Cold Storage Infrastructure permalink

Despite the growing demand, the supply of cold storage infrastructure has not kept pace, especially in secondary and tertiary markets. Modern cold storage capacity remains a challenge in many parts of the country. Major PRWs such as Lineage and Americold generally operate large facilities that are especially focused on the big manufacturers, processors and distributors. However, demand is often distributed over multiple smaller storage requirements within a geographic area. These smaller customers have significant needs for cold storage but often struggle to find suitable cold storage solutions nearby, highlighting the need for localized facilities.

Complex Factors Impacting Supply permalink

Several factors contribute to the supply-demand imbalance in the cold storage market. The evolving structure of the cold storage network driven by increasing downstream consumer demand, often creates additional upstream production, manufacturing and processing requirements. This can lead to the displacement of on-site cold storage and the need for new facilities in proximity. This type of activity is happening throughout the country as manufacturers and processors convert on-site cold storage and related activity to production as the best and highest use of the facility. An illustration of this is poultry processors who increase processing capacity by moving blast freezing to a different location or even third parties. Further, it is the PRW that understands the need for economies of agglomeration, density and scale in making its services much more appealing to a specific type of user or customer.

Another factor is the strategic initiative by many companies to shorten their supply chain. For example, according to a recent report by Prologis, Mexican logistics real estate has a 1% vacancy, mostly driven by nearshoring demand. In a similar way, companies are increasingly developing strategy to shorten their cold storage network within the U.S. By locating inventory closer to customers and capacity closer to suppliers, costs and flexibility to react more quickly to supply chain disruptions may be improved. At the same time, this may create increased demand for cold storage facilities in specific areas.

Furthermore, infrastructure stakeholders such ports, regional economic development groups and industry groups are collaborating to address latent demand. Without the cold storage infrastructure in place, the demand will not materialize simply because there is no infrastructure to support the demand. On the other hand, the demand must be identified to support the business case for the cold storage infrastructure. These partnerships aim to identify the demand for cold storage infrastructure and develop strategies to solve this business case conundrum.

Aging Infrastructure permalink

Another challenge of the cold storage supply issue is the functional obsolescence associated with the current cold storage network. According to a 2020 JLL study, the average age of a U.S. cold storage warehouse is 42 years old, with nearly 80% built before 2000. The aging of the cold storage network throughout the U.S. greatly impacts its utility. Limitations are encountered due to functionality issues, such as ceiling heights, temperature capabilities, processing requirements, etc.

The Market Response permalink

Investor groups, PRWs and other market participants have recognized this complex market supply and demand issue in the cold storage market. Especially in the last two to three years, the market is responding with significant activity ranging from acquisitions, new construction and new strategy to fill the void. Examples of some of these market trends include:

  • Significant acquisition activity has occurred by Lineage and Americold (largest players) to create larger networks. The large providers are also building new facilities with very large capacities and automation.
  • Other regional, smaller and more agile cold storage providers are also combining to create national networks of smaller providers. These providers can provide responsive services for small to mid-size shippers at competitive rates. In addition, these regional provides can provide economies of scale, density and scope due to combination or merging of like type of products into larger shipments. As such, these smaller shippers can have a cost structure comparable to larger shippers.
  • New investor groups with significant capital are seeking to leverage opportunities with potential higher returns than in the past have entered the market. However, they are becoming increasingly selective in searching for the right market with sustainable demand.

Barriers to Entry permalink

Investing in cold storage infrastructure presents notable challenges and requires substantial capital. The costs associated with construction and equipment are significantly higher compared to conventional warehouses, often reaching double or more. Additionally, the ongoing operational expenses are considerably elevated due to the need for precise climate control to preserve product quality.

Compliance with stringent regulations such as the Food Safety Modernization Act (FSMA) and FDA regulations further adds complexity to the operations of cold storage facilities. Handling smaller orders and ensuring quick turnarounds in a refrigerated and frozen environment also pose logistical challenges that need to be addressed.

A significant risk factor in this industry is the absence of long-term customer contracts for cold storage facilities. Customers prioritize flexibility and the ability to switch providers as their requirements change, making it challenging to establish stable, long-term contracts that provide risk mitigation for investors.

Furthermore, the current economic conditions have had an impact on market activity. The increase in interest rates has prompted a stronger emphasis on investment quality, resulting in only the most promising opportunities in the cold storage sector advancing. Investment groups carefully assess potential returns and thoroughly evaluate the market and potential customers supported by the facility. While a few speculative cold storage facilities have recently emerged, the market as a whole undergoes rigorous scrutiny. Despite these challenges, the growing consumer demand for a broader array of cold storage and distribution services, coupled with the state of the U.S. cold storage infrastructure, present attractive investment opportunities that have garnered support from various investment groups.

Conclusion permalink

The demand for additional cold storage infrastructure presents both opportunities and risks for investors and market participants. The evolving market, driven by consumer demand and a unique set of supply chain dynamics, will continue to shape the cold storage infrastructure. While challenges exist, the market offers excellent investment opportunities supported by various investment groups. As the cold chain market continues to grow, the development of cold storage facilities will be essential to meet the increasing consumer demand for perishable products.

In today's environment, identifying the optimal market for a cold storage facility requires a comprehensive approach that goes beyond geographical considerations. It necessitates a broader perspective that emphasizes the benefits for all customers through collaborative approaches. Our strategy for determining the ideal market for a public refrigerated warehouse (PRW) or a developer focuses on fostering collaboration and capitalizing on economies of agglomeration (bringing together similar types of shippers), as well as economies of scope, scale, and density. These factors significantly enhance the attractiveness of cold storage projects.