The recession might finally be over for the refrigerated warehouse industry.
Operators in the U.S. and Canada expect revenue to grow more than 4 percent in 2013, according to a recent survey by the International Association of Refrigerated Warehouses. Some of the growth will be from expanded capacity, but the IARW survey found that most of the businesses expect customer demand to boost growth.
The forecast contrasts sharply with a study done by the IARW in 2010, when member companies expected growth of less than 1 percent.
Companies now are finding financing for expansion, another sign the financial crisis is easing. IARW members, spread throughout 65 countries, report current total capacity of 121.5 million cubic meters of temperature-controlled space, 6.5 percent more than companies reported a year ago.
But the biggest change can be seen by comparing the group’s Global Top 25 and North American Top 25 list to previous years. AmeriCold, the world’s largest refrigerated warehouse company, has 958.5 million cubic feet of temperature-controlled space in Australia, China, the U.S., New Zealand and Argentina, up 5.2 percent from last year, but 61.3 percent higher than in 2009. Four years ago, AmeriCold had 591.6 million cubic feet of storage in the U.S. and Canada.
Lineage Logistics, now the second-largest cold storage company with 290 million cubic feet of storage, ranked seventh in 2012 when it had 127.5 million cubic feet. Lineage didn’t even exist when the IARW put out its list in 2011.
Both companies grew quickly through acquisitions. Several years ago, AmeriCold acquired most of the assets of No. 2 VersaCold, which now operates only in Canada and is the world’s eighth-largest reefer warehouse company, with 117.3 million cubic feet of storage.
Lineage was created by Bay Grove Capital, which has acquired nine U.S. cold-storage companies in the past three years and combined them under the Lineage banner last April. The largest company, Castle & Cooke, was added last summer and instantly doubled Lineage’s size.
The buying spree continued this year, when Lineage added Seattle Cold Storage. Lineage this month also began operating two Tennessee cold-storage facilities with 9.6 million cubic feet of capacity for Rich Products.
It’s hard to get a handle on exact market values in the industry because only one of the 25 largest companies is publicly traded and financial information on deals is rarely disclosed. No. 3 Swire Cold Storage and United States Cold Storage is owned by Swire Group, which is listed on the Hong Kong Stock Exchange.
AmeriCold’s majority investor is Yucaipa Cos., owned by billionaire Ron Burkle. As sole owner in 2009, Yucaipa announced an IPO to list AmeriCold on the New York Stock Exchange, but withdrew the offering. A second IPO offering aimed at the NASDAQ exchange would have been the stock market’s largest IPO of 2010, but was also withdrawn.
Instead, Burkle raised $975 million in 2010 to buy 51 percent of VersaCold, having acquired 49 percent in 2009. The transaction was funded by raising $375 million from two new investors and issuing $600 million of fixed-rate debt.
One of those investors is China Merchants Holdings International, whose infusion followed a partnership between the two companies forming China Merchants AmeriCold, the largest cold-chain company in China.
A Burkle connection also exists in the creation of Lineage Logistics. Kevin Marchetti, managing director of Bay Grove Capital, was previously an investor with Burkle and Yucaipa and worked for Burkle while he was investing in AmeriCold.
Bay Grove invests in a number of industries, but Lineage is its biggest holding and one Marchetti says will grow. “We view food as a core fundamental market, and we view this company as a best-in-class logistics provider,” he said. “Together, that makes Lineage a very attractive best-in-class investment. We want to be a thought leader in the industry and a service leader for our customers.”
Three factors are driving consolidation in the historically fragmented industry, Marchetti said. “Large national customers want to simplify and reduce the number of logistics companies,” he said. “It is a matter of efficiency on their part, so they want someone they can work with everywhere.”
And costs for investing in the business are mounting and moving beyond the reach of many family owned businesses that historically dominated the industry. “The cost for infrastructure is growing,” Marchetti said. “Our business is highly capital-intensive, requiring investment costs for land, construction, labor, materials and equipment before the warehouse can even operate. Larger companies have the financial wherewithal to fund expansion and growth.”
Government requirements also are driving industry consolidation. “There are more and more food safety regulations, and the cost continues to increase to be compliant,” Marchetti said. Larger companies can be more efficient by spreading the cost of the safety training and infrastructure across a large company, and new growth allows us to leverage our best-in-class practice more efficiently.”
Although market geography matters, Marchetti said he’s mostly driven to acquire companies that are best-in-class and run by industry leaders. He says he’s still seeking additions to the company. “We are always looking around opportunistically. We would like to add additional geographies within our network to provide greater flexibility and options for customers, but mostly we are looking for best-in-class companies in robust markets,” Marchetti said.
One strategy the company uses focusing operations around major seaports. “We see the consistent expansion in global trade and sourcing of products internationally,” Marchetti said. “Commerce continues to grow, and it makes sense to contribute to that growth.”
Short-term growth likely will be focused in North America, but he said Lineage wants to expand internationally. “We certainly intend to grow into other countries,” Marchetti said, but any transactions would have to be preceded by “a lot of homework and diligence.”
Marchetti said the industry is fragmented not just in terms of company size, but also scope of work, with customers dealing with separate companies for transportation, storage and other parts of the process. “We offer many complementary services to cold storage right now, including blast freezing, custom services, repackaging and transportation,” he said. “We want to figure out how to be a one-stop solution for our customers and continue to find ways to be a value-added partner who makes their lives easier.”
Those expanded services may be done directly or in partnership with other companies, he said.
One market research firm said it expects market consolidation to continue in the refrigerated warehouse industry, but not at the rapid pace seen in the last five years. “Among the leaders in the industry, I don’t expect mergers, but the larger companies will continue to acquire smaller companies,” said Irshad Ali, researcher with Lucintel. The Irving, Texas-based company in April published a report analyzing the five-year period to 2017 called “Global Refrigerated Warehousing and Storage Industry 2012-2017: Trend, Profit, and Forecast Analysis.”
Lucintel’s growth forecast, which exceeds the IARW’s, estimates global refrigerated warehousing revenue will reach $130 billion by 2017, a 34.9 percent increase from the 2011 base of $96.4 billion.
That increase will come not only from expanded capacity but also through diversifying business with freight transportation and increasing value-added service options. “What we’re seeing is the drivers coming from frozen food, pharmaceuticals, dairy products, frozen fish and game,” Ali said. “A big driver for growth is technology development in the food industry and an increase in the prepared food market. Microwaveable meals are a global phenomenon these days, not just a trend in the U.S.”
The strongest growth potential is seen in the Asia-Pacific region as the retail market grows and becomes available to millions more customers. “Ready-made meals and pharma are relatively new there, and it is spurring a lot of growth,” Ali said.
Lucintel expects the frozen food business to grow 18 percent in North America, 15 percent in Europe and 13 percent in Asia-Pacific from the 2011 base through 2018. The rest of the world is expected to grow 19 percent.
Lucintel expects pharmaceuticals to grow by bigger margins from the 2011 base through 2017, 28 percent in North America, 23 percent in Europe, 46 percent in Asia-Pacific and 48 percent in the rest of the world.
China’s cold chain will continue to develop, but Ali said he didn’t expect major growth in Tier 3 or 4 cities,” he said. “The biggest expansion will remain in the coastal regions near port areas. We expect the market in China to focus on using trucks for distribution of the product to inland regions.”
The biggest development in the Chinese market in the next few years will be growth in refrigerated trucking, he said. “The retail companies have their own refrigerated trucks, and they are viewing them as portable refrigerated warehouses,” Ali said. “This is where they are going to expand because everything in the truck can be very tightly controlled just as if it was in a stationary warehouse.”
In such a rapidly expanding market, companies view trucks as portable warehouses that can be taken where needed with the option of parking a truck anywhere.
Contact Stephanie Nall at email@example.com.