cold storage market report - cbre

1

COLD STORAGE REPORT | 2020

COLD STORAGEMARKET REPORT

J U L Y 2 0 2 0

2


I N T RODUC T ION

3


INTRODUCTION TO COLD STORAGE

Investors are starting to take notice of the coldstorage sector, realising the important role itplays in the food industry

The business of freezing and storing food has been around for a considerable

length of time. Until recently it has been a domain occupied by food producers and

supermarket retailers as a key component of their business. The high cost of

provision meant that the mainstream investment market and development markets

largely left this space to the end user who would typically develop and occupy their

own real estate. As such, trading of these assets has previously been infrequent and

examples of such were typically assets sold by way of a sale and leaseback which

were normally located in established commercial locations.

Whilst the logistics sector has seen dramatic growth across both the occupier and

investment markets, cold storage was previously overlooked. However, investors are

starting to take notice of the sector, realising the important role it plays in the food

industry. Indeed, this has been supported by solid sector fundamentals in which the

cold storage industry has enjoyed stable growth, underpinned by strong demand for

food driven by population growth.

Along with the food producers and retailers, another important occupier of cold

storage facilities are specialist cold storage operators who handle the temperature

controlled storage and distribution on behalf of others. Historically, third-party cold

storage operators have been limited to having either a single country or single

customer revenue stream.

However, over the past few years there has been consolidation in the sector,

especially in the US in which the top three players, Lineage Logistics, Americold and

US Cold Storage control close to 70% of the market.

The European market, on the other hand, remains highly fragmented, but this is

starting to change as operators are seeking to invest in Europe to expand their

capabilities globally and increase efficiencies across their customer base. This group

of occupiers plays a crucial part in the industry as food producers and retailers look

to operate their supply chain more efficiently yet require their third-party supplier to

maintain the integrity of the product and service as this is crucial for brand

reputation.

The cold storage industry has enjoyed stable growth, underpinned by strong demand for food driven by population growth.

4


C O L D S T O R A G E I N T H E S U P P L Y C H A I N

PRE-PRODUCTION PHASE:

This is close to the site of raw material production. Often suchfacilities will have a narrow customer base and the facilitymay be bespoke to store a particular food product of thecustomer. Examples of this would include facilities located inmajor agricultural areas or close to a fishing port.

LOGISTICS HUB:

These are usually located near to a port or motorwaynetwork with a high level of accessibility. The customer baseis commonly much broader.

RETAIL DISTRIBUTION CENTRE:

Often close to a production or distribution plant of a majorretailer. It is likely that the customer base will be small, as theoperator may have an existing contract with the retailernearby. Such facilities often provide packaging and sortingof the retailer’s goods also.

POST PRODUCTION PHASE:

These are situated at a central hub with a good level oftransport connectivity, supplying products to retailers orwholesalers.

The diagram to the right details the process.

Frozen food is very much dependent on the refrigeration, freezing,defrosting and management of goods. There are generally considered to befour main types of cold storage facility, each of which plays a crucial role inthe process, as follows:

Pre-Production PhaseIn close proximity to site of raw material production, narrow customer base and high-volume security.

Logistics HubNear port or motorway network with

a broader customer base and low security

Retail Distribution CentreOften close to production plantwith similar high security

Post-Production PhaseAt a central hub supplying retailor

wholesale retailers.

Retailer

Consumer

55


5

To create a seamless and

efficient process operators

are having to diversify

their business. As food is

transported globally,

operators have had to

expand to meet demand,

yet retain quality control

across the supply chain.

”

6

COLD STORAGE REPORT | 2020 COLD STORAGE REPORT | 2020

A N O P E R A T O R ’ S P E R S P E C T I V E

Just a few years ago, the process and network through which

food was both stored and transported relied heavily on

antiquated technology as well as disparate, regionally

focused warehousing companies with limited access to capital

and little network connectivity. We at Lineage Logistics, along

with others in in the cold storage industry, realized the space

was ripe not only for technical disruption through the use of

data and applied sciences, but also for consolidation by

creating larger, more institutional players.

In a matter of a decade, Lineage Logistics transformed from

one warehouse to be the world’s largest provider of

temperature-controlled logistics solutions by acquiring best-

in-class regional operators in key markets with population

demand for the food our customers grow or produce and

distribute.

Today, with more than 260 facilities and 1.7 billion cubic feet

of capacity in ten countries, we carry that growth mindset

forward as we explore new ways to collaborate with our

customers and further expand Lineage’s reach.

We will continue to identify companies to acquire in diverse

U.S. markets where our customers need capacity;

additionally, we are expanding our buy-and-build model

abroad to grow our networks in both Europe and the Asia-

Pacific region, thereby setting the stage for Lineage to act as

a true institutional player on a global scale. We are also now

uniquely positioned to acquire and operate facilities owned

by food producers and retailers, which frees up their capital,

creates greater efficiencies in their supply chains and allows

them to focus on their core business.

L I N E A G E L O G I S T I C S

77


7

T H E O P E R A T O R M A R K E T

It is evident that this consolidation activity is being

mirrored in the cold storage sector, with the expansion of

a number of key operators. This space was previously

fragmented, typically family run businesses limited to

single product or single county operations. In many

instances this has been driven by US backed private

equity which has allowed rapid growth. This would

include global players such as Lineage Logistics and

AGRO Merchants Group.

Typically, operators have expanded through acquiring

existing businesses to create a global platform and

diversify their customer base. Indeed, expansion has been

particularly evident in Europe where operators have been

historically localised.

The table below of leading providers in Europe illustrates

not only the previous fragmentation of the market, but

moreover underlines the strategies of the major operators

who occupy the top five positions:

In the past, the market for frozen food production has been dominated bya number of household names such as Unilever, Nestle and Nomad. Thesector has witnessed consolidation in recent years including Nomad’sacquisition of Findus and Bird’s Eye in 2015.

# Company Locations *Cubic Metres

1 Lineage Logistics Belgium, Netherlands, United Kingdom 5,033,862

2 KloosterboerFrance, Germany, Netherlands, Norway, Sweden

4,659,353

3 AGRO Merchants GroupAustria, Ireland, Netherlands, Poland, Portugal, Spain, United Kingdom

3,455,536

4 NewCold Advanced Cold LogisticsFrance, Germany, Netherlands, Poland, United Kingdom

2,895,146

5 Nichirei Logistics Group, Inc France, Netherlands, Poland 1,572,500

6 Magnavale Ltd United Kingdom 1,159,509

7 Agri-Norcold A/S Denmark 978,750

8 Stockhabo Belgium 865,501

9 Bring Frigo Norway, Sweden 817,623

10 Claus Sorensen A/S Denmark 807,003

*Source: International Association of Refrigerated Warehouses (IARW), May 2020

8

The significant barriers to entry in the sector owing to the

substantial costs of construction has made it difficult for the

smaller operators to capitalise in the same way. Costs to

build are typically much higher than those of regular logistics

buildings, depending on the type and specification of

the facility; for example, manual vs automated, or frozen vs

chilled. In instances, costs to build can be 2-3x higher than

that of a conventional warehouse. Combined with the task of

securing long-term contracts to maintain a stable cashflow,

levels of expertise are required to ensure the efficient running

of operations.

We expect that there will be further consolidation in the

sector. It allows operators to provide solutions to key

customers in offering efficiencies across geographies and to

meet their demand requirements, in turn developing a deep

knowledge of their customers’ operations. Indeed, the need

for frozen storage is recognised as being essential to the

food industry as third-party suppliers are increasingly being

viewed as the link between the producer and retailer; very

much emphasising the requirement for cold storage at each

stage of the supply chain.

Global Operators

99


9

A N O P E R ATO R ’ S P E R S P E C T I V E

We at NewCold have developed our own state of the art, fully

automated, cold storage facilities which have enabled us to

meet the demands of our global customer base. We operate

large scale facilities creating efficiencies through economies

of scale. Our ultra-modern warehouses allow us to secure

contracts with the premium brands as we can demonstrate

the integrity of our cold supply chain.

We identify the key trends in the sector to be (i) a further

move towards outsourcing this part of the supply chain by the

large food processing companies and retailers and (ii) the

consolidation of smaller / family businesses by larger players

and financial sponsors. We also see a further move towards

automation by traditionally manual operators as they seek

to increase efficiencies.

N E W C O L D

10


Trends suggest that the attitude towards the sector isstarting to change, as investors are increasingly looking atthe cold storage market as a means to diversify theirportfolios.

Having invested heavily in industrial and logistics over the last few years, institutional

real estate investors are increasingly turning their attention to the attractive returns

provided by cold storage, seeing it as a growth sector that is underpinned by sound

fundamentals. To demonstrate this, transactional activity across Europe by investors

such as Tristan Capital Partners, Barings, LaSalle, Garbe and Axa among others has

seen over c. €755 million invested in the sector over the last five years. As a result of

increased demand, it has led to yield narrowing between cold storage and

traditional logistics facilities.

Typically, cold stores are not built speculatively and are built to meet specific

demand requirements. Likewise, activity in the leasing market is thin and often

forms part of a sale and leaseback transaction or when a facility becomes vacant.

As such, mainstream institutional real estate investors have previously been deterred

from investing in cold storage owing to the higher specification of cold storage

facilities compared to a regular logistics building due to the cost of construction.

When cold storage facilities are leased, rents achieved are often 2-3 times higher

than that of a warehouse. This has often been a detracting factor for investors as the

perception has been that cold storage is overrented in comparison to regular

industrial property, owing to the bespoke nature. Likewise, this has raised concerns

of the re-letting of such assets owing to a low pool of potential occupiers as well as

the prospect of reinstatement at the end of the term; in essence, returning the asset

to a lower specification at the end of the lease term.

Arguably, what lay behind this was uncertainty as to the depth of the market in this

area. This has not been unique to cold storage and has applied to most asset

classes outside the traditional sectors of industrial, office and retail. As a result, the

market has traditionally been the domain of the owner occupier and investment has

often come from within the sector by means of merger and acquisition or new

developments. In many cases, cold storage facilities are situated at the initial source

of food production which are not locations which would appeal to institutional

investment but would be vital to the corporate occupier or retailer in connecting their

supply chain. Instead, facilities further along the chain in logistics hubs or close to

the retailer are those which have witnessed a degree of investor demand. In both

cases, investors typically consider the trading performance of the business in

question as priority as the business and the real estate are intrinsically linked.

R E A L E S T A T E M A R K E T

Low poolof potential occupiers

£ £Prospect of reinstatement at the end of term

10

As EBITDA multiples have increased for corporate acquisitions, so have yield narrowed for real estate investment. This trend is expected to continue as the industry continues to grow and attract interest.

1111


11

S E C T O R O U T L O O KInevitably technology will be a factor that drives sector

growth. As operators seek to increase their global reach,

creating efficiencies through greater automation via

technology will be vital to compete with the challenges of a

changing supply chain.

It is evident a number of companies recognise the need to

be ahead of the curve on this matter. For example, at all

eight of its facilities in Europe, USA and Australia, NewCold

implemented cutting edge automated storage and retrieval

systems (ASRS) to automatically move and store products;

thereby increasing productivity and reducing human error.

It is expected that that there will be further consolidation

by the major cold storage operators. The appeal of

investment in the European market is two-fold; not only

does it allow operators to enter a new market, but also

take advantage of existing robust demand / supply

dynamics for frozen products. Indeed, the fact that

Europe is the largest consumer and exporter of frozen

vegetables globally serves to underline this.

In turn, real estate investment is forecast to increase as

investors will be increasingly attracted to the higher

returns offered by cold storage in comparison to regular

industrial and will see it as an opportunity to diversify their

portfolio.

This is very much driven by the strong underlying

fundamentals of the sector. Future yield compression is

likely as investors and corporates alike will seek to

capitalise on opportunities in an increasingly competitive

market.

According to research, the cold storage sector is set to

grow at a CAGR of 4.5% by 2023 as the requirement for

cold storage is becoming more pertinent due to a number

of factors.

For example, as the global population increases, it puts

pressure on the supply chain for the demand for food.

Indeed, the world population currently stands at c. 7.5

billion and this is projected to increase to c. 9.75 billion

by 2050, according to research by Oxford University.

Similarly, sector growth is being fuelled by changes in

consumer and retailer habits. Frozen food has

traditionally been associated as being a product of lower

quality and offering, very much second to fresh produce.

The frozen ready meal and convenience food segment

still dominants the sector, however perceptions appear to

be changing as the offering has expanded across

products such as frozen vegetables.

Pre-prepared vegetables accounted for 90.6% of the

share of fruit and vegetables globally in 2017; their

advantage over fruit being that most vegetables do not

require thawing, thereby saving time and increasing

customer convenience. This is supported by the fact that

in countries such as the UK the industry is growing at an

annual rate of 4% due to increased consumer demand

for frozen food.

To meet demand, this has led to the greater need to

invest in technologies to enhance the shelf-life of such

products and ensure that quality and nutritional value is

not compromised.

It is expected that that there will be further consolidation by the major cold storage operators

12


12

C O N T A C T T H E T E A M

CBRE Limited | Valuation & Advisory Services – Corporate Valuation Services

St Martins Court | 10 Paternoster Row | London | EC4M 7HP

m: +44 (0)7584 886 999

t: +44 (0)20 7182 2596

e: [email protected]

Dominic BurkeMRICS | RICS Registered Valuer

Senior Director

CBRE Limited | Valuation & Advisory Services – Corporate Valuation Services

Henrietta House, Henrietta Place, London, W1G 0NB

m: +44 (0)7769 367 055

t: +44 (0)20 7182 2296

e: [email protected]

Charles McCloyMRICS | RICS Registered Valuer

Senior Surveyor

To learn more about the cold storage sector around the world read

“Cold Storage Logistics Unpacked” from the US and

“Asia Pacific Cold Storage: An Investor's Guide”.

https://www.cbre.com/-/media/cbre/countryunitedstates/corporate-offices/southern%2520california/ind-rn/us-food-on-demand-cold-storage-logistics-unpacked.pdf

https://www.cbre.com/research-and-reports/Asia-Pacific-Cold-Storage---An-Investors-Guide

13


cbre.co.uk

cold storage market report - cbre

Documents