Demand for fresh, perishable food via online grocery shopping means cold storage space needs to be optimized.
Millenials are a generation of consumers who prefer e-commerce over in-store shopping, so much so that their preferences are causing the grocery industry to make big changes. While online grocery sales are currently responsible for a modest three percent of all grocery sales, research indicates that 70 percent of consumers will be grocery shopping online within the next five to seven years. More specifically, the amount of people shopping for groceries online is expected to rise to 13 percent by 2024.
Proof of this shift in evident in the market as Amazon decided to purchase Whole Foods earlier this year. By many measures, online grocery shopping is rising. Naturally, with a shift in the demand of groceries available for online purchase comes an increased need for cold storage. Whether it’s in an industrial space or a retail space, in distribution centers or warehouses, the need for more cold storage is on the rise.
As of now, cold storage uses 180 million square feet of industrial space and 300 million square feet of retail space. It’s expected that 35 million square feet of storage space will shift from retail storage to industrial, which includes cold storage, by 2024.
What caused the shift toward industrial space in the cold storage sector? According to Jason DeLoach, Vice President of Supply Chain Engineering at Americold Logistics, it all falls on the consumer.
“We’re ordering more fresh and chilled products in smaller quantities from a large overall section,” he said. It’s the convenience that online shopping offers that lures in consumers, and their expectation remains the same for their groceries to be as fresh as if they’d gone the store for them.
In other words, if retailers want to succeed at the online grocery game they need to make sure there is plenty of fresh, perishable food readily available for purchase. Retailer demand for the availability of fresh food at this volume is what led Manfredi Cold Storage—a distributor of fruit, vegetables, and foodstuffs from 22 countries—to expand its Kennett Square, Pennsylvania facility by 70,000 square feet to 400,000 square feet.
With the global cold storage market expected to reach $212.54 billion by 2025 it makes sense that distributors and retailers alike are making moves to accommodate to the online grocery industry.
Walmart and Amazon
“As e-commerce expands further into the grocery business the resulting growth of the food supply chain demand for new climate-controlled warehouse space could very well be the new opportunity that investors and developers have been seeking,” shared CBRE.
For Walmart, its e-commerce investments—such as its $3 billion purchase of Jet.com—have resulted in a 63 percent online sales spike. This undoubtedly is also a result of the major improvements the retail giant made to its online marketplace—which went from selling 10 million first and third party items last year to now selling 50 million.
Similarly, e-commerce giant Amazon made its own investment this year when it notably purchased Whole Foods as a way to enter the grocery industry. The massive move has made such an impact in the grocery industry that research now indicates that “within the next five years Amazon will become a top five grocer in the U.S.,” said Cooper Smith, Research Director at L2 Inc.
By comparison, Whole Foods and Amazon respectively had 1.21 percent and 0.19 percent of the U.S. food and grocery market share in 2016, whereas this year so far Whole Foods is up by 37.2 percent and Amazon is up by 30.1 percent, wrote Tonya Garcia of MarketWatch.
A Costly Venture
“Investment in cold storage is not cheap—it can be up to two times more expensive to build a refrigerated facility over a conventional warehouse,” said DeLoach. A clear indication of this is the fact that cold storage facilities across the U.S. are only projected to grow by one percent annually for the next five years, according to Sowinski.
With Walmart and Amazon continuing to make a name for themselves in the online grocery industry cold storage space will have to increase markedly in the near future. How can this be accomplished when the task is so costly? DeLoach points to the trend of vertical facilities to achieve high efficiency.
“Land prices or capacity constraints encourage vertical development,” he noted. “A higher building can be more efficient than the same volume of space for a lower/wider building.”
Other notable cold storage trends DeLoach recommends exploring are:
- multi-vendor consolidation
- outsourcing for the benefits of variable costs
- consolidation for particular retailers/overflow
- power reclamation
- vertical dock levelers
Millennials are setting the trend of “e-commerce everything” and Walmart and Amazon are mobilizing to meet demand. As cold storage mega warehouses crop up, look to see smaller perishable grocery stores take part in the movement—for now, it’s a Fortune 500 battle.