PRWs May Grow at a Lesser Pace,
But Slow and Steady Wins the RaceTitle
By J.J. PIERCE QFFI Assistant Editor

Rate of new construction and purchase of equipment slows, but that's just the industry taking a breather after rapid expansion in recent years. Future challenges include bar code harmonization and responding to emergency logistics situations.

The public refrigerated warehouse industry is still growing, but not as fast, according to findings gleaned from the QFFI/IARW Annual Refrigerated Services Survey.

But there are regional contrasts. In North America, the trend seems to be towards stable turnover and inventories, whereas in Asia and the Pacific Rim there is still a sharp contrast between gains and losses.
Returns from Europe this year are too few to be statistically significant, but an executive from one PRW company reports that trends include more construction of facilities dedicated to particular products like french fries - and monster traffic jams interfering with pickups and deliveries.

It was only after returns came in that a coalition led by United States invaded Iraq to get rid of the Saddam Hussein regime. Although the war doesn't involve Europe, Europeans are nervous about its impact on trade and the economy, and stricter measures to ensure food safety and security could prove to be a burden.

Long before the war, the economy had taken a downturn around the world, and that seems to be reflected in the PRW industry, in terms of everything from turnover and inventory to plans for new construction, purchase of equipment, and efforts to cut costs reflected in use of consultants to advise on energy management and other issues of efficiency.

A year ago, 51% of North American warehouses reported increased turnover. This year, it's 37.8%. A year ago, 28.4% reported turnover staying about the same. This year, it's 49.5%. And yet, only 2.6% report turns actually declining, versus 7.3% last year.

There's a similar situation with inventories. Some 57.1% this year report them holding steady, compared to 41.7 in 2002; while 28.6% report increases, versus 31.1% a year ago. Only 9.2%, against 19.2%, reported declines. For some reason, fewer operators left the space blank than for turnover trends.

In the Pacific Rim and across Asia and southern Africa, 46.7% of the weighted sample reported increased turnover this year compared to 57% a year ago, while the percentage with declining turnover remained the same at 42.6%. Increased inventories were reported by 51.6%, again versus 57% in 2002, and again with 42.6% reporting declines.

John Mynes, regional sales and marketing manager of P&O Cold Logistics, City of Industry, California, blamed the situation on specific factors. "If turns are slowing down, it's partly because of the economy generally, but mostly because exports are down. Russia is importing less meat and poultry, and Japan is importing less of everything. Plus there was the West Coast dock lockout."

J. William Hudson, president and ceo of the IARW (International Associated of Refrigerated Warehouses), stressed that the overall situation is still positive. "According to your own numbers, 87.3% of PRWs reported higher or same turnover, versus 79.4% a year earlier. You also noted that only 2.6% showed a decrease, versus 7.3% the year before."

It's the same with inventory, Hudson told Quick Frozen Foods International: "In this year's survey 85.7% of PRWs reported higher or the same level of inventory versus 72.1% the year earlier. Inventory was down for 9.2% this time versus 19.2% the last time."

In terms of construction plans, there seems to be a lot less emphasis in new buildings in North America as opposed to additions and renovations. Only 12.2% plan new -29° C warehouses in 2003 versus 50.6% a year ago, whereas 22.4% plan additions (none a year ago) and 14.3% renovations (3.3% a year ago) in that category.

In the -18° C category, the numbers are 17.9%, 12.8% and 3.1%, versus 23.8%, 4.6% and 10.6% in 2002. In 0° C warehouses, 6.1% plan new facilities (20.5% a year ago), 3.6% additions (zero last year) and 2.6% renovations (again zero a year ago). One surprise: 16.8% are adding to facilities other than warehouses or offices; examples include food processing and custom packing facilities, staging areas and enclosed docks.

IARW's Hudson wasn't surprised by the changing pace in construction plans, in face of both the economic slowdown and a previous building boom.

"Your findings on construction activity confirm our unscientific observation that companies are looking for ways to upgrade and expand their facilities and utilize improved technology in order to operate efficiently and enhance customer service," said Hudson. "Moreover, we've seen a great deal of new construction over the past ten years, so it's not surprising to see some leveling off. I'm sure we'll see another upturn when the economy takes off again."

No survey respondents in Asia and the Pacific Rim plan new warehouses in the -29° range. But beyond that, it's build-we-must, with 46.7% planning new structures in the -18° range and 45.1% in the 0° range. New offices are also planned by 45.1%, whereas plans for additions and renovations are relatively few. A lot of this may involve replacing smaller units with larger ones.

When it comes to equipping warehouses, Asia and the Pacific Rim also seem to be a lot more active than North America. Some 96.7% of locations in the former, for example, report plans to buy new screw compressors, compared to 39.8% in the latter. Half the Asia-Pacific Rim warehouses are seeking standard racks, as opposed to 34.2% in the US. Even for as basic an item as pallets, the response was 95% in Asia and the Pacific Rim, but only 31.6% in North America.

Part of the discrepancy may be attributed to warehouse executives being pressed for time. Some returns, even from major operators, left completely blank the spaces for freezing equipment, materials handling equipment and insulation. A number of major operators, again no doubt pressed for time, left the section on computerization blank. But a slowed pace for equipment purchasing goes hand-in-hand with a slowed pace of construction.

"It stands to reason that with less new construction there would be less demand for new racking, new refrigeration equipment, new materials handling equipment, etc.," said the IARW's Hudson. "The decline is not what's significant here. I think it's more significant that so many facilities are doing all these things now despite the slowdown in new construction."

Another sign of the economy's impact on the industry is the quest for greater efficiency. Of the 27.5% of North American warehouses that reported using consultants, the purpose most often cited was "energy management." The fact that 45.1% in North America also reported that they were investing on heat recovery systems is further evidence of a strategy to make PRW operations as energy efficient as possible.

But the movement towards greater efficiency in another area, transportation logistics, can have its pitfalls, warned John Mynes of P&O Cold Logistics.

"The most important trend in the industry, and it's been going for the last ten years, is the shift towards just-in-time delivery. Smaller but more frequent shipments mean that supplies start to back up," he noted. "The other side of that is that, with a global economy like ours, the system is vulnerable to disruption."

How vulnerable?

"You find out what that kind disruption can do when you have a situation like that West Coast shipping stoppage," Mynes said. "It's the same with weather problems, and now the war. People are canceling trade-related trips, and that could disrupt trade itself. It's not that the steps we've taken in changing logistics are wrong, but people have to recognize the risks."

Because European survey returns were so sparse, they aren't being figured into global totals. But North America and the Asia-Pacific Rim region offer some stark contrasts. Conveyer systems and cranes figure strongly in Asia-Pacific purchasing plans, for example, whereas they're hardly a blip in North America. And nearly all the Asia-Pacific warehouses are buying pallets, versus only 31.6% in North America.

Nearly half the Asia-Pacific warehouses are buying fluorocarbon compressors, which don't rate a mention in North America. Apparently nobody in the Asia-Pacific region is interested in purchasing condensers this year, whereas the rate in North America in 29.6%. Some North American operators expressed interest in gravity racks, none so in Asia and the Pacific.

But hardware isn't the whole thing these days. Some 21.9% of North American warehouses plan to upgrade their computer systems this year, and 45.1% in Asia and the Pacific Rim aim to fully replace them. In terms of basic installations, 48.5% of North American outlets still use owned mainframes, whereas shared mainframes (45.9%), individual microcomputers (48.4%) and especially networked microcomputers (54.1%) are more popular on the opposite side of the world.

Some 87.7% of North American warehouses have Internet websites, with 7.1% planning sites; and in Asia and the Pacific Rim the rate for existing sites is 57.4%. Several North American operators mention using the Internet as well as electronic systems like EDI and WINS for communication. And yet fax machines are still the most popular form of business communication worldwide at 75.9%, although they lag behind cybernetic means in North America - and in Asia and the Pacific Rim, telex machines are still widely used.

"Internet use has been embraced by the PRW industry, and members are using it in every imaginable way," observed IARW's Hudson. "This includes communications and e-mail, transmitting documents, EDI, inventory tracking, order shipment reports, product tracking, purchasing, marketing, and research. It's no longer unusual for a warehouse worker to use the Internet to log onto the IARW/WFLO website to check on optimal storage conditions recommended in the WFLO Commodity Storage Manual."

One might think it odd that only 33.2% of North American warehouses report using bar code technology. As in other areas, some operators may have simply failed to check it off. And yet, according to John Mynes, there's an all too real reason for some operators to be less than enthused about bar coding.

"One of the greatest challenges in the refrigerated logistics industry today, and for the foreseeable future, is the lack of uniform electronic and bar code standards," he said. "Standards aren't even uniform within the country, let alone from one country to another - the ConAgra Group realized a year ago that their codes don't all read the same."

Unfortunately, there isn't a lot of pressure from the food industry to change things.

"The ones pushing the most for uniformity are the people at Wal-Mart and Sam's Club, which do a lot of international business," Mynes said. "Some people claim that they need their own codes for 'security,' but it's easy to crack a bar code. With different codes, there's more paperwork, more delay. Indeed that West Coast dock dispute was over paperwork, over being able to scan in containers as they came in instead of doing everything manually."

The fact that the US and the rest of the world still have different systems of measurement aggravates the problem, he added: "Don't forget that we had a spacecraft crash into Mars because somebody forgot to convert feet into meters. Our whole system is a patchwork, and it's going to take the concerted efforts of retailers to change that."

While energy management seems to be the most frequent assignment for consultants, others mentioned include productivity, accounting, MIS, information technology, personnel rating, utilities, loss control and international operations.

"There are a number of consultants who specialize in this industry and have successfully worked with PRWs to improve operations and/or save money," noted Hudson. "Since energy is the second greatest expense in the PRW industry, it's not surprising that you have found a high demand for consultants that can help control energy costs."

"Regarding the trend to just-in-time purchasing, its just-a-headache to most companies - but it's here to stay as manufacturers and retailers struggle to beat down costs in the supply chain," said Hudson.

From the European Front

Elsewhere (see page 121), Eurofrigo's Derk J.B. van Mackelenbergh comments on PRW issues. Here is the perspective of Theo W.M. van Sambeeck, director of IARW's European Division.

For some time now, the market for temperature controlled logistics has been characterized by pressure on revenues and therefore on profitability. Why else would Hays put its logistics division on display, Prologis limit its Frigoscandia network to the United Kingdom and France, Salvesen step up the reorganization process in Germany and the UK, and P&O sell its European logistic activities to Wincanton?

There are numerous reasons for this trend; overcapacity in all sectors of the market being the number one cause. The present slow growth of most economies in Central Europe - in particular Germany, the Netherlands, Italy and France, which are performing well below average - increases the mutual competitiveness, especially in those logistic areas where volumes and occupancy rates play an important role.

The war in Iraq adds to the difficulties, putting more pressure on consumer confidence and consumption and therefore on logistics. Customers reduce stock supplies, contributing to the consolidation of the product flows and the centralization of purchasing power. Expansion is reducing the number of service providers, which increases dependency and lowers profit margins.

Is there any good news? Yes!

In his analysis during the IARW/WFLO European Institute in Leuven (see pages 118 and 120), Dirk Jan de With, Planning & Logistics Director for Unilever´s European Ice Cream & Frozen Food Division, pointed to the steady growth that can be expected in the consumption of frozen and moreover chilled products in the coming years. In specific product categories the growth will be impressive and, as a result, contribute to the growth of the logistics industry.

Some logistic service providers have succeeded in decreasing the pressure on margins. Instead of a multi client operation, logistics companies are more and more inclined to work towards real dedicated or limited client operations, with contracts from five to sometimes even 20 years. If there performance is good, the margins can be very reasonable. Others develop new concepts, which often results in obtaining extra service with more than average added value.

Especially now that companies which are (often) listed on the stock exchange withdraw from the temperature controlled warehousing market, there is again more room for the medium-sized independent companies.