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GCCA Eyes Cold Chain Business Challenges

June 1, 2020

The Global Cold Chain Alliance (GCCA) has released the first-quarter data showing the general major cost structure of operating refrigerated warehouses. The cost of labor was once again the largest share of expenses, followed by property rent or lease expenses.

The rates that cold storage warehouses charge customers for providing third-party logistics services such as storage and shipping of perishable foods have been challenged as arbitrary and steep. In order to improve the economic information available to industry participants, the Global Cold Chain Alliance has commissioned a Cold Chain Index (CCI), reported since the end of 2018. The CCI tracks the growth rates of costs using predominantly official sources of economic data. The CCI can be customized to the region and state where a warehouse facility operates.

The CCI includes five classes of expenses: labor, electric power, rent, supplies, and repairs; the cost shares typical of a North American refrigerated warehouse are shown in Figure 1. Labor was the largest share of expenses, at 46% of the total. Property rent or lease expenses represented nearly 35% of total expenses. Electric power accounted for 10% of total expenses. The “other” category included the leases on material handling equipment, expenses on utilities other than electric power, and un-specified other expenses. Note that the cost shares have been updated since the Q4 2019 release for all 2020 releases based on the FY2018 IARW Productivity and Benchmarking Survey results.

“GCCA’s Cold Chain Index is a valuable tool for third-party warehouses – and their customers, such as food retailers and wholesalers – in contract negotiations that reflect actual costs of the major inputs for producing the 3PL services – labor, electric power, rent, supplies, and repairs,” says Jason Troendle, Director of Market Intelligence & Research. “Today’s 3PL services are not commodities; they are tailored in many cases to specific customers, and many 3PLs are offering value-added services such as case picking, blast freezing, GDP Audit Certification, SQF Certification, and much more. The CCI helps purchasers of 3PL services understand the basic costs and it’s up to the 3PL to discuss the ROI of the value-added services.”

Key findings of this research include:

Business challenges. The most frequently-selected challenge was supply chain disruptions (e.g. keeping up with demand surge, slowdowns in food service, production/manufacturing challenges) and selected by slightly over 50% of all respondents.

Responses. The top COVID-19 response was to take extra measures to protect the workforce (e.g. staggered shifts, social distancing, remote working). The next-highest issues were maintaining overall business continuity and workforce morale.

Impact on revenue. Comparing actual Q1/Q2 revenue vs. Q1/Q2 pre-crisis revenue expectations, 54% of all respondents reported some type of a decrease, 11% saw no change, and 35% reported an increase in revenue. Respondents believe the next six months may look very similar to the past few months.
Increased costs. Approximately 80% of respondents indicated an increase in costs, with the most common uptick between 1-5% increase.

Government priorities. Respondents indicated access to PPE and cleaning as the top priorities they would like to see governments focused on, followed closely by financial support for employees as well as employers in the cold chain industry.

Changing business operations. Measures taken to reduce person-to-person contact to slow the spread of the virus caused operational changes across the cold chain. While these measures were done out of necessity, the changes also provided an opportunity to adjust or try new processes or controls that if effective and efficient may remain in place after the pandemic from COVID-19 is over. 53% of respondents believe the percent of employees working remotely will increase. Pre-pandemic work-from-home rates averaged 4.5% of their workforce. That has increased to 19.8% of the workforce during the pandemic, and there is an expectation that about 10.6% of the workforce will continue to work remotely. This could lead to an increase of 6.1% of the workforce working remotely moving forward.

Industry Trends. About three quarters of all respondents think that the pandemic will cause an increase in the growth rate of e-commerce/direct-to-consumer delivery of chilled and/or frozen product. Even stronger demand for data and predictive analytics is expected in the future, and respondents are optimistic that the growth rate of the industry as a whole will be even more significant because of the pandemic. Conversely, 73% of respondents believe that global trade opportunities will either decrease or remain the same relative to pre-COVID expectations.

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