Growing cold storage market set for further consolidation

30 January 2020 Consultancy.eu

Cold storage is the temperature-controlled warehousing of food such as meat & fish, vegetables, fruit and dairy products. Cold storage is used for two main reasons: as a necessary logistical node and as a cushion against imbalances in supply and demand.

For example, some fruits, vegetables and meats are seasonally harvested and need to be frozen and stored to ensure year-round supply. Similarly, ice-cream is produced year-round and stored in a temperature controlled environment for consumption in the summer. 

According to a new report by EY-Parthenon, the global cold storage market is steadily expanding, driven by a number of trends, including increased food consumption, increasing globalisation, mounting complexity of food chains and rising income levels in developing economies.

French fries serve as a good example: their demand is growing strongly internationally, but production is concentrated in the US and North-Western Europe. Cold storage is needed to meet demand and ensure movement of goods across the value chain.

Simplified cold storage value chainGrowing demand and attractive market fundamentals are driving consolidation activity, with private equity often the instigator of deals. Leading international players such as Lineage, Americold and Agro Merchants have combined closed more than 15 deals in between 2017 – 2019, mostly geared at scale and product line extension. 

“Larger portfolio’s offer more financial power, increased credibility towards large customers and opportunities to professionalise operations,” stated EY-Parthenon’s authors Bram Kuijpers, Jacco Slegers and Casper Roex, all based in the consulting firm’s office in Rotterdam, the Netherlands. 

But, “it's not only the large players that are driving consolidation. In the last few years, we have observed a growing trend among small and medium-sized players to grow via acquisitions, often with the help of investors.” 

Looking ahead, EY-Parthenon’s experts believe the consolidation trend is far from over. “There still is a large ocean of small and medium-sized cold storage companies that could very well fit into a consolidation strategy.”

The cold storage market inhibits several attractive investment characteristicsKey factors underpinning the market’s continued attractiveness include further growing food consumption, a relatively high resilience to recessions (food is a product of need), customer relations that tend to be long-term oriented, and significant potential for scale and improvement.

Meanwhile, for financial investors such as private equity and family offices, “the asset-heavy nature, steady cash-flows and stable returns make it especially interesting for investors with a longer horizon and lower risk appetite.” 

However, getting deals right is not an easy task. “There are a large variety of cold storage businesses out there, each with their own characteristics. Picking the winners can be a challenging endeavour.” EY-Parthenon, which is specialised in corporate strategy and mergers & acquisitions, advises to thoroughly assess underlying market and competitive dynamics, as well as products, customers and value chain nodes, prior to embarking on deal negotiations.