Cold Storage Operations Academic Group23 20th Jan 2010 Industry boundary Vertical scope: The below diagram depicts the key activities performed in a cold chain. Of these, packaging, precooling and cold storage are typically provided by the same player. These activities are together referred to as cold storage operations, and form the ‘vertical scope’ of our industry analysis. Horizontal scope: Cold chain logistics are used for a variety of products such as pharmaceuticals, dairy products, farm produce, fish, flowers etc.
However, we will be looking at cold storage operations specifically for fruits and vegetables commonly referred as ‘farm to table’. Business modal: Cold storage operators for fruits and vegetables can function as both traders as well as service providers. In their capacity as traders, they purchase the products directly from the farmers, package them, store them and then sell them to large retailers.
However we are limiting our scope to cold storage operations as service providers, where the cold storage operators are engaged by either the producers or (most commonly) buyers (mainly) organized retailers to render packaging, pre-cooling and storage services. Geographic carrier: We will be looking at this industry at the pan-India level Barriers to entry Economies of scales: It is a largely untapped, fragmented & full of unorganized small size players. No player has achieved economies of scale and thus a new a new entrant with deep pockets can enter this industry and still be at a major cost advantage.
Capital Requirement & Technology: The cold chain logistics is a highly capital-intensive industry (cost of real estate and refrigeration equipments) with a large-size cold chain has a payback period of as high as five years. Incumbency advantages independent of size: Existing players like Snowman have built expertise by operating in this industry for longer periods in time & use imported hi-tech equipment, which new entrants would find difficult to emulate.
Access to distribution: Lack of an organized distribution system, objections by the trucker’s union & bottle necks in cold storage during transit poses a threat to new entrants. Another reason for non competitiveness in this industry is the lack of a strong retail front. However, India is witnessing a transformation in its retail front end which would provide a boost to new distribution players too. Retaliation to new entrants: Cold chain players face resistance from farmer’s community as this industry promotes hoarding of food items.
A farmer would be forced to sell his excess produce to retailers at low price, who in turn might be in an advantageous position to sell the products at a higher price in off-season by leveraging cold storage. Overall high barriers to entry, which will be the case in future too as the industry will mostly remain capital intensive. Barriers to exit Exit barriers: Because the growth opportunity that the industry shows one can easily sell off his business to another entrant or an existing player to give him economies of scale or more geographic coverage.
Though when there are enough players, due to high capital investments and specialized assets exiting industry would be very difficult. Asset Specialization: Cold chain assets are capital intensive & are not multi-purpose. Heavy investment in capital & technology will act as a barrier for incumbents to leave this industry. Higher break even time period will also act as a deterrent for players to close shop. Emotional Barriers: Farmers from far off regions avail the services of one cold storage in a big region.
Closing down would cause lot of inconvenience to these farmers who would be using the plant to save their excess produce from spoilage which in turn would be disadvantageous for the incumbent’s brand image. Interrelated Businesses: Incumbents like Snowman Frozen Foods Ltd have an integrated storage, handling and transportation infrastructure for fruits and vegetables. This makes the exit from this industry even more difficult. So, currently exit barriers may not be that high, but as market gets sufficient players, the market will have high exit barriers too. Supplier’s power
Cold storage involves three major inputs – labour, capital and technology at each stage. The cost of these inputs, affects a company’s profitability. Important Suppliers: Many small local players providing not so sophisticated refrigeration systems . The major foreign players providing better technological systems to Indian companies are Hurree Group of Finland, AG Refrigeration Systems, Blue Star, and GE Equipment Manf. Etc. They provide the necessary equipment for all three stages. So for better technology Substitutes for Products: There are various options available at each stage.
You have broad range of technologies to choose from. Take for example the pre-cooling stage; you have five methods – vacuum cooling, forced air cooling, hydro cooling, icing and room cooling. Each method involves a different set of suppliers and the company can choose amongst each method depending on its capital budget. Similar trends exist in the other two stages and therefore, the company enjoys a higher bargaining power. Switching Cost: All the equipments are expensive and highly capital intensive.
The three stages are interlinked and to switch from one technology to another would involve huge investment. So the supplier once established has the power to dictate terms to the company. But since switching of a supplier for a given technology is not difficult. Forward Integration: This industry faces a high risk of forward integration. If the suppliers decide to provide the storage facilities themselves, then the existing players would be driven out of business. Local players like – GE Equipment Services imposes such a threat .
Government’s policy on 100% FDI in the cold chain industry, further promotes the foreign manufacturers to come here and set up storage units. QoS: Supplier’s technology largely determines the quality of service. More efficient the technology better would be the quality of service. So a player with superior technology commands a higher bargaining power. Threat of substitutes The demand for cold storage facilities arises mainly because of the need for increasing the shelf life of perishable fruits and vegetables and transporting them to distant territories.
Even though there are no ‘product substitutes’ for cold storages, any method/ technique/ alternative that can satisfy this core need, could possibly undermine cold storage operations. 1)Refrigerated trucks – Presently there are only about 25,000 vehicles involved in transportation of perishable products. Most of these vehicles (~80%) are used for transportation of milk. Therefore only around 5000 refrigerated transportation vehicles are available for other products . With increased availability of refrigerated transportation vehicles, buyers may prefer transporting fruits and vegetables directly from the farms to the point of sale. )Possible Indirect Substitutes/ a. Shortening of transit time through improvement in transportation facilities – Improvement in transport infrastructure (or use of more efficient means of transportation) can reduce the total time required in moving goods from one place to another. This could, to a certain extent, bring down the need for increasing shelf life of eatables by processing/ packaging/ freezing. b. Production near the point of consumption – The foods to be packaged are produced near the point of consumption, thus reducing the transit time c.
Increased shelf life through better quality of produce – Use of techniques of production/ inputs that can naturally enhance the shelf life of fruits and vegetables can again bring down the demand for cold storages. Government actions I. The industry hitherto comprised mainly unorganised players and was therefore not very well regulated. However with the advent of large players the industry is expected to get more regulated. II. The government has been promoting cold chain investments in a big way. A number of policy initiatives have been taken in this direction. a. 00% depreciation for cold chain investments announced in the Union Budget for 2009 b. Special Purpose Vehicle to be set up for cold logistics. Central Warehousing Corporation has been named the apex body for this purpose. c. Financial assistance provided by the government for setting up of 156 cold storages from 2005-06 to 2009-10. d. Special scheme being implemented by Ministry of Food Processing Industries under which financial assistance is being provided for supporting cold chain infrastructure. e. 10 cold chain projects approved by Food processing ministry during 2008 – 09 f.
No controls on import of cold storage equipment g. Full excise duty exemption provided on cold chain refrigeration equipment. This translates into an effective cost saving of around 16% in capital investment. III. Furthermore, barriers for foreign investment are extremely low. 100% FDI has been allowed in the cold chain sector. Buyer’s power Buyers of cold storage of food include Food chains, Retail chains, Non-veg food packers, Milk and milk food manufacturers, Ready to eat food manufacturers. Of these, fresh produce retailers are the major consumers of old storage. Number of important buyers (High): There are around 20 major players in all food segments being catered to by 6 – 7 cold storage/ transportation providers. These include McDonald’s, Mother Dairy, Dominoes, Pizza Hut and other new retail chains of fresh produce like Reliance, ITC, etc… Buyer switching cost (Low): Most service providers have same service options. Buyers have low cost of switching cold storage providers hence higher power, still there is the risk of losing trusted providers is very high.
So the added quality service only can ensure not very high switching by buyers. Buyer’s threat of backward integration (Medium – High): A number of large players are already invested to develop own supply chain and cold chain. Still, as this is a highly capital intensive initiative, buyers look for integration in terms of agreement with cold storages rather than owning the plant. Eg. Future Logistics Industry threat of forward integration (Medium): Industry players like Radhakrishna Foodland has tied up with SPAR, a foreign player to get in to retail market.
Contribution to quality or service of buyer’s product (High): As freshness of food produce in retail stores is of utmost importance to a consumer, buyers are highly dependent on quality of cold storage provided Total buyer’s cost contributed by the industry (Low): Warehousing costs constitute 1 – 2% of MRP for food products while Transportation costs constitute 3-4%. The percentage of cost is not huge but the opportunity cost of cutting on cold storage is huge. So here the buyer’s power is weak. On the whole Buyers power is low in terms of risk of competition but dependency on margins from large retailers is high.
Rivalry among Competitors The gap for stationary cold storage infrastructure is over 60% is growing at 20-25 per cent and is expected to touch Rs 40,000 crore by 2015. There are many small regional players in the cold storage industry which cater to different customers and do not compete with each other. Recently few national players have come up but as the industry still is falling short of capacity there is not much rivalry amongst competitors. Number of equally balanced competitors: Low big players, many small regional non competing players.
But many small players are expanding and also new entrants (mostly foreign players in joint venture with Indian companies through FDI) are making huge investments to cater to the gap in the industry namely Snowman Frozen Foods, Fresh and Healthy Enterprise, Apollo- Everest Cool Solutions, Adani Agrifresh, Future Logistics, Gati Logistics etc. Relative Industry growth: Current as well as future industry growth is very high. The cold chain industry itself is estimated to be as large as Rs 10,000-15,000 crore, growing at 20-25 per cent and is expected to touch Rs 40,000 crore by 2015.
Service cost: Being a service industry no high storage costs are associated except for the coolants which are used for cold storages. The costs involved in operation are energy, maintenance, operation labour, equipment maintenance. The energy cost is a high component of the costs involved. Product features: It’s a commoditised service. Although short term differentiation in service can be created but nothing that cannot be imitated. A difference in technology could also be created because of how much capital has a company invested.
Diversity of competitors: RK Foodland provides service mostly to restaurants like McDonalds where as Snowman Frozen Foods caters to the farm to table retail markets. Others like Future Logistics support their own front end stores. They are also diverse in terms of cold storage facility provided for vegetable, fruits, dairy, meat, tamarind, fish, or milk and dairy products. So form the rivalry point of view the industry looks medium to high attractive but then with new competitors venturing in, this industry could be a blood bath in coming times. Overall attractiveness
As seen from the figure attached barriers to exit, rivalry amongst competitors and power of buyers will turn highly unfavourable because of increasing number of industry players, as already mentioned. Barriers to entry, power of suppliers and availability of substitutes are not likely to change. The government action though might turn a little less attractive as it might pull out some incentives when the industry shown some amount of growth (like excise duty discounts). Overall attractiveness is very high at current point of time but as more players get into the market the industry attractiveness will fall down.
