The demand for cold storage services has evolved in recent years, and like anything else, it has made an impact on costs. Population growth has been the traditional driver of the rise in demand for cold storage space, but in today’s environment, the demand for cleaner labels, particularly products with less preservatives, has resulted in a larger portion of the American food supply requiring colder temperatures. This conversion to clean labels is an ongoing effort and continues to exhibit increasing traction.
While supply and demand influences storage rates, cold storage companies have been basing prices on skyrocketing storage costs. Why? Expenses related to cold storage have increased at a rate faster than the general Consumer Price Index (CPI).
Read on as we break down the complexities.
What industries or seasonal patterns are driving higher demand?
As mentioned, healthier products tend to require colder temperatures. For example, seafood, proteins, produce and baked goods are all key drivers of frozen storage. As far as seasonality, July through early November traditionally sees the highest demand for cold storage due to the impending holiday season. Interestingly, the rising popularity of ethnic frozen meals has also increased demand for cold storage warehouses.
How energy costs and labor shortages play a significant role
Energy costs and labor shortages have had a profound impact on cold storage inflation. Looking at the numbers, 75% of the cold storage work force earn between $42,000 and $60,000 annually, a wage range that has seen some of the steepest increases across the labor market. Labor expenses make up roughly 30-35% of total warehouse costs and have risen by 23-27% over the past four years.
Additionally, commercial electricity costs have steadily climbed since 2021, leading to a double-digit increase in expenses. As large-scale energy consumers, cold storage facilities purchase electricity in bulk, with energy expenses representing 8-11% of their total operational costs.
The role of supply chain disruptions
Like in many industries, supply chain disruption has also affected the cold storage business. Know how microchips disrupted the automotive industry? They also affected the material handling industry with similar increases in cost of goods sold. Carrier performance (ability of drivers to arrive at their warehouse appointment on time) was impacted negatively by supply chain disruptions, adding costs to warehouses.
Parts/supplies that are integral to warehouse performance and building maintenance were tough to find and diminished warehouse efficiencies.
Additional barriers and the need for technology upgrades
What barriers and high costs are driving up cold storage rates as companies expand capacity? Newer facilities now face costs that are 45-60% higher than historical spending, with significant increases in expenses for material handling equipment, steel racking and cement foundations. These higher construction and equipment costs translate into higher operational expenses, which impact rates charged to customers.
With respect to technological upgrades, the cold storage industry has been compelled to move toward ammonia as a coolant versus traditional coolants, resulting in significant capital investment. While technology investments may not cost more upfront, the increasing complexity of these upgrades now demands significantly more labor to ensure smooth implementation compared to previous years.
Primary factors driving cold storage inflation beyond the national CPI inflation rate
To summarize the key factors driving up prices in the cold storage industry, we’ve compiled a breakdown of the primary contributors:
Will cold storage rates continue to outpace national CPI inflation?
In a word, yes. CPI reflects the costs typically associated with household spending, whereas cold storage inflation is driven by industrial expenses, which are rising at a faster rate. Key costs for cold storage, such as facility rent, labor, commercial electricity, insurance, taxes, building supplies, maintenance and material handling, continue to increase faster than household-related expenses.
What steps are being taken to manage rates?
Strategies being considered to mitigate inflationary pressures on cold storage rates include the implantation of solar power and automation, although the outcome of these strategies are still unknown in terms of return of investment (ROI). Both strategies will be evaluated as cold storage facilities reach the later stages of their lifecycle. Maintenance costs for aging systems will play a critical role in assessing the overall ROI.
In other words, for the time being, the trend of cold storage costs outpacing CPI is likely to continue, keeping businesses and consumers’ eyes on the charts. No matter what the future holds, rest assured Interstate Cold Storage will be there every step of the way. Our first priority is serving our customers, and that means maximizing efficiency to keep prices in check, so your pocketbook is protected from unnecessary costs. Need more information on this subject? Contact Us!
