Sustainability and Innovation in Cold Chain I: Understanding the Sustainable Revolution

Sustainable innovation is key for the present and future of the cold chain sector. Three factors are creating a favorable environment for and driving investments in innovative and sustainable solutions. Cold chain companies are exploiting this opportunity, responding effectively to the increasingly complex demands of the food supply chain.

Making Sense of Complex Issues

The topic of sustainable innovation is vast, full of interlinking components, and difficult to grasp at first, but worry not! We have a plan. This article is the first of a three-part series in which we share our findings and views on the state of play of sustainable practices and technological innovation in cold chain. This first note covers the key factors that are driving increasing investments and commitments of cold chain companies towards innovation and sustainability. In part two, we will analyze the operative solutions undertaken by cold storage and transportation companies towards sustainability. Finally, part three will close the loop by sharing our thoughts on which issues will be central in shaping the sustainable cold chain sector of the future.

Three Drivers for a Sustainable Revolution

Sustainable practices are at the core of any debate about food supply chains. Every subsector has its specific drivers for sustainability, and these drivers sum up to a complex system of factors that range from shifting consumption patterns down to regulatory intervention.

To guide our analysis, we have isolated three factors that, in our opinion, are driving the sustainable revolution in cold chain:

1. Changes in consumer preferences
2. Shifts in cold chain ownership structure
3. Availability of innovative technological solutions

These factors are synergic and are creating an environment in which external pressures from food companies, retailers, and consumers are translated into increasing investments in sustainable innovations. In order to understand the present situation and to try to shed some light into the near future, it is important to get the essence of the impacts that these factors have on the cold chain sector, its practices, and its commitments towards sustainability.

Consumer Preferences: Fresh, Healthy, Sustainable, and Convenient

The first push to innovate sustainably comes from the changing behavior of consumers towards food. Contemporary consumers ask food companies for a wider and healthier range of fresh food products. At the same time, they demand retailers provide convenient access to food in accordance with their busy lifestyles. Finally, yet importantly, they want to know everything about the origin and environmental footprint of what they eat.

Food companies have responded by increasing the range of fresh products on offer while also developing complex schemes for sustainable sourcing and packaging to adjust to growing consumer scrutiny. Retailers, on their side, have changed their business strategies by enlarging their offering of fresh products at convenience stores and developing various platforms that allow clients to do their grocery shopping online.

The cold chain sector got somewhat caught in the middle of this and is now pushed to find innovative solutions to deliver food timely and sustainably while guaranteeing its quality and traceability. The choice that cold chain companies face is quite straightforward: either evolve by embracing innovation and sustainability, or see their market share and client base shrink simply because they could not provide the services that the market was asking for in a profitable way.

Consolidation: The Sector Is Changing Its Structure and Its Way of Thinking Too

Consolidation in the cold chain sector is well underway. New players are transforming the industry into one of the most technologically advanced sectors of the economy, setting high standards in terms of innovation and sustainability.

The combination of rising fresh food consumption and increased demand for high added-value services made the cold chain sector particularly interesting for investors, both in terms of operating margins and return on investments (ROI). These factors are at the core of the consolidation wave that the sector is experiencing, which, in our opinion, will reach full potential in the coming years.

Private equity (PE) funds are at the forefront of consolidation dynamics. Looking at the evolution of the top ten companies worldwide from 2013 to 2018 in terms of ownership, the portion held by PE-owned companies increased by 5.3%, while the non-PE owned share of top ten companies decreased by 2.4%. In terms of global capacity, the portion of the top ten companies owned by PE increased from 2013 to 2018 by 38.5m m3, to 83.8m m3 (9.1% of total global capacity). At the same time, non-PE capacity shrank by 11m m3, to 18.7m m3 (see Figure 1).

20191209_figure1_FA

When compared to a family-owned business, PE ownership brings a different approach. The primary goal of investors is to increase the value of the company and report a high ROI to their shareholders. Investments in technological innovations and sustainable practices are a crucial component of their business strategy.

New players in developed markets brought competitive pressure to a higher level and elevated the standard of services expected by a modern cold chain service provider. Moreover, they have continuously increased their engagement towards sustainability, including all aspects of company operations, and produced regular reports on their progress and commitments.

The tougher competitive environment caused a ripple effect that quickly reached family-owned businesses. Innovation and sustainability were already on the agendas of medium-sized familyowned businesses, but the increased competitive pressure and the need to find a spot under the sun in a more technologically advanced and sustainable market have accelerated investments in more modern, functional, and sustainable companies by middle-sized family-owned business too.

Technological Innovation: We Can Now Do Amazing Stuff!

In the last ten years, the availability of innovative solutions covering all aspects of daily activities in the cold chain sector has increased tremendously. Companies now have a wide pool of instruments to streamline their operations and offer the level of services required by the market in a sustainable way.

Warehouse automation and robotization of tasks are probably the first innovations that come to mind and are among the fields in which the offering has reached some level of maturity. In parallel, solutions to manage energy use in refrigeration systems or optimize warehouse throughput and transport routing have reached high levels of operational efficiency. Cold chain companies can now be more energy efficient while at the same time being profitable and sustainable. Moreover, many players in the market are making greater use of temperaturemonitoring sensors and real-time alert systems for food contamination, greatly enhancing food safety standards of the whole supply chain.

Other solutions are still in a nascent stage. Artificial intelligence, blockchain, and smart contracts are now starting to prove their worth in connecting all parts of the supply chain, making the whole system more transparent, saving time and financial resources, and thus reducing transaction costs.

The wealth of data gathered by smart applications in food logistics provides the perfect ground for data analysis applications. Companies can now expand even further the service pool available to their clients and exploit the technology to make effective data-based management decisions on strategic issues and daily activities.

In the future, attention will move from the contributions of specific technological innovations to the harmonization and standardization of innovative and sustainable practices across the entire supply chain.

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